-----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, Pg4fd4+yGgzz8PQIbSeBsWoBUniJUMzJedUryUwKjNqOzLTK4oVGldsrCfJRq4ob t84ZDnGSLnVo8nwoADyS3g== 0000944209-97-001496.txt : 19971114 0000944209-97-001496.hdr.sgml : 19971114 ACCESSION NUMBER: 0000944209-97-001496 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 42 FILED AS OF DATE: 19971112 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED PANAM FINANCIAL CORP CENTRAL INDEX KEY: 0001049231 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 953211687 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-39941 FILM NUMBER: 97712659 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 1 FORM S-1 FOR UNITED PANAM FINANCIAL CORP. AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1997 FILE NO.: 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- UNITED PANAM FINANCIAL CORP. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 6162 95-3211687 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) 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 GIBSON, DUNN & CRUTCHER LLP 11355 WEST OLYMPIC BOULEVARD ONE MONTGOMERY STREET, SUITE 3100 LOS ANGELES, CALIFORNIA 90064 SAN FRANCISCO, CALIFORNIA 94104 (310) 312-4196 (415) 393-8200 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement has become effective. ---------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box. [_] ---------------- CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED MAXIMUM AGGREGATE AMOUNT OF TITLE OF EACH CLASS OF OFFERING REGISTRATION SECURITIES TO BE REGISTERED PRICE(1) FEE - ------------------------------------------------------------------------------- Common Stock, $0.01 par value(2)..................... $80,500,000 $24,394
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Estimated pursuant to Rule 457(a) solely for the purpose of calculating the registration fee. (2) Includes shares which the Underwriters have the option to purchase solely to cover over-allotments, if any. 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 NOVEMBER 12, 1997 SHARES UNITED PANAM FINANCIAL CORP. [LOGO] COMMON STOCK All of the shares of Common Stock offered hereby (the "Offering") are being sold by United PanAm Financial Corp., a Delaware 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 $ and $ 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 $750,000. (3) The Company has granted the Underwriters a 30-day option to purchase up to 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, Inc. on or about , 1997. ----------- NationsBanc Montgomery Securities, Inc. Piper Jaffray Inc. The date of this Prospectus is , 1997 [MAP OF THE UNITED STATES SHOWING THE LOCATION OF THE COMPANY'S OFFICES.] The Company intends to furnish its stockholders 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, INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 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 of 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 and Federal Home Loan Bank ("FHLB") advances at its federal savings bank subsidiary, Pan American Bank, FSB (the "Bank"), and whole loan sales, and expects to complete its first securitization of mortgage loans 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 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 Corp., 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 the purchase of a home, debt consolidation, home improvements, education and other consumer needs, and may benefit from consolidating existing consumer debt through mortgage loans with 3 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 mortgage loan originations have grown from $36.7 million for the nine months ended September 30, 1996 to $336.9 million for the nine months ended September 30, 1997. The average loan-to-value ratio ("LTV") on mortgage loans originated by UPAM during the nine months ended September 30, 1997 was approximately 75%. UPAM's operating strategy is to maintain a balance between retail and wholesale origination of mortgage loans. Approximately 41% of the mortgage loans originated by UPAM during the nine months ended September 30, 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 September 30, 1997, UPAM had six retail loan offices and five wholesale loan centers originating mortgage loans in 19 states, and intends to balance its future growth between retail offices (four of which are forecasted to be opened in the fourth quarter of 1997) and wholesale loan centers. UPAM currently sells substantially all of its loan originations to mortgage companies and investors through whole loan packages offered for bid several times each month. During the nine months ended September 30, 1997, UPAM sold $273.1 million of mortgage loans at a weighted average sales price equal to 105.9% of the unpaid principal balance of the loans sold. The Company expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize mortgage loans on a periodic basis. 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 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 66,247 contracts in the aggregate gross amount of $31.3 million at September 30, 1996 to 123,371 contracts in the aggregate gross amount of $47.3 million at September 30, 1997, primarily as a result of changes in California's automobile insurance laws. During the nine months ended September 30, 1997, IPF originated 99,558 insurance premium finance contracts in the aggregate gross amount of $117.1 million, as compared to 63,533 such contracts in the aggregate gross amount of $73.4 million during the nine months ended September 30, 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, commencing on April 29, 1999 at an agreed price. See "Business--Insurance Premium Finance--Relationship with BPN." 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 of factors such as impaired credit history or high debt-to-income ratios compared to customers of traditional automobile lenders. The Company believes that success in the subprime automobile finance business depends upon controlled growth, disciplined underwriting, strong 4 corporate internal audit procedures and focused servicing and collection efforts at each of its local branches. The Company's portfolio of auto contracts has grown from 651 contracts in the aggregate gross amount (excluding unearned financing charges) of $6.4 million at September 30, 1996 to 3,619 contracts in the aggregate gross amount of $32.0 million at September 30, 1997. During the nine months ended September 30, 1997, the Company acquired 2,859 auto contracts in the aggregate gross amount of $29.8 million, as compared to 669 auto contracts in the aggregate gross amount of $6.7 million during the nine months ended September 30, 1996. At September 30, 1997, the Company marketed its automobile finance program from seven branch offices in California and one each in Arizona and Utah. During the nine months ended September 30, 1997, UACC approved 13.7% and funded 12.2% of the applications for auto contracts it received. 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 book value, which loans aggregated $87.2 million (before unearned discounts and premiums) at September 30, 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 September 30, 1997, deposits totaled $210.8 million with a weighted average interest rate of 5.20%. In the future, the Company intends to operate its mortgage finance business principally through United Pan Am Mortgage Corp. 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." 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. 5 . 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-- Master Repurchase Agreement." The Company expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize mortgage loans on a periodic basis. 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." The Company was incorporated in Delaware on August 31, 1989. 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. 6 THE OFFERING Common Stock offered by the Company... shares Common Stock to be outstanding after the Offering.......................... shares(1) Use of proceeds....................... To repay certain indebtedness to existing stockholders and 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 "Use of Proceeds." Proposed Nasdaq National Market symbol................................ UPFC - -------- (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 November 7, 1997, at a weighted average exercise price of $4.55 per share, and (ii) 140,000 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 AT OR FOR THE AT OR FOR THE (INCEPTION) YEAR ENDED NINE MONTHS THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, ------------------ -------------------- 1994 1995 1996 1996 1997 -------------- -------- -------- --------- --------- STATEMENT OF OPERATIONS DATA Interest income......... $ 6,882 $ 13,533 $ 16,561 $ 12,116 $ 18,314 Interest expense........ 3,573 7,727 7,853 5,752 8,193 -------- -------- -------- --------- --------- Net interest income... 3,309 5,806 8,708 6,364 10,121 Provision for loan losses................. 50 120 194 98 445 -------- -------- -------- --------- --------- Net interest income after provision for loan losses.......... 3,259 5,686 8,514 6,266 9,676 -------- -------- -------- --------- --------- Non-interest income Gain on sale of loans................ 3 90 2,333 854 15,260 Other non-interest income............... 95 228 443 314 523 -------- -------- -------- --------- --------- Total non-interest income............. 98 318 2,776 1,168 15,783 -------- -------- -------- --------- --------- Non-interest expense Compensation and benefits............. 1,564 2,750 5,248 3,365 12,195 Savings Association Insurance Fund special assessment... -- -- 820 -- -- Other expense......... 1,579 2,412 3,581 2,441 7,090 -------- -------- -------- --------- --------- Total non-interest expense............ 3,143 5,162 9,649 5,806 19,285 -------- -------- -------- --------- --------- Income before income taxes.................. 214 842 1,641 1,628 6,174 Income taxes............ 98 384 691 698 2,580 -------- -------- -------- --------- --------- Net income.............. $ 116 $ 458 $ 950 $ 930 $ 3,594 ======== ======== ======== ========= ========= Net income per common share (pro forma)(1) .. $ 0.01 $ 0.04 $ 0.09 $ 0.09 $ 0.32 ======== ======== ======== ========= ========= Weighted average common shares outstanding (pro forma)(1) ........ 10,886 10,886 10,886 10,886 11,344 ======== ======== ======== ========= ========= BALANCE SHEET DATA Total assets............ $180,024 $159,581 $187,598 $ 173,983 $ 283,262 Loans................... 53,176 131,794 134,821 140,882 152,500 Loans held for sale..... -- -- 20,766 9,605 70,241 Allowance for loan losses................. (378) (5,250) (5,356) (5,313) (6,203) Deposits................ 163,114 141,924 159,061 147,979 210,783 Notes payable........... 10,930 10,930 10,930 10,930 12,870 FHLB advances........... -- -- 4,000 4,000 35,000 Stockholders' equity.... 5,270 5,811 6,761 6,740 10,355 OPERATING DATA Return on average assets(2).............. 0.11% 0.27% 0.56% 0.75% 2.09% Return on average stockholders' equity(2).............. 3.44% 8.51% 16.10% 21.38% 62.85% Net interest margin..... 3.24% 3.61% 5.44% 5.41% 6.36%
8
APRIL 29, 1994 AT OR FOR THE AT OR FOR THE (INCEPTION) YEAR ENDED NINE MONTHS THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, ---------------- --------------------- 1994 1995 1996 1996 1997 -------------- ------- ------- --------- ---------- Stockholders' equity to assets................. 2.93% 3.64% 3.60% 3.87% 3.66% Tangible capital ratio of Bank................ 8.50% 9.89% 8.85% 9.55% 7.06% Core capital ratio of Bank................... 8.50% 9.89% 8.85% 9.55% 7.06% Risk-based capital ratio of Bank................ 27.53% 17.19% 16.36% 16.82% 13.20% ASSET QUALITY DATA Nonaccrual loans, net(3)................. $1,439 $ 5,240 $ 5,835 $ 5,221 $ 4,668 Real estate owned....... -- 298 988 714 637 Total non-performing assets................. 1,439 5,538 6,823 5,935 5,305 Non-performing assets to total assets........... 0.80% 3.47% 3.64% 3.41% 1.87% Allowance for credit losses to net loans.... 0.71% 3.98% 3.97% 3.77% 4.07% General allowance for credit losses to non- performing loans(4).... 26.27% 82.80% 74.90% 82.34% 110.70% SUBPRIME MORTGAGE FI- NANCE DATA Loan origination activities(5) Wholesale originations......... -- -- $58,456 $ 34,818 $ 198,854 Retail originations... -- -- 13,055 1,899 138,025 ------ ------- ------- --------- ---------- Total loan originations....... -- -- 71,511 36,717 336,879 Percent of loans secured by first mortgages............ -- -- 95% 94% 97% Weighted average initial loan-to-value ratio................ -- -- 72% 72% 75% Originations by product type Adjustable-rate mortgages.......... -- -- 85% 78% 87% Fixed-rate mortgages.......... -- -- 15% 22% 13% Weighted average interest rate Adjustable-rate mortgages.......... -- -- 9.55% 9.74% 9.42% Fixed-rate mortgages.......... -- -- 10.76% 10.64% 10.76% Average balance per loan................. -- -- $ 100 $ 100 $ 112 Loans sold through whole loan transactions(6)... -- -- $50,142 $21,557 $273,080 Number of sales offices................ -- -- 5 3 11 INSURANCE PREMIUM FI- NANCE DATA Loans originated........ -- $20,398 $99,012 $ 73,449 $ 117,119 Number of loans originated............. -- 15,258 77,816 63,533 99,558 Average net yield on loans originated....... -- 15.77% 13.62% 13.73% 14.04% Average loan size at origination............ -- $ 1.34 $ 1.27 $ 1.16 $ 1.18 Net charge-offs to average loans(2)(7).... -- -- 0.38% 0.38% 0.27% AUTOMOBILE FINANCE DATA Gross contracts purchased.............. -- -- $12,133 $ 6,724 $ 29,814 Number of contracts purchased.............. -- -- 1,184 669 2,859 Average APR on contracts purchased.............. -- -- 21.00% 21.00% 21.10% Average discount on contracts purchased.... -- -- 10.00% 10.00% 9.80% Number of sales offices................ -- -- 4 2 6 Gross amount financed per contract........... -- -- $ 10.27 $ 10.05 $ 10.43 Net charge-offs to average contracts(8)... -- -- 1.50% 0.20% 4.96%
9 - -------- (1) 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 effected in November 1997 and includes all options issued below the estimated initial public offering price within one year prior to the filing of the Registration Statement calculated using the treasury stock method. (2) Information for the nine months ended September 30, 1996 and 1997 and for the period from April 29, 1994 (Inception) through December 31, 1994 is annualized for comparability with year end information. (3) Nonaccrual loans are net of specific loss allowances. (4) General allowances represent provisions for losses not specifically identified in the loan portfolio. (5) 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. (6) Does not include $3.5 million in conforming loan sales in the year ended December 31, 1995. (7) See "Business--Insurance Premium Finance--Servicing and Collection." (8) 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 ---------------------- FHLB Advances 100% Owned(4) ------------------- -------------------- --------------------- 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." (3) See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--Master Repurchase Agreement." (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 and 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. No assurance can be given that the Company's underwriting criteria and collection methods will 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 and FHLB advances at the Bank and whole loan sales. 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 $177.7 million or 84.3% of the Bank's total deposits at September 30, 1997, of which amount $139.4 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 being 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 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 12 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. The Company believes that, upon completion of the Offering, it will be a minority-owned business and that the Offering will not constitute permanent financing of PAFI. However, there can be no assurances that the RTC will not view the Offering as permanent financing and require repayment of the RTC Notes Payable. In addition, the Company has pledged the shares of the Bank as collateral for the RTC interim capital assistance loan. 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 September 30, 1997, 82.0% of the dollar amount of the Company's loans were 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 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 Corp., and Ray C. Thousand, President and Chief Executive Officer of United Auto Credit Corporation. The loss of the services of any such employee, or the failure of the Company 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. 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." 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. 13 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 purchase what it terms "A-" mortgage loans by the end of 1997. 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. 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 $293.4 million of the $336.9 million of mortgage loans originated by the Company during the nine months ended September 30, 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 14 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 employ 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 expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize mortgage loans on a periodic basis. The Company will, in the future, consider the securitization of other financial assets. 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 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. In a securitization, the Company would sell 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." 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 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 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. To the Company's knowledge, there currently is no active market for the sale of these residual interests. No assurance can be given that the residual interests could be sold at their stated value, if at all. 15 The Company may rely on credit enhancements to guarantee senior certificates in the securitization trusts. If the Company is unable to obtain credit enhancement to guarantee 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 securitization trusts 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 securitization trusts or the securitization trusts 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. 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 nine months ended September 30, 1997, UPAM sold substantially all of its loan originations in the secondary market to a limited number of institutional purchasers and 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. During the nine months ended September 30, 1997, UPAM sold loans to 13 institutional purchasers, three of which purchased approximately 76% 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 16 coverage and increasing the possibility of a loss in the event of a default. Further, delinquencies, foreclosures 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. 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 Protection Act of 1994 ("High Cost Mortgage Act"), the Equal Credit Opportunity Act ("ECOA"), the Fair 17 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. Under current federal statutes and regulations, the Bank generally is not subject to state law limits on its lending operations, other than certain California limits on interest charges. It is contemplated that the Company's mortgage lending operations in the future will be conducted by United PanAm Mortgage Corp. 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. 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 nine months ended September 30, 1997, two insurance agents accounted for approximately 19.2% and 12.3%, 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 premium, and a delay in processing a claim for the return of the unearned premium may cause IPF to incur a 18 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. Accordingly, IPF may suffer a loss on an insurance premium finance contract as a result of a default. 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 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 19 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 and the Company. 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 STOCKHOLDERS Upon completion of the Offering, Pan American Financial, L.P. ("PAFLP") will own an aggregate of approximately % of the outstanding shares of Common Stock (approximately % 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 stockholders (including mergers, consolidations and sales of assets) and to elect all members of the Board of Directors. See "Principal Stockholders" and "Management." ANTI-TAKEOVER PROVISIONS The Company's Amended and Restated Certificate of Incorporation (the "Certificate of Incorporation") and Bylaws (the "Bylaws") include provisions that could delay, defer or prevent a takeover attempt that may be in the best interests of stockholders. These provisions include the ability of the Board of Directors to issue up to 2,000,000 shares of Preferred Stock without any further stockholder approval and requirements that (i) stockholders give advance notice with respect to nomination of candidates for election as directors and certain proposals they may wish to present for a stockholder vote, (ii) stockholders act only at annual or special meetings and (iii) special meetings of stockholders may only be called by the Company's Board of Directors, Chairman of the Board, President or Chief Executive Officer, or at the written request of holders of not less than 25% of the Company's voting shares. In addition, the Bylaws and certain provisions of the Certificate of Incorporation, including provisions denying cumulative voting, prohibiting stockholder action by written consent, and setting forth the procedures for calling special meetings, can only be amended by the affirmative vote of the holders of 75% or more of the voting shares. The 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. In addition, under certain conditions, 20 Section 203 of the Delaware General Corporation Law (the "DGCL") would prohibit the Company from engaging in a "business combination" with an "interested stockholder" (in general, a stockholder owning 15% or more of the Company's outstanding voting stock) for a period of three years after becoming an interested stockholder, unless the business combination is approved in a prescribed manner. 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 shares of Common Stock. The shares of Common Stock offered hereby ( 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 November 7, 1997 and 140,000 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 stockholders 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 stockholders 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, Inc. on behalf of the Underwriters. See "Underwriting." 21 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 $ per share in net tangible book value assuming an initial public offering price of $ 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 shares of Common Stock offered hereby (after deducting the estimated underwriting discount and Offering expenses) are estimated to be $ million ($ million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $ per share (the mid- point of the filing range set forth on the cover of this Prospectus). The Company intends to use $2.0 million of the net proceeds of the Offering to repay the Company's indebtedness to its existing stockholders, which indebtedness was incurred subsequent to July 1, 1997 to finance the establishment and operations of United PanAm Mortgage Corp. Such indebtedness bears interest at 8% per year (payable semiannually) and is payable on June 30, 1999. See "Management--Certain Transactions." The remaining net proceeds of the Offering will be used 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 the event the Offering is deemed to 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources--RTC Notes Payable." 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." 22 DILUTION At September 30, 1997, the net tangible book value of the Company was approximately $9.9 million, or $0.92 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 September 30, 1997, other than to give effect to the sale by the Company of the shares of Common Stock offered hereby, assuming an initial public offering price of $ 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 September 30, 1997 would have been approximately $ million, or $ per share. This represents an immediate increase in net tangible book value of $ per share to the existing stockholders and an immediate net tangible book value dilution of $ per share to purchasers in the Offering, as illustrated by the following table. Assumed initial public offering price............................... $ Net tangible book value per share at September 30, 1997............ $0.92 Increase in net tangible book value per share attributable to new investors......................................................... ----- Net tangible book value per share after the Offering................ ---- Dilution to new investors........................................... $ ====
The following table summarizes as of September 30, 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 stockholders and to be paid by the investors purchasing shares of Common Stock in the Offering assuming the sale of shares by the Company at an assumed initial public offering price of $ 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 stockholders..... 10,668,750 % $10,355,000 % $0.97 New investors............. % % ---------- ----- ----------- ----- Total................. 100.0% $ 100.0% ========== ===== =========== =====
23 CAPITALIZATION The following table sets forth the consolidated capitalization and certain ratios of the Company and the Bank's regulatory capital ratios at September 30, 1997, and as adjusted to give effect to the sale of Common Stock offered hereby.
AS OF SEPTEMBER 30, 1997 ---------------------------- AS ACTUAL ADJUSTED ------------- ------------- (DOLLARS IN THOUSANDS) Long-term borrowings Stockholder notes payable due 1999.............. $ 1,940 $ RTC notes payable due 1999...................... 10,930 ------------- ----------- Total long-term borrowings........................ 12,870 ------------- ----------- Stockholders' equity Common Stock ($0.01 par value).................. 107 Additional paid-in capital...................... 5,130 Retained earnings............................... 5,118 5,118 ------------- ----------- Total stockholders' equity........................ 10,355 ------------- ----------- Total capitalization.............................. $ 23,225 $ ============= =========== Ratio of equity to assets......................... 3.66% % Regulatory capital ratios of the Bank(1) Leverage........................................ 7.06% 7.06% Tier 1 risk-based............................... 11.93% 11.93% Total risk-based................................ 13.20% 13.20%
- -------- (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. 24 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. Financial information at September 30, 1996 and 1997 and for the nine months then ended is derived from unaudited financial data, but in the opinion of management reflects all adjustments (consisting only of normal recurring adjustments) which are necessary to present fairly the results for such interim periods. Interim results at and for the nine months ended September 30, 1997 are not necessary indicative of the results that may be expected for the year ending December 31, 1997. 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 AT OR FOR THE AT OR FOR THE (INCEPTION) YEAR ENDED NINE MONTHS THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, ------------------ -------------------- 1994 1995 1996 1996 1997 -------------- -------- -------- --------- --------- STATEMENT OF OPERATIONS DATA Interest income......... $ 6,882 $ 13,533 $ 16,561 $ 12,116 $ 18,314 Interest expense........ 3,573 7,727 7,853 5,752 8,193 -------- -------- -------- --------- --------- Net interest income... 3,309 5,806 8,708 6,364 10,121 Provision for loan losses................. 50 120 194 98 445 -------- -------- -------- --------- --------- Net interest income after provision for loan losses.......... 3,259 5,686 8,514 6,266 9,676 -------- -------- -------- --------- --------- Non-interest income Gain on sale of loans................ 3 90 2,333 854 15,260 Other non-interest income............... 95 228 443 314 523 -------- -------- -------- --------- --------- Total non-interest income............. 98 318 2,776 1,168 15,783 -------- -------- -------- --------- --------- Non-interest expense Compensation and benefits............. 1,564 2,750 5,248 3,365 12,195 SAIF special assessment........... -- -- 820 -- -- Other expense......... 1,579 2,412 3,581 2,441 7,090 -------- -------- -------- --------- --------- Total non-interest expense............ 3,143 5,162 9,649 5,806 19,285 -------- -------- -------- --------- --------- Income before income taxes.................. 214 842 1,641 1,628 6,174 Income taxes............ 98 384 691 698 2,580 -------- -------- -------- --------- --------- Net income.............. $ 116 $ 458 $ 950 $ 930 $ 3,594 ======== ======== ======== ========= ========= Net income per common share (pro forma)(1)... $ 0.01 $ 0.04 $ 0.09 $ 0.09 $ 0.32 ======== ======== ======== ========= ========= Weighted average common shares outstanding (pro forma)(1)......... 10,886 10,886 10,886 10,886 11,344 ======== ======== ======== ========= ========= BALANCE SHEET DATA Total assets............ $180,024 $159,581 $187,598 $ 173,983 $ 283,262 Loans................... 53,176 131,794 134,821 140,882 152,500 Loans held for sale..... -- -- 20,766 9,605 70,241 Allowance for loan losses................. (378) (5,250) (5,356) (5,313) (6,203) Deposits................ 163,114 141,924 159,061 147,979 210,783 Notes payable........... 10,930 10,930 10,930 10,930 12,870 FHLB advances........... -- -- 4,000 4,000 35,000 Stockholders' equity.... 5,270 5,811 6,761 6,740 10,355
25
APRIL 29, 1994 AT OR FOR THE AT OR FOR THE (INCEPTION) YEAR ENDED NINE MONTHS THROUGH DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, ---------------- --------------------- 1994 1995 1996 1996 1997 -------------- ------- ------- --------- ---------- OPERATING DATA Return on average assets(2)............ 0.11% 0.27% 0.56% 0.75% 2.09% Return on average stockholders' equity(2)............ 3.44% 8.51% 16.10% 21.38% 62.85% Net interest margin... 3.24% 3.61% 5.44% 5.41% 6.36% Stockholders' equity to assets............ 2.93% 3.64% 3.60% 3.87% 3.66% Tangible capital ratio of Bank.............. 8.50% 9.89% 8.85% 9.55% 7.06% Core capital ratio of Bank................. 8.50% 9.89% 8.85% 9.55% 7.06% Risk-based capital ratio of Bank........ 27.53% 17.19% 16.36% 16.82% 13.20% ASSET QUALITY DATA Nonaccrual loans, net(3)............... $1,439 $ 5,240 $ 5,835 $ 5,221 $ 4,668 Real estate owned..... -- 298 988 714 637 Total non-performing assets............... 1,439 5,538 6,823 5,935 5,305 Non-performing assets to total assets...... 0.80% 3.47% 3.64% 3.41% 1.87% Allowance for credit losses to net loans.. 0.71% 3.98% 3.97% 3.77% 4.07% General allowance for credit losses to non- performing loans(4).. 26.27% 82.80% 74.90% 82.34% 110.70% SUBPRIME MORTGAGE FINANCE DATA Loan origination activities(5) Wholesale originations........ -- -- $58,456 $ 34,818 $ 198,854 Retail originations.. -- -- 13,055 1,899 138,025 ------ ------- ------- --------- ---------- Total loan originations....... -- -- 71,511 36,717 336,879 Percent of loans secured by first mortgages........... -- -- 95% 94% 97% Weighted average initial loan-to- value ratio......... -- -- 72% 72% 75% Originations by product type Adjustable-rate mortgages.......... -- -- 85% 78% 87% Fixed-rate mortgages.......... -- -- 15% 22% 13% Weighted average interest rate Adjustable-rate mortgages.......... -- -- 9.55% 9.74% 9.42% Fixed-rate mortgages.......... -- -- 10.76% 10.64% 10.76% Average balance per loan................ -- -- $ 100 $ 100 $ 112 Loans sold through whole loan transactions(6)... -- -- $50,142 $ 21,557 $ 273,080 Number of sales offices................ -- -- 5 3 11 INSURANCE PREMIUM FINANCE DATA Loans originated........ -- $20,398 $99,012 $ 73,449 $ 117,119 Number of loans originated............. -- 15,258 77,816 63,533 99,558 Average net yield on loans originated....... -- 15.77% 13.62% 13.73% 14.04% Average loan size at origination............ -- $ 1.34 $ 1.27 $ 1.16 $ 1.18 Net charge-offs to average loans(2)(7).... -- -- 0.38% 0.38% 0.27% AUTOMOBILE FINANCE DATA Gross contracts purchased.............. -- -- $12,133 $ 6,724 $ 29,814 Number of contracts purchased.............. -- -- 1,184 669 2,859 Average APR on contracts purchased.............. -- -- 21.00% 21.00% 21.10% Average discount on contracts purchased.... -- -- 10.00% 10.00% 9.80% Number of sales offices................ -- -- 4 2 6 Gross amount financed per contract........... -- -- $ 10.27 $ 10.05 $ 10.43 Net charge-offs to average contracts(8) .. -- -- 1.50% 0.20% 4.96%
26 - -------- (1) 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 and includes all options issued below the estimated initial public offering price within one year prior to the filing of the Registration Statement for the initial public offering calculated using the treasury stock method. (2) Information for the nine months ended September 30, 1996 and 1997 and for the period from April 29, 1994 (Inception) to December 31, 1994 is annualized for comparability with year end information. (3) Nonaccrual loans are net of specific loss allowances. (4) General allowances represent provisions for losses not specifically identified in the loan portfolio. (5) 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. (6) Does not include $3.5 million in conforming loan sales in the year ended December 31, 1995. (7) See "Business--Insurance Premium Finance--Servicing and Collection." (8) 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 ----------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1996 1996 1997 1997 1997 ------------- ------------ --------- -------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) STATEMENT OF OPERATIONS DATA Net interest income.... $ 2,317 $ 2,344 $ 2,766 $ 3,511 $ 3,844 Provision for loan losses................ 98 96 94 285 66 ------- ------- ------- -------- -------- Net interest income after provision for loan losses........... 2,219 2,248 2,672 3,226 3,778 ------- ------- ------- -------- -------- Non-interest income Gain on sale of loans................ 729 1,479 2,380 4,697 8,183 Other non-interest income............... 123 129 143 179 201 ------- ------- ------- -------- -------- Total non-interest income.............. 852 1,608 2,523 4,876 8,384 ------- ------- ------- -------- -------- Non-interest expense... 2,280 3,843 4,800 6,496 7,989 ------- ------- ------- -------- -------- Income before income taxes................. 791 13 395 1,606 4,173 Income taxes........... 329 (7) 162 666 1,752 ------- ------- ------- -------- -------- Net income............. $ 462 $ 20 $ 233 $ 940 $ 2,421 ======= ======= ======= ======== ======== Net income per common share (pro forma)(1)........ $ 0.04 $ -- $ 0.02 $ 0.08 $ 0.22 ======= ======= ======= ======== ======== Weighted average common shares outstanding (pro forma)(1)........ 10,886 10,886 11,316 11,344 11,344 ======= ======= ======= ======== ======== OTHER DATA Mortgage loan originations.......... $16,646 $34,796 $67,337 $108,481 $161,061 Insurance premium finance loan originations.......... $23,888 $25,563 $43,304 $ 41,951 $ 31,864 Automobile installment contracts purchased... $ 4,080 $ 5,409 $ 7,713 $ 9,588 $ 12,513
- -------- (1) 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 and includes all options issued below the estimated initial public offering price within one year prior to the filing of the Registration Statement for the initial public offering calculated using the treasury stock method. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL 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. 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 Corp. 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. After obtaining all required licensing, the mortgage operations will be operated entirely by United PanAm Mortgage Corp. The Company has funded its mortgage finance business to date primarily through the Bank's deposits, FHLB advances and the sale of substantially all of its mortgage loan originations to mortgage companies and investors through whole loan packages offered for bid several times per month. 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 expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize mortgage loans on a periodic basis. The Company has sold substantially all of its mortgage loan originations to date on a servicing released basis. 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. 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 28 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 whole loan sales. As of September 30, 1997, the Bank was a five-branch federal savings bank with $210.8 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 book value, which loans aggregated $87.2 million in principal amount (before unearned discounts and premiums) at September 30, 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. 29 AVERAGE BALANCE SHEETS The following tables set forth information relating to the Company for the nine months ended September 30, 1996 and 1997 and for the years ended December 31, 1995 and 1996 and for the period from April 29, 1994 (Inception) to December 31, 1994. 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.
NINE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, 1996 SEPTEMBER 30, 1997 --------------------------- --------------------------- AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ BALANCE(1) INTEREST COST BALANCE(1) INTEREST COST ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest earning assets Investment securities........... $ 10,731 $ 531 6.62% $ 9,772 $ 447 6.12% Mortgage loans, net(2)............... 116,890 8,368 9.55% 143,715 10,378 9.63% IPF loans, net(3)..... 27,920 2,931 13.99% 44,591 4,735 14.16% Automobile installment contracts, net(4).... 1,386 286 27.59% 14,113 2,754 26.09% -------- ------ -------- ------- Total interest earning assets..... 156,927 12,116 10.29% 212,191 18,314 11.51% ------ ----- ------- ----- Non-interest earning as- sets(3)................ 8,119 17,485 -------- -------- Total assets(4)..... $165,046 $229,676 ======== ======== Liabilities and Equity Interest bearing liabil- ities Customer deposits..... 143,756 5,330 4.96% 183,134 6,710 4.89% Notes payable......... 10,930 388 4.75% 11,124 482 5.79% FHLB advances......... 754 34 6.03% 20,334 1,001 6.38% -------- ------ -------- ------- Total interest bearing liabilities........ 155,440 5,752 4.95% 214,592 8,193 5.10% ------ ----- ------- ----- Non-interest bearing li- abilities.............. 3,805 7,459 -------- -------- Total liabilities... 159,245 222,051 Equity.................. 5,801 7,625 -------- -------- Total liabilities and equity......... $165,046 $229,676 ======== ======== Net interest income be- fore provision for loan losses................. $6,364 $10,121 ====== ======= Net interest rate spread(5).............. 5.34% 6.41% Net interest margin(6).. 5.41% 6.36% Ratio of interest earn- ing assets to interest bearing liabilities.... 100.9% 98.8%
- -------- (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 allowances for estimated losses; includes non-performing loans. (4) Net of unearned finance charges, allowances 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. 30
APRIL 29, 1994 (INCEPTION) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------------------------------------------- 1994 1995 1996 ------------------------------ --------------------------- --------------------------- AVERAGE AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE(1) INTEREST(2) COST BALANCE(1) INTEREST COST BALANCE(1) INTEREST COSTS ---------- ----------- ------- ---------- -------- ------- ---------- -------- ------- (DOLLARS IN THOUSANDS) ASSETS Interest earning assets Investment Securities.. $ 97,501 $3,753 5.71% $ 52,363 $3,205 6.12% $ 11,050 $ 706 6.39% Mortgage loans, net(3)................ 55,661 3,129 8.43% 105,833 10,028 9.48% 117,877 11,150 9.46% IPF loans, net(4)...... -- -- -- 2,591 300 11.58% 28,795 4,026 13.98% Automobile installment contracts, net(5)..... -- -- -- -- -- -- 2,488 679 27.29% -------- ------ -------- ------ -------- ------ Total interest earning assets................ 153,162 6,882 6.74% 160,787 13,533 8.42% 160,210 16,561 10.34% ------ ------ ------ Non-interest earning assets(5).............. 2,260 6,106 8,124 -------- -------- -------- Total assets........... $155,422 $166,893 $168,334 ======== ======== ======== LIABILITIES AND EQUITY Interest bearing liabilities Customer deposits...... 140,265 3,385 3.58% 148,582 7,240 4.87% 146,160 7,225 4.94% Notes payable.......... 8,984 188 3.10% 10,930 487 4.46% 10,930 556 5.09% FHLB advances.......... -- -- -- -- -- -- 1,170 72 6.15% -------- ------ -------- ------ ----- -------- ------ Total interest bearing liabilities........... 149,249 3,573 3.55% 159,512 7,727 4.85% 158,260 7,853 4.96% ------ ----- ------ ----- ------ ----- Non-interest bearing liabilities............ 1,120 1,998 4,173 -------- -------- -------- Total liabilities...... 150,369 161,510 162,433 Equity.................. 5,053 5,383 5,901 -------- -------- -------- Total liabilities and equity................ $155,422 $166,893 $168,334 ======== ======== ======== Net interest income before provision for loan losses............ $3,309 $5,806 $8,708 ====== ====== ====== Net interest rate spread(6).............. 3.19% 3.57% 5.38% Net interest margin(7).. 3.24% 3.61% 5.44% Ratio of interest earning assets to interest bearing liabilities............ 102.6% 101.0% 101.2%
- -------- (1) Average balances are measured on a month-end basis. (2) Interest income and interest expense for the period from April 29, 1994 (Inception) through December 31, 1994 were annualized for comparability with the years ended December 31, 1995 and 1996. (3) Net of deferred loan origination fees, unamortized discounts, premiums and allowance for estimated loan losses; includes loans held for sale and non- performing loans. (4) Net of allowance for estimated loans; includes non-performing loans. (5) Net of unearned finance charges, allowance for estimated losses; includes non-performing loans. (6) Net interest rate spread represents the difference between the yield on interest earning assets and the cost of interest bearing liabilities. (7) 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.
APRIL 29, 1994 (INCEPTION) TO YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1994 DECEMBER 31, 1995 SEPTEMBER 30, 1996 COMPARED TO COMPARED TO COMPARED TO YEAR ENDED YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1995 DECEMBER 31, 1996 SEPTEMBER 30, 1997 ----------------------- ---------------------- -------------------- INCREASE INCREASE (DECREASE) INCREASE (DECREASE) (DECREASE) DUE TO DUE TO DUE TO ----------------------- ---------------------- -------------------- VOLUME RATE NET VOLUME RATE NET VOLUME RATE NET ------- ----- ------- ------- ---- ------- ------ ---- ------ (IN THOUSANDS) Interest earning assets Investment securities............ $(2,797) $ 433 $(2,364) $(2,639) $140 $(2,499) $ (46) $(38) $ (84) Mortgage loans, net(1)................ 4,690 645 5,335 1,138 (16) 1,122 1,936 74 2,010 IPF loans, net......... 300 -- 300 3,652 74 3,726 1,769 35 1,804 Automobile installment contracts, net........ -- -- -- 679 -- 679 2,483 (15) 2,468 ------- ----- ------- ------- ---- ------- ------ ---- ------ Total interest earning assets...... 2,193 1,078 3,271 2,830 198 3,028 6,142 56 6,198 Interest bearing liabilities Customer deposits...... 313 1,904 2,217 (133) 118 (15) 1,442 (62) 1,380 Notes payable.......... 69 139 208 -- 69 69 7 87 94 FHLB advances.......... -- -- -- 72 -- 72 963 4 967 ------- ----- ------- ------- ---- ------- ------ ---- ------ Total interest bearing liabilities......... 382 2,043 2,425 (61) 187 126 2,412 29 2,441 ------- ----- ------- ------- ---- ------- ------ ---- ------ Change in net interest income................. $ 1,811 $(965) $ 846 $ 2,891 $ 11 $ 2,902 $3,730 $ 27 $3,757 ======= ===== ======= ======= ==== ======= ====== ==== ======
- -------- (1) Includes interest on loans held for sale. (2) Interest income and interest expense for April 29, 1994 (Inception) through December 31, 1994 were annualized for comparability with the year ended December 31, 1995 amounts. COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997 GENERAL Net income increased from $930,000 for the nine months ended September 30, 1996 to $3.6 million for the nine months ended September 30, 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 $14.4 million in gain on sales of loans from the Company's mortgage finance operations offset by an increase in non-interest expense of $13.5 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 $36.7 million for the nine months ended September 30, 1996 to $336.9 million for the nine months ended September 30, 1997, while insurance premium financing originations increased from $41.7 million to $117.1 million, respectively, and auto contracts purchased increased from $6.7 million to $29.8 million, respectively. Sales of mortgage loans were $21.6 million for the nine months ended September 30, 1996 and $273.0 million for the comparable period in 1997. 32 INTEREST INCOME Interest income increased from $12.1 million for the nine months ended September 30, 1996 to $18.3 million for the nine months ended September 30, 1997 due primarily to a $55.3 million increase in average earning assets and a 1.22% 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 $26.8 million, $16.7 million and $12.7 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 $9.6 million at September 30, 1996 to $70.2 million at September 30, 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 $5.8 million for the nine months ended September 30, 1996 to $8.2 million for the nine months ended September 30, 1997, due to a $59.1 million increase in average interest bearing liabilities and a 0.15% 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 $143.8 million for the nine months ended September 30, 1996 to $183.1 million for the nine months ended September 30, 1997. The average yield on deposits decreased from 4.96% for the nine months ended September 30, 1996 to 4.89% for the nine months ended September 30, 1997. The increase in deposits resulted from the use of retail and wholesale CDs to finance the Company's lending operations, and the decrease in the average yield on the Bank's deposits reflects the repricing of accounts to lower rates. The second largest component of growth in interest bearing liabilities was FHLB advances to the Bank, which increased from an average balance of $754,000 for the nine months ended September 30, 1996 to $20.3 million for the comparable period in 1997. This increase reflects the use of short-term borrowings to support the growth of its lending businesses. PROVISION FOR LOAN LOSSES Provision for loan losses increased from $98,000 for the nine months ended September 30, 1996 to $445,000 for the nine months ended September 30, 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 $5.3 million at September 30, 1996 compared to $6.2 million at September 30, 1997. The increase is attributable to the additional provision for losses recorded during the nine months ended September 30, 1997 and $1.3 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. Loan charge-offs were $227,000 in the nine months ended September 30, 1996 compared to $912,000 in the nine months ended September 30, 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 $14.6 million, from $1.2 million for the nine months ended September 30, 1996 to $15.8 million for the nine months ended September 30, 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 nine months ended September 30, 1996, the Company sold $21.6 million in mortgage loans compared to $273.1 million during the comparable period in 1997. Net gains on sales of loans, as a percentage of loans sold, were 3.96% for the nine months ended September 30, 1996 compared to 5.59% for the nine months ended September 30, 1997. All loans sold during the nine months ended September 30, 1996 and 1997 were sold as whole loans with servicing released to the investor. The Company expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize mortgage loans on a periodic basis. 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 $209,000, from $314,000 for the nine months ended September 30, 1996 to $523,000 for the nine months ended September 30, 1997. NON-INTEREST EXPENSE Non-interest expense increased $13.5 million, from $5.8 million for the nine months ended September 30, 1996 to $19.3 million for the nine months ended September 30, 1997. This increase primarily reflects an increase in salaries, loan commissions, employee benefits and other personnel costs of $8.8 million associated with the expansion of the Company's mortgage and automobile finance operations. In addition, occupancy expense increased $1.3 million, reflecting an increase in the number of mortgage and automobile lending offices. Marketing expense was $932,000 for the nine months ended September 30, 1997, compared to $100,000 for the nine months ended September 30, 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 $2.5 million during the nine months ended September 30, 1997 compared to the same period in 1996. The Company significantly expanded its mortgage and automobile finance operations, resulting in an increase from 34 employees in three offices and 20 employees in three offices, respectively, as of September 30, 1996 to 260 employees in six offices and 54 employees in 11 offices, respectively, as of September 30, 1997. INCOME TAXES Income taxes increased $1.9 million, from $698,000 for the nine months ended September 30, 1996 to $2.6 million for the nine months ended September 30, 1997. This increase occurred as a result of a $4.5 million increase in income before income taxes between the two periods offset by a decrease in the effective tax rate from 42.9% for 1996 to 41.8% for 1997. COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1997 Total assets increased $109.3 million, from $174.0 million at September 30, 1996 to $283.3 million at September 30, 1997. This increase occurred primarily as a result of a $72.2 million increase in loans receivable, from $150.5 million at September 30, 1996 to $222.7 million as of September 30, 1997. The increase in loans was comprised of a $60.6 million increase in mortgage loans held for sale, a $19.0 million increase (net of unearned finance charges) in auto contracts and a $16.0 million increase in insurance premium finance loans, offset by a $36.4 million decrease in loans purchased from the RTC as a result of scheduled principal amortizations and prepayments. Cash and cash equivalents increased $31.5 million, from $14.3 million at September 30, 1996 to $45.8 million at September 30, 1997, as a result of increased liquidity from the Company's sale of mortgage loans. 34 Premises and equipment increased from $662,000 at September 30, 1996 to $2.3 million at September 30, 1997 as a result of purchases of furniture and equipment for the Company's new lending branch offices and the overall growth in lending operations. Deposit accounts increased $62.8 million, from $148.0 million at September 30, 1996 to $210.8 million at September 30, 1997, due primarily to an increase in CDs of $53.6 million, from $124.1 million at September 30, 1996 to $177.7 million at September 30, 1997. Included in deposits at September 30, 1997 are $7.5 million in brokered CDs. There were no brokered CDs outstanding at September 30, 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 September 30, 1996 at a weighted average interest rate of 5.58% to $35.0 million at September 30, 1997 at a weighted average interest rate of 6.43% and notes payable from stockholders which increased $1.9 million between period ends. Net deferred tax assets were $2.1 million at September 30, 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. Stockholders' equity increased from $6.7 million at September 30, 1996 to $10.4 million at September 30, 1997, solely as a result of the Company's net income. 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 mortgages 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 $952,000 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 35 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. 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. 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 28 employees in four offices, respectively. 36 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 $27.9 million, from $159.6 million as of December 31, 1995 to $187.6 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. 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 37 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 $10.0 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. 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. 38 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 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. 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 39 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 June 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 six basis points and would result in a $11,000 increase in the NPV of the Bank and (ii) a 200 basis point increase in interest rates was 51 basis points and would result in a $1.7 million decrease in the NPV of the Bank. At June 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. The following table shows the NPV and projected change in the NPV of the Bank at June 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")
NPV AS % OF PORTFOLIO NET PORTFOLIO VALUE VALUE OF ASSETS --------------------------- ------------------------ $ AMOUNT $ CHANGE % CHANGE NPV RATIO % CHANGE CHANGE IN RATES -------- -------- -------- ----------- ----------- (DOLLARS IN THOUSANDS) +400 bp.................... $28,596 $(7,519) -21% 11.37% -253 bp +300 bp.................... $31,928 $(4,187) -12% 12.53% -137 bp +200 bp.................... $34,451 $(1,664) -5% 13.39% -51 bp +100 bp.................... $35,883 $ (232) -1% 13.85% -5 bp 0 bp....................... $36,115 -- -- 13.90% -- - -100 bp.................... $35,956 $ (159) -- 13.81% -9 bp - -200 bp.................... $36,126 $ 11 -- 13.84% -6 bp - -300 bp.................... $36,900 $ 785 +2% 14.07% +17 bp - -400 bp.................... $38,167 $ 2,052 +6% 14.46% +56 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 40 short-term borrowings. The required ratio is currently 5%, 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 of loans have been a primary source of funds for the Company. During the nine months ended September 30, 1996 and 1997, cash flows from sales of loans were $22.2 million and $298.5 million, respectively, and, during the year ended December 31, 1996, loans sales produced $52.2 million in cash flows. 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 September 30, 1997, such retail deposits were $174.3 million or 82.7% of total deposits. The Bank uses wholesale and broker-originated deposits to supplement its retail deposits and, at September 30, 1997, wholesale deposits were $29.0 million or 13.7% of total deposits while broker-originated deposits were $7.5 million or 3.6% 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 September 30, 1997 was five months. 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 and 1996 and for the nine months ended September 30, 1996 and 1997.
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- --------------------------------- 1995 1996 1996 1997 ---------------- ---------------- ---------------- ---------------- AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE BALANCE RATE -------- ------- -------- ------- -------- ------- -------- ------- (DOLLARS IN THOUSANDS) Passbook accounts....... $ 16,612 2.12% $ 14,665 2.39% $ 14,248 2.77% $ 19,972 3.30% Checking accounts....... 12,091 1.48% 10,060 1.33% 9,927 1.33% 9,966 1.32% Certificates of deposit Under $100,000......... 112,342 5.67% 117,063 5.55% 115,698 5.58% 131,494 5.52% $100,000 and over...... 7,537 6.36% 4,372 5.88% 3,883 5.88% 21,702 5.90% -------- -------- -------- -------- Total................. $148,582 4.87% $146,160 4.94% $143,756 4.96% $183,134 4.89% ======== ======== ======== ========
41 The following table sets forth the time remaining until maturity for all CDs at December 31, 1995 and 1996 and September 30, 1997.
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- (IN THOUSANDS) Maturity within one year................ $ 76,879 $103,369 $139,415 Maturity within two years............... 36,316 26,819 37,831 Maturity within three years............. 1,681 1,177 500 Maturity within four years.............. 957 -- -- -------- -------- -------- Total certificates of deposit........... $115,833 $131,365 $177,746 ======== ======== ========
At September 30, 1997, the Bank exceeded all of its regulatory capital requirements (and was deemed to be "well capitalized") with (i) tangible capital of $19.7 million, or 7.06% of total adjusted assets, which is above the required level of $4.2 million, or 1.50%; (ii) core capital of $19.7 million, or 7.06% of total adjusted assets, which is above the required level of $8.4 million, or 3.00%; and (iii) risk-based capital of $21.8 million, or 13.20% of risk-weighted assets, which is above the required level of $13.2 million, or 8.00%. The Company has other sources of liquidity, including FHLB advances 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 approximately $45 million at September 30, 1997. Other borrowings of the Company consist of the RTC Notes Payable which mature in 1999, and notes payable from stockholders which mature in 1999. See "--Liquidity and Capital Resources--RTC Notes Payable" for a discussion of the Company's RTC Notes Payable and "Management--Certain Transactions" for discussion of the notes payable from stockholders. The following table sets forth certain information regarding the Company's short-term borrowed funds (consisting solely of FHLB advances) at or for the periods ended on the dates indicated.
AT OR FOR AT OR FOR YEARS ENDED NINE MONTHS DECEMBER 31, ENDED ------------- SEPTEMBER 30, 1995 1996 1997 ----- ------ ------------- (DOLLARS IN THOUSANDS) FHLB advances Maximum month-end balance.................... $ -- $4,000 $35,000 Balance at end of period..................... -- 4,000 35,000 Average balance for period................... -- 1,170 20,334 Weighted average interest rate on Balance at end of period..................... -- % 5.70% 6.43% Average balance for period................... -- % 6.15% 6.38%
The Company had no material contractual obligations or commitments for capital expenditures at September 30, 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 September 30, 1997, the Company had outstanding commitments to originate loans of $116.0 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. 42 MASTER REPURCHASE AGREEMENT 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 equal to 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 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 28, 1994 with respect to a loan of $6,930,000 and a second Interim Capital Assistance Agreement on September 28, 1997 with respect to a loan of $4,000,000 (together, the "RTC Agreements"). The RTC Agreements provide for repayment of the entire principal amount, 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 September 30, 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 Corp. 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; or (iii) 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 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 Summary of Loan Portfolio. At September 30, 1997, the Company's loan portfolio constituted $222.7 million or 78.6% of the Company's total assets, of which $152.5 million or 68.5% were held for investment and $70.2 million or 31.5% 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. 43 The following table sets forth the composition of the Company's loan portfolio at the dates indicated.
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, 1995 1996 1997 ------------ ------------ ------------- (IN THOUSANDS) MORTGAGE LOANS Mortgage loans (purchased primarily from RTC)............................ $124,483 $102,733 $ 87,157 -------- -------- -------- Subprime mortgage loans Held for sale....................... -- 20,766 70,241 Held for investment................. -- 1,294 3,840 -------- -------- -------- Total subprime mortgage loans....... -- 22,060 74,081 -------- -------- -------- Total mortgage loans................ 124,483 124,793 161,238 -------- -------- -------- CONSUMER LOANS Automobile installment contracts...... -- 10,830 32,037 Insurance premium financing........... 16,975 32,058 47,287 Other consumer loans.................. 31 230 327 -------- -------- -------- Total consumer loans................ 17,006 43,118 79,651 -------- -------- -------- Total loans......................... 141,489 167,911 240,889 Unearned discounts and premiums....... (4,445) (3,697) (3,135) Unearned finance charges.............. -- (3,271) (8,810) Allowance for loan losses............. (5,250) (5,356) (6,203) -------- -------- -------- Total loans, net.................... $131,794 $155,587 $222,741 ======== ======== ========
Loan Maturities. The following table sets forth the dollar amount of loans maturing in the Company's loan portfolio at September 30, 1997 based on scheduled contractual amortization. Loan balances are reflected before unearned discounts and premiums, unearned finance charges and allowance for losses.
AT SEPTEMBER 30, 1997 ---------------------------------------------------------------------------- MORE THAN MORE THAN MORE THAN MORE THAN ONE YEAR 1 YEAR TO 3 3 YEARS TO 5 YEARS TO 10 YEARS TO MORE THAN OR LESS YEARS 5 YEARS 10 YEARS 20 YEARS 20 YEARS TOTAL LOANS -------- ----------- ---------- ---------- ----------- --------- ----------- (IN THOUSANDS) Mortgage loans held for investment............. $ 116 $ 328 $ 2,208 $7,411 $22,903 $ 58,031 $ 90,997 Mortgage loans held for sale................... -- -- -- -- 3,697 66,544 70,241 Consumer loans.......... 47,511 15,833 16,307 -- -- -- 79,651 ------- ------- ------- ------ ------- -------- -------- Total................. $47,627 $16,161 $18,515 $7,411 $26,600 $124,575 $240,889 ======= ======= ======= ====== ======= ======== ========
The following table sets forth, at September 30, 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 SEPTEMBER 30, 1998 ------------------------------ FIXED ADJUSTABLE TOTAL -------- --------------------- (IN THOUSANDS) Mortgage loans held for investment........... $ 16,884 $ 74,001 $ 90,885 Mortgage loans held for sale................. 11,326 58,915 70,241 Consumer loans............................... 31,813 326 32,139 -------- --------- --------- Total...................................... $ 60,023 $ 133,242 $ 193,265 ======== ========= =========
44 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 September, 30, 1997, the Company had $3.7 million in assets classified as special mention, $5.2 million of assets classified as substandard, $127,000 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 combined loan portfolio (before specific reserves for losses) that were more than 30 days delinquent at December 31, 1995 and 1996 and September 30, 1997.
LOAN DECEMBER 31, % OF TOTAL DECEMBER 31, % OF TOTAL SEPTEMBER 30, % OF TOTAL DELINQUENCIES 1995 LOANS 1996 LOANS 1997 LOANS - ------------- ------------ ---------- ------------ ---------- ------------- ---------- (DOLLARS IN THOUSANDS) 30 to 59 days........... $1,753 1.3% $ 1866 1.3% $ 938 0.5% 60 to 89 days........... 842 0.6% 109 0.1% 332 0.2% 90+ days................ 5,594 4.1% 5,438 3.7% 4,196 2.5% ------ --- ------ --- ------ --- Total................... $8,189 6.0% $7,413 5.1% $5,466 3.2% ====== === ====== === ====== ===
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 following table sets forth the aggregate amount of non- performing loans (net of unearned discounts and premiums, unearned finance charges and specific allowances) at December 31, 1995 and 1996 and September 30, 1997. The Company does not generally modify, extend or rewrite loans and at September 30, 1997 had no troubled debt restructured loans. 45
DECEMBER 31, SEPTEMBER 30, -------------- ------------- 1995 1996 1997 ------ ------ ------------- (DOLLARS IN THOUSANDS) Non-performing loans Single-family residential.................. $5,086 $5,044 $3,523 Multi-family residential................... 154 81 81 Consumer and other loans................... -- 710 1,064 ------ ------ ------ Total.................................... $5,240 $5,835 $4,668 ====== ====== ====== Non-performing loans as a percentage of Total loans held for investment............ 3.85% 4.19% 2.96% Total assets............................... 3.28% 3.11% 1.65% General allowance for loan losses as a percentage of Total loans held for investment............ 3.19% 3.14% 3.28% Non-performing loans....................... 82.80% 74.90% 110.70%
For the years ended December 31, 1995 and 1996 and for the nine months ended September 30, 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, $370,0000 and $248,000, respectively. 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 and 1996 and September 30, 1997, real estate owned was $988,000, $298,000 and $637,000, respectively, and consisted entirely of one to four family residential properties. For the nine months ended September 30, 1997, real estate owned expenses were $36,000 and gains of $56,000 were reported on the sale of real estate owned. 46 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 and 1996 and the nine months ended September 30, 1997.
AT OR FOR THE YEARS ENDED AT OR FOR THE NINE DECEMBER 31, MONTHS ENDED -------------- SEPTEMBER 30, 1995 1996 1997 ------ ------ ------------------ (DOLLARS IN THOUSANDS) ALLOWANCE FOR LOAN LOSSES Balance at beginning of period.............. $ 378 $5,250 $ 5,356 Provision for loan losses................. 120 194 445 Charge-offs Mortgage loans held for investment...... (108) (285) (319) Mortgage loans held for sale............ -- -- -- Consumer loans.......................... -- (433) (1,372) ------ ------ ------- (108) (718) (1,691) Recoveries Mortgage loans held for investment...... -- -- 77 Mortgage loans held for sale............ -- -- -- Consumer loans.......................... -- 274 702 ------ ------ ------- -- 274 779 ------ ------ ------- Net charge-offs........................... (108) (444) (912) Acquisition discounts allocated to loss allowance................................ 4,860 356 1,314 ------ ------ ------- Balance at end of period.................... $5,250 $5,356 $ 6,203 ====== ====== ======= Allowance as a percent of net principal balance Mortgage loans held for investment........ 4.23% 4.35% 4.28% Consumer loans............................ 1.00% 2.66% 2.97% Charge-offs to average loans.............. 0.10% 0.30% 0.45% Ending allowance to period end loans, net...................................... 3.98% 3.97% 4.07%
AT OR FOR THE YEARS ENDED DECEMBER 31, ----------------------------------------------- AT OR FOR THE NINE MONTHS ENDED 1995 1996 SEPTEMBER 30, 1997 ----------------------- ----------------------- ----------------------- PERCENT OF LOANS PERCENT OF LOANS PERCENT OF LOANS IN EACH CATEGORY IN EACH CATEGORY IN EACH CATEGORY 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....... $5,080 87.9% $4,295 70.7% $3,672 53.3% Consumer loans........ 170 12.1% 1,061 29.3% 2,105 46.7% Unallocated........... -- -- -- -- 426 -- ------ ----- ------ ----- ------ ----- $5,250 100.0% $5,356 100.0% $6,203 100.0% ====== ===== ====== ===== ====== =====
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. 47 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. 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 and 1996 and September 30, 1997.
AS OF DECEMBER 31, AS OF ---------------- SEPTEMBER 30, 1995 1996 1997 ------- ------- ------------- (DOLLARS IN THOUSANDS) Balance at end of period Fed funds..................................... $ 8,500 $ -- $ -- Overnight deposits............................ 1,507 21,000 22,000 U.S. agency securities........................ -- -- 2,002 Commercial paper.............................. 2,986 -- -- FHLB certificates of deposit.................. 9,000 -- -- ------- ------- --------- Total......................................... $21,993 $21,000 $ 24,002 ======= ======= ========= Weighted average yield at end of period Fed funds..................................... 5.29% -- -- Overnight deposits............................ 5.67% 5.02% 5.50% U.S. agency securities........................ -- -- 6.15% Commercial paper.............................. 5.63% -- -- 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........................ -- -- 25 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. 48 ACCOUNTING CONSIDERATIONS In June 1996, the FASB issued FASB No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("FASB 125"), which addresses the accounting for all types of securitization transactions, securities lending and repurchase agreements, collateralized borrowing arrangements and other transactions involving the transfer of financial assets. FASB 125 distinguishes transfers of financial assets that are sales from transfers that are secured borrowings. FASB 125 is generally effective for transactions that occur after December 31, 1996, and it is to be applied prospectively. FASB 125 requires the Company to allocate its basis in mortgage loans between the portion of the mortgage loans sold through mortgage-backed securities and the portion retained (the "residual interest") based on the relative fair values of those portions on the date of sale. FASB 125 requires the Company to account for residual interests as "held-for-trading" securities which are to be recorded at fair value in accordance with SFAS No. 115. The Company adopted FASB 125 on January 1, 1997, and there has been no material impact on the Company's financial position or results of operations. In February 1997, the FASB issued FASB No. 128, "Earnings Per Share" ("FASB 128"). FASB 128 supersedes APB Opinion No. 15, "Earnings Per Share" ("APB No. 15"), and specifies the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock or potential common stock. FASB 128 was issued to simplify the computation of earnings per share and to make the U.S. standard more compatible with the earnings per share standards of other countries and that of the International Accounting Standards Committee. It replaces the presentation of primary earnings per share with a presentation of basic earnings per share and fully diluted earnings per share with diluted earnings per share. Basic earnings per share, unlike primary earnings per share, excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share 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 in the issuance of common stock. Diluted earnings per share is computed similarly to fully diluted earnings per share under APB No. 15. FASB 128 is effective for financial statements for both interim and annual periods ending after December 15, 1997. Earlier application is not permitted. After adoption, all prior-period earnings per share data presented must be restated to conform with FASB 128. The Company has determined that the effect of applying FASB 128 will be to increase earnings per share as compared to the primary earnings per share calculation under the existing method due to options outstanding. FASB No. 129, "Disclosure on Information about Capital Structure," is effective for financial statements for periods ending after December 15, 1997. It is not expected that FASB No. 129 will require significant revision of prior disclosures since FASB No. 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. 49 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 and FHLB advances at the Bank and whole loan sales, and expects to complete its first securitization of mortgage loans 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 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. The Company believes that the Bank currently is the largest Hispanic-controlled savings association in California. 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." 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. 50 . 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 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--Master Repurchase Agreement." The Company expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize mortgage loans on a periodic basis. 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 the purchase of a home, debt consolidation, home improvements, 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 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 86% of UPAM's loans are secured by borrowers' primary residences and approximately 97% are secured by first mortgages, mitigates certain risks inherent in subprime lending. The average LTV ratio on loans originated by UPAM during the nine months ended September 30, 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 $138.0 million, or 41%, of UPAM's total loan production during the nine months ended September 30, 1997. The wholesale division originates loans through independent loan brokers and accounted for $199.0 million, or 59%, of UPAM's total loan production during the same period. UPAM currently sells substantially all of its loan originations, servicing released, to other mortgage companies and investors through whole loan packages offered for bid several times per month. During the nine months ended September 30, 1997, UPAM sold $273.1 million of loans through whole loan sales at a weighted average sales price equal to 105.9% of the original principal balance of the loans sold. UPAM expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize its loans on a periodic basis. No assurances can be given that UPAM will securitize its mortgage loans in the future or that any such securitizations will prove to be profitable if commenced. See "Risk Factors--General-- Securitizations." 51 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 securitize these loans and (iii) over time develop an in-house collection capability to complement third- party sub-servicing. UPAM currently sells 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. The Company expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize mortgage loans on a periodic basis. 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. 52 OPERATING SUMMARY The following table presents a summary of UPAM's key operating and statistical results on a quarterly basis for the year ended December 31, 1996 and the nine months ended September 30, 1997.
FOR THE QUARTER ENDED -------------------------------------------------------------------------------- MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, 1996 1996 1996 1996 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 Number of loans originated............. 51 144 171 345 606 933 1,466 Average principal balance per loan....... $ 96 $ 105 $ 97 $ 101 $ 111 $ 116 $ 110 Weighted average interest rate Fixed-rate loans....... 10.21% 10.46% 11.61% 11.11% 10.60% 10.83% 10.78% Adjustable-rate loans.. 9.46% 10.00% 9.6% 9.38% 9.27% 9.38% 9.51% Weighted average loan- to-value ratio......... 70% 72% 72% 72% 73% 74% 76% First mortgage loans.... 91% 94% 96% 96% 97% 97% 97% Fixed-rate loans........ 42% 29% 10% 8% 11% 10% 16% Owner occupied.......... 92% 93% 92% 86% 86% 88% 85% Retail origination...... 7% 1% 8% 32% 35% 41% 44% California.............. 21% 16% 36% 46% 53% 58% 50% BORROWER QUALITY STATISTICS(1) AA or A-................ 55% 67% 69% 67% 73% 71% 71% B or C.................. 40% 28% 28% 31% 23% 25% 25% C- or D................. 5% 5% 3% 2% 4% 4% 4% LOAN SALES STATISTICS Loans sold ($).......... $1,097 $ 4,226 $16,234 $28,585 $40,254 $ 92,463 $140,363 Average sales price (% of principal balance)............... -- 105.69% 105.32% 106.13% 106.15% 105.60% 105.73% OPERATING STATISTICS States loans originated in..................... 4 7 7 7 10 14 19 Retail loan offices..... -- -- 2 3 6 6 6 Retail loan officers.... -- -- 7 17 41 59 79 Wholesale loan centers.. 1 1 1 2 2 4 5 Wholesale account executives............. 3 3 5 10 33 34 38
- -------- (1)See "Business--Mortgage Finance--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 nine months ended September 30, 1997, the retail division originated $138 million in loans, or 41%, of UPAM's total loan production. As of September 30, 1997, the retail division employed 79 loan officers, located in six retail locations. Three of these offices are located in California, and one each in Arizona, Colorado and Washington. UPAM intends to continue its retail geographic expansion by opening four additional retail locations during the remainder of 1997 in Albuquerque, Las Vegas, Portland and San Diego, and increasing the total number of its loan officers to approximately 100 by the end of 1997. The retail division has implemented an expansion plan designed to control the significant operating expenses associated with establishing new branch office locations. Under this plan, UPAM has housed several marketing 53 groups responsible for specific geographic areas in one centrally located retail office, thereby reducing overhead while retaining locally-focused marketing efforts. As an example, only one greater Los Angeles retail office exists (in Orange), but it houses five distinct marketing groups responsible for the Pasadena, Orange, Long Beach, West Los Angeles and Riverside areas. 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 office. Telemarketing activities are aimed at identifying potential borrowers with subprime credit characteristics. 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, 1996 1996 1997 1997 1997 ------------- ------------ --------- -------- ------------- (DOLLARS IN THOUSANDS) Loans originated........ $1,391 $11,158 $23,616 $44,151 $70,258 Number of loans originated............. 19 102 222 372 604 Average principal balance per loan....... $ 73 $ 109 $ 106 $ 118 $ 116 Weighted average loan- to-value ratio......... 63% 72% 74% 75% 77% First mortgage loans.... 97% 98% 98% 98% 98% Property securing loan Owner occupied........ 74% 72% 77% 83% 86% Non-owner occupied.... 26% 28% 23% 17% 14% Weighted average interest rate Fixed-rate loans...... 10.11% 10.50% 10.28% 10.47% 10.48% Adjustable-rate loans................ 8.65% 8.73% 8.95% 8.99% 9.03%
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 quickly increase its loan origination volume through increased leverage of fixed costs. The wholesale division funded $199.0 million in loans, or 59% of UPAM's total loan production, during the nine months ended September 30, 1997. At September 30, 1997, the wholesale division had five loan centers located in Washington, Utah, California, Florida and Ohio, and employed 38 account executives. These loan centers maintain relationships with brokers that provide loans to UPAM. During the nine months ended September 30, 1997, UPAM originated loans through approximately 450 independent mortgage brokers, with the top 20 brokers generating 38% of those loans and the largest broker accounting for 8.0%. 54 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, 1996 1996 1997 1997 1997 ------------- ------------ --------- -------- ------------- (DOLLARS IN THOUSANDS) Loans originated........ $15,255 $23,637 $43,721 $64,330 $90,803 Number of loans originated............. 152 243 384 561 862 Average principal balance per loan....... $ 100 $ 97 $ 113 $ 114 $ 105 Weighted average loan- to-value ratio......... 73% 72% 73% 74% 75% First mortgage loans.... 96% 95% 96% 97% 96% Property securing loan Owner occupied....... 93% 93% 91% 92% 85% Non-owner occupied... 7% 7% 9% 8% 15% Weighted average interest rate Fixed-rate loans..... 11.93% 11.49% 10.83% 11.22% 10.99% Adjustable-rate loans................ 9.67% 9.69% 9.44% 9.63% 9.89%
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 nine months ending September 30, 1997 had an average loan amount of approximately $112,000 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 September 30, 1997, approximately 90% 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 the Chief Credit Officer for a period of time and deemed satisfactory. No branch-based underwriter has an approval limit greater than $250,000. Two branch-based underwriters must approve loans 55 over $250,000, with all loans over $400,000 requiring 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. 56
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 incidences Isolated months. Isolated when calculating the of minor incidences of incidences of ratio of derogatory ac- delinquencies minor credit counts to total ac- greater than 30 delinquencies delinquencies counts. days will be greater than 60 greater than 90 considered. days will be days will be -Sufficient number considered. considered. of accounts paid -Sufficient number -Demonstrate as agreed to of accounts paid ability/ offset isolated as agreed to willingness to pay incidences of offset isolated majority of delinquencies incidences of accounts as greater than 30 delinquencies agreed. days. greater than 60 -Evidence of -Evidence of days. significant significant -Evidence of delinquencies delinquencies significant greater than 90 greater than 30 delinquencies days or 90 days days not allowed. greater than 60 overdue are not -< 25% of credit days not allowed. allowed. report items -< 35% of credit -Minimum 3 derogatory in last report items accounts open for 24 months. derogatory in last 6 months. If no -Minimum of 3 12 months. minimum consumer accounts open for -Minimum of 3 credit, 6 months. accounts open for satisfactory "B" 6 months. mortgage rating or VOR last 12 months required. -< 50% of credit report items derogatory in last 12 months. BANKRUPTCY 3 years since 2 years since 1 year since FORECLOSURE discharge/dismissal. discharge--Chapter discharge--Chapter Re-established 7. 7. excellent ("A") 2 years since filing 1 year since filing credit since Chapter 13. Chapter 13. discharge/dismissal. Must be discharged Must be discharged Minimum of 3 prior to loan prior to loan accounts open at application. application. least 6 months. No Re-established good Re-established good delinquency credit ("A") credit since ("B") credit since report items since discharge/dismissal. discharge/dismissal; discharge/dismissal. Minimum of 3 or 18 months, if no accounts open at re-established least 6 months. No credit since delinquent credit discharge/dismissal. items since discharge/dismissal. No foreclosures last No foreclosures last No foreclosures last 3 years. 2 years. 2 years. COLLECTION No collections, Generally, there Generally, there CHARGE-OFF charge-offs allowed should be no should be no in last 24 months. collections or collections or charge-offs in the charge-offs in the 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
57
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 and 60-day 120-day late LAST 12 MONTHS 90-day late late payments and payment within last payments within one 90-day or 120- 12 months. Current last 12 months. day late payment NOD allowed. Rolling 30-day within last 12 lates okay. Not months. Current NOD more than 89 days allowed. Not more delinquent at 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 items derogatory when calculating the derogatories in -Percentage of in last 12 ratio of derogatory ac- the past. derogatory credit months. counts to total ac- -Currently items are not a -Percentage of counts. delinquent factor. derogatory credit accounts. 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
58 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, 1996 1996 1997 1997 1997 ------------- ------------ --------- -------- ------------- AA Risk Grade Percent of total originations......... 15% 14% 20% 27% 32% Weighted average loan- to-value ratio....... 74% 74% 75% 75% 75% Weighted average interest rate........ 8.91% 9.65% 8.88% 9.06% 9.22% A- Risk Grade Percent of total originations......... 54% 53% 53% 44% 39% Weighted average loan- to-value ratio....... 71% 71% 74% 76% 76% Weighted average interest rate........ 9.48% 9.19% 9.28% 9.15% 9.55% B Risk Grade Percent of total originations......... 24% 26% 21% 21% 21% Weighted average loan- to-value ratio....... 75% 73% 72% 75% 78% Weighted average interest rate........ 10.43% 9.69% 9.56% 9.77% 10.17% C Risk Grade Percent of total originations......... 4% 5% 2% 4% 4% Weighted average loan- to-value ratio....... 66% 69% 70% 69% 70% Weighted average interest rate........ 11.53% 10.94% 10.81% 10.33% 10.61% C- Risk Grade Percent of total originations......... 1% 2% 1% 2% 2% Weighted average loan- to-value ratio....... 55% 66% 68% 64% 69% Weighted average interest rate........ 12.23% 11.54% 11.58% 11.17% 10.89% D Risk Grade Percent of total originations......... 2% -- 3% 2% 2% Weighted average loan- to-value ratio....... 54% 53% 64% 59% 64% Weighted average interest rate........ 13.25% 13.25% 12.61% 11.95% 12.88%
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, 1996 1996 1997 1997 1997 ------------- ------------ --------- -------- ------------- California.............. 36% 46% 53% 58% 50% Washington.............. 31% 27% 19% 12% 17% Utah.................... 22% 23% 13% 11% 5% Colorado................ 6% 1% 6% 5% 6% Arizona................. -- -- 5% 5% 6% Florida................. -- -- -- -- 5% Oregon.................. 2% 1% 1% 5% 2% Ohio.................... -- -- -- -- 2% All others combined..... 3% 2% 3% 4% 7% --- --- --- --- --- Total................. 100% 100% 100% 100% 100% === === === === ===
59 LOAN SALES AND SECURITIZATIONS Whole Loan Sales. During the nine months ended September 30, 1997, UPAM sold $273.1 million of mortgage loans through whole loan sales at a weighted average sales price equal to 105.9% 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. UPAM's repurchase history to date has been minimal. 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 nine months ended September 30, 1997, UPAM sold loans to 13 institutional purchasers, three of which purchased approximately 76% of the loans sold by UPAM in this period. Securitizations. The Company expects to complete its first securitization of mortgage loans in December 1997 and, thereafter, to sell or securitize loans on a periodic basis. Whether, when and how significantly the Company enters the securitization market will depend upon economic and secondary market conditions and available financial resources. See "Risk Factors--General-- Securitizations." LOAN SERVICING AND DELINQUENCIES UPAM currently sells substantially all of its loans on a servicing released basis. All loans held for sale, 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 that they comply with its guidelines. As the Company begins the securitization of UPAM's 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. 60 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% to 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 2% of total loans outstanding. At September 30, 1997, approximately 75% 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. Generally, agents are required to deposit with the Bank an amount equal to 25% of its credit limit 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 66,247 contracts in the aggregate gross amount of $31.3 million at September 30, 1996 to 123,371 contracts in the aggregate gross amount of $47.3 million at September 30, 1997, primarily as a result of the adoption in California of mandatory automobile insurance. These contracts were originated solely in California by over 450 agents and were secured by policies underwritten by over 200 insurance companies. 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 it is the second largest provider of financing of automobile insurance premiums for consumers in California. On a very limited basis, IPF also finances insurance premiums for businesses purchasing property, casualty and liability insurance. At September 30, 1997, BPN had three stockholders and 47 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 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 the earnings of the loan portfolio, and includes (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. Under these guaranties, all debts of BPN to the guarantors are subordinated to the full payment of all obligations of BPN to the Bank. 61 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 $750,000 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 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 September 30, 1997, policies issued by non- admitted carriers comprised 1.07% 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 62 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 September 30, 1997, approximately 32.8% of the insurance policies financed by IPF were issued under CAARP. BUSINESS STRATEGY IPF's business strategy is to profitably increase 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 other insurance lines of business (e.g., commercial, property, casualty and liability insurance); and . Expanding the Company's operations into new states either through the joint venture with BPN 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 year ended December 31, 1996 and the nine months ended September 30, 1997.
AT OR FOR THE AT OR FOR THE NINE YEAR ENDED MONTHS ENDED DECEMBER 31, 1996 SEPTEMBER 30, 1997 ----------------- ------------------ (DOLLARS IN THOUSANDS, EXCEPT PORTFOLIO AVERAGES) OPERATING DATA Loan originations........................ $99,012 $117,119 Loans outstanding at period end.......... $32,058 $ 47,287 Average gross yield(1)................... 19.18% 19.84% Average net yield(1)..................... 13.62% 14.04% Allowance for loan losses................ $ 504 $ 605 LOAN QUALITY DATA Allowance for loan losses (% of loans outstanding)............................ 1.57% 1.28% Net charge-offs (% of average loans outstanding)(2)......................... 0.39% 0.27% Delinquencies (% of loans outstanding)(3)......................... 1.18% 1.76% PORTFOLIO DATA Average monthly loan originations (number of loans)............................... 6,986 11,061 Average loan size at origination......... $ 1,180 $ 1,176 Commercial insurance policies (% of loans outstanding)............................ 1.6% 1.5% CAARP policies (% of loans outstanding).. 19.8% 32.8% Cancellation rate (% of premiums financed)............................... 45.0% 44.0%
- -------- (1) Gross yield represents total rates and fees paid by the borrower. Net yield represents the yield to the Bank after interest and fee sharing with BPN. (2) Includes only the Bank's 50% share of charge-offs. Information for the nine months ended September 30, 1997 is annualized for comparability with year end information. (3) 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. 63 PRODUCTS AND PRICING IPF charges 18% to 20% annualized interest (depending on the amount financed) and a $40 processing fee per contract, which the Company believes is competitive in IPF's industry. In 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 450 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 September 30, 1997, IPF had one agent that exceeded the 15% portfolio parameter, accounting for 19.2% 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 nine months ended September 30, 1997, IPF canceled for nonpayment contracts representing approximately 44% 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 September 30, 1997, IPF had no insurance premium finance loans 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 64 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. 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, a California corporation ("UACC"), as a subsidiary of the Bank. UACC purchases auto contracts primarily from dealers in used automobiles, approximately 75% of which are 65 independent dealers and 25% 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 and Utah. At September 30, 1997, UACC's portfolio contained 3,619 auto contracts in the aggregate gross amount of $32.0 million, excluding unearned finance charges of $8.8 million. 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 corporate 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. During the nine months ended September 30, 1997, UACC approved 13.7% and funded 12.2% of the applications for auto contracts it received. 66 OPERATING SUMMARY The following table presents a summary of UACC's key operating and statistical results for the year ended December 31, 1996 and the nine months ended September 30, 1997.
AT OR FOR THE AT OR FOR THE YEAR ENDED NINE MONTHS ENDED DECEMBER 31, 1996 SEPTEMBER 30, 1997 ------------------------- ---------------------- (DOLLARS IN THOUSANDS, EXCEPT PORTFOLIO DATA) OPERATING DATA Gross contracts purchased................ $ 12,133 $ 29,814 Gross contracts outstanding.............. $ 10,830 $ 32,037 Unearned finance charges.. $ 3,271 $ 8,810 Net contracts outstanding.............. $ 7,559 $ 23,227 Average purchase discount................. 10.0% 9.8% APR to customers.......... 21.0% 21.1% Allowance for loan losses................... $ 557 $ 1,500 LOAN QUALITY DATA Allowance for loan losses (% of net contracts)..... 7.37% 6.46% Delinquencies (% of net contracts) 31-60 days............... 0.38% 0.66% 61-90 days............... 0.34% 0.11% 90+ days................. -- 0.30% Net charge-offs (% of average net contracts)(3)............ 1.50% 4.96% Repossessions (net) (% of average net contracts)...... 3.53% 0.92% PORTFOLIO DATA Used vehicles............. 98.3% 98.9% Vehicle age at time of contract (years)......... 6.4 6.5 Original contract term (months)................. 37.0 38.2 Gross amount financed to WSBB(1).................. 119% 116% Net amount financed to WSBB(2).................. 109% 104% Net amount financed per contract................. $ 7,397 $ 7,478 Down payment.............. 22% 20% Monthly payment........... $ 269 $ 269 OTHER DATA Number of offices......... 4 9 Percent of contracts funded to applications received................. 15.9% 12.2%
- -------- (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. (3) Information for the nine months ended September 30, 1997 is annualized for comparability to year end information. PRODUCTS AND PRICING UACC targets transactions which involve (i) a used automobile with an average age of five to eight years, (ii) an average original contract term of 38 to 42 months and (iii) an average liquidation period of 24 to 28 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. 67 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 September 30, 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. SALES AND MARKETING UACC markets its financing program to both independent used automobile dealers 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 September 30, 1997, UACC directly marketed its programs to dealers through its nine branch offices in California, Utah and Arizona.
GROSS NUMBER OF CONTRACTS CONTRACTS PURCHASED OUTSTANDING OVER THE NINE MONTHS AT SEPTEMBER 30, ENDED SEPTEMBER 30, BRANCH LOCATION DATE ESTABLISHED 1997 1997 - --------------- ---------------- ---------------- -------------------- (IN THOUSANDS) Irvine, CA............... March 1996 $ 9,841 678 San Diego, CA............ June 1996 6,436 543 Riverside, CA............ September 1996 5,918 630 San Jose, CA............. November 1996 3,920 376 Los Angeles, CA.......... March 1997 3,035 317 San Fernando, CA......... May 1997 1,938 208 Upland, CA............... July 1997 615 67 Salt Lake City, UT....... August 1997 268 31 Phoenix, AZ.............. September 1997 66 9 ------- ----- $32,037 2,859 ======= =====
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. 68 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, 1996 1996 1996 1997 1997 1997 -------- ------------- ------------ --------- -------- ------------- (DOLLARS IN THOUSANDS, EXCEPT PER CONTRACT AMOUNTS) Gross amount of contracts.............. $2,644 $4,080 $5,409 $7,713 $9,588 $12,513 Average original term of contracts (months)..... 36.9 36.9 37.0 36.1 38.0 38.2
At September 30, 1997, 99.0% of UACC's auto contracts were written by California branch locations. In the quarter ended September 30, 1997, UACC expanded into Salt Lake City and Phoenix, and UACC intends to open an office in Portland by the end of 1997. 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 September 30, 1997, no dealer accounted for more than 2.8% of UACC's portfolio and the ten dealers from which UACC purchased the most contracts accounted for approximately 20.7% of the portfolio in the aggregate. 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. 69 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 non-accrual status accounts delinquent in excess of 90 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 non-accrual 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. 70 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 MONTHS SECOND QUARTER THIRD QUARTER FOURTH QUARTER FIRST QUARTER SECOND QUARTER THIRD QUARTER OUTSTANDING -------------- ------------- -------------- ------------- -------------- ------------- 1....................... 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% 3....................... 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 4....................... 0.0% 0.0% 0.1% 0.1% 0.2% 5....................... 0.0% 0.2% 0.1% 0.3% 0.2% 6....................... 0.1% 0.5% 0.3% 0.6% 0.5% 7....................... 0.6% 1.6% 0.8% 0.9% 8....................... 1.0% 2.1% 1.0% 1.3% 9....................... 1.7% 3.1% 1.4% 1.9% 10...................... 1.9% 3.7% 2.2% 11...................... 3.8% 3.9% 3.2% 12...................... 4.5% 4.9% 3.4% 13...................... 5.3% 5.6% 14...................... 6.8% 6.2% 15...................... 7.4% 7.0% 16...................... 7.4% 17...................... 7.7% 18...................... 7.8% Original Pool ($000).... $2,030 $2,855 $3,792 $5,505 $6,794 $8,781 ====== ====== ====== ====== ====== ====== Remaining Pool ($000)... $ 982 $1,573 $2,434 $4,264 $5,758 $8,145 ====== ====== ====== ====== ====== ====== (%).................... 48% 55% 64% 77% 85% 93% ====== ====== ====== ====== ====== ======
UACC purchased its first auto contracts in March 1996 and, accordingly, a maximum of 18 months loss history is available at September 30, 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 at a discount from the RTC in 1994 and 1995, which loans aggregated $87.2 million (before unearned discounts and premiums) at September 30, 1997. The Bank has focused its 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 management, executive, financial, facilities 71 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 "Business--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 purchase what it terms "A-" mortgage loans by the end of 1997. 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. 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. 72 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 non-savings institution 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 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 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"). 73 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 as agent 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 is also 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. 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 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. 74 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 qualification; (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 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. 75 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 (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 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 76 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, 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, 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 September 30, 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 September 30, 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. The Bank has never failed to meet its liquidity requirements. 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 77 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. The legislation also provides for BIF members to service a growing portion of the FICO bond payments. Until January 1, 2000, annual assessments of .013% of BIF deposits and .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 .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. 78 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. Notwithstanding 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 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 79 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%. Rechartering Legislation. Legislation enacted in 1996 provides that the BIF and SAIF will merge on January 1, 1999, if there are no savings associations, as defined, in existence on that date. Pursuant to that legislation, the Department of Treasury in May 1997 recommended in a report to Congress that the separate charters for thrifts and banks be abolished. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter, conform holding company regulation and abolish the OTS have been introduced in Congress. The House Committee on Banking and Financial Services (the "Banking Committee") has considered and reported H.R. 10, the Financial Services Competition Act of 1997, including Title III, the "Thrift Charter Transition Act of 1997" ("Title III"). If enacted, Title III will require federal savings associations to convert to national banks or some type of state charter within two years of enactment or they would automatically become national banks. On the earlier of January 1, 2000, or two years after the date of enactment, the BIF and SAIF will merge. Two years after enactment, HOLA will be repealed and the OTS will be abolished. Within nine months of enactment, the Secretary of the Treasury will adopt a plan for the combination of the OTS and the Office of the Comptroller of the Currency into a single agency. Converted federal thrifts generally will be permitted to continue to engage in any activity, including the holding of any asset, lawfully conducted on the date prior to enactment. A federal savings association converted to a national bank may retain all branches established or proposed in a pending application as of enactment and establish new branches in any state in which it has a branch. Otherwise, it may establish new branches only under national bank rules. In addition, beginning two years after enactment, national banks will be authorized to exercise all powers formerly authorized for federal savings associations. Under Title III, holding companies for converted savings associations generally will become subject to the same regulation as holding companies that control commercial banks, with a grandfather provision for former unitary savings and loan holding companies. Such grandfathered companies will be permitted to maintain and establish affiliations with any type of company and to acquire additional depository institutions, as long as any acquired depository institution is merged into its converted savings association and such institution continues to comply with both the qualified thrift lender test and certain asset and investment limitations to which it was subject as a federal savings association. Such a converted holding company would be subject to the same capital requirements, if any, applicable under OTS regulation if it were a savings and loan holding company on June 19, 1997, and for three years would be subject to substantially similar regulation, reporting and examination as implemented by the OTS as of January 1, 1997. Title III provides for the continuation of adjustable rate mortgage indices used by converted savings associations, including cost-of-funds indices, if calculation of the index could not be made by the terms of the governing instrument as a result of changes made by Title III. Title III also makes significant changes in the 80 operation of the FHLB system, including the types of stock that may be issued by FHLBs to members and borrowers and FHLB capitalization, management, investments and lending. Effective January 1, 1999, federal savings associations will be permitted to be voluntary members and stockholders of a FHLB. The Company is unable to predict whether Title III or any other such legislation will be enacted, what the provisions of any such final legislation may be, or the extent to which the legislation would restrict, disrupt or otherwise have a material effect on the Company's operations. Under House rules, the House Commerce Committee (the "Commerce Committee") was also given jurisdiction over H.R. 10 and, on October 30, 1997, reported its version of that Bill. As noted below, the Commerce Committee largely retained the Banking Committee language, but renumbered Title III as Title IV and made certain material changes to the thrift rechartering legislation ("Title IV"). Title IV provides grandfather treatment only to a company that was a savings and loan holding company as of September 16, 1997, or had an application to become such a holding company on file as of that date. Second, a grandfathered company will lose its grandfather treatment if it acquires control of another insured bank. Third, Title IV restricts affiliate transactions between a grandfathered bank and its nonfinancial affiliates. In addition, the Commerce Committee deleted the entire FHLB subtitle from H.R. 10. H.R. 10 is now pending in the House Rules Committee (the "Rules Committee"). A Republican leadership working group has been delegated responsibility to review the Banking and Commerce Committees' respective versions and to propose a single bill for consideration by the Rules Committee. 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 September 30, 1997.
AS OF SEPTEMBER 30, 1997 ------------------------------------- RISK- CORE CAPITAL BASED TANGIBLE CAPITAL (LEVERAGE) CAPITAL ---------------- ------------ ------- (DOLLARS IN THOUSANDS) Stockholder's equity/GAAP capital... $20,274 $20,274 $20,274 Reductions to capital Goodwill and other intangibles.... (489) (489) (489) Disallowed portion of deferred taxes............................ (83) (83) (83) Additions to capital General valuation allowances...... -- -- 2,100 ------- ------- ------- Regulatory capital as reported to the OTS............................ 19,702 19,702 21,802 Minimum capital requirements as reported to the OTS................ 4,184 8,369 13,217 ------- ------- ------- Regulatory capital-excess........... $15,518 $11,333 $ 8,585 ======= ======= ======= Capital ratios...................... 7.06% 7.06% 13.20% Well-capitalized requirement........ 3.00% 5.00% 10.00%
81 Federal Home Loan Bank System. The Bank is a member of the FHLB system, which consists of twelve regional FHLBs. The FHLB system provides a central credit facility primarily for member associations and administers the home financing credit function of savings associations. FHLB advances must be secured by specified types of collateral and may only be obtained for the purpose of providing funds for residential housing finance. The FHLB funds its operations primarily from proceeds derived from the sale of consolidated obligations of the FHLB system. The Bank, as a member of the FHLB system, must acquire and hold shares of capital stock in its regional FHLB in an amount at least equal to the greater of 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB. The Bank was in compliance with this requirement, having an investment in FHLB stock at September 30, 1997 of $1.8 million. 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 and 1996, and for the nine months ended September 30, 1997, dividends from the FHLB to the Bank amounted to $38,000, $72,000, and $74,000, respectively. If dividends were reduced, the Bank's income would likely also be reduced. 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 business. 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 September 30, 1997, the Company maintained five branches for its banking business, fourteen branches for its mortgage finance business, nine 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 September 30, 1997, the Company had 376 full-time equivalent employees. The Company believes its relations with its employees are satisfactory. 82 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The following table sets forth information regarding the directors and executive officers of the Company.
NAME AGE POSITION ---- --- -------- Guillermo Bron(1)....... 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 Corp. 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 Stephen W. Haley........ 44 Senior Vice President--Compliance and Risk Management Edmund M. Kaufman(1)(2).......... 67 Director of the Company and the Bank Luis Maizel(2).......... 47 Director of the Company Daniel L. Villanueva(1)(2)....... 38 Director of the Company and the Bank
- -------- (1)Member of the Compensation Committee. (2)Member of the Audit Committee. 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 the corporate general partner of Bastion Partners, L.P., a private equity investment fund. Previously, Mr. Bron was President of Bastion Capital Corporation and 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 Corp. since October 1997. From 1985 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 served as President of the General Loan Brokerage division of Western Real Estate Financial, a general loan brokerage company and an affiliate of American Mortgage Bankers. 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 executive positions in consumer and commercial lending with Norwest Financial (from 1979 to 1985), Bank of America/Security Pacific Credit (from 83 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 the Controller of the Bank since December 1995 and as Senior Vice President and the Chief Financial Officer of the Company since October 1997. 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 American Savings and Loan from May 1987 to April 1989. Ms. Bucci is a CPA in California. 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. 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 financial, industrial and technical business law. 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. Since 1984, Mr. Maizel has been President of LM Capital Management and LM Advisors Inc., 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. All directors are elected annually and serve until the next annual meeting of stockholders or until their successors have been elected and qualified. 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. 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 members are Messrs. Kaufman, Maizel 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 members are Messrs. Kaufman, Bron and Villanueva. The primary purposes of the Compensation Committee are (i) to review and recommend 84 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 $500 quarterly fee. The Company reimburses directors for all reasonable and documented expenses incurred as a director. Directors who are also employees of the Company, including Messrs. Bron, Grill and French, are not compensated for their services as directors. The Board of Directors may change such compensation in the future. EXECUTIVE COMPENSATION Summary Compensation Table. The following table sets forth the compensation paid or accrued by the Company for services rendered in all capacities during the fiscal year ended December 31, 1996 to the President and Chief Executive Officer and the Company's four other most highly compensated executive officers during 1996 (the "Named Executives").
LONG-TERM COMPENSATION ------------------------------- ANNUAL COMPENSATION AWARDS PAYOUTS ------------------------------ ----------------------- ------- SECURITIES OTHER ANNUAL UNDERLYING ALL OTHER BONUS COMPENSATION RESTRICTED OPTIONS/ LTIP COMPENSATION NAME AND PRINCIPAL POSITION SALARY ($) ($) ($)(1) STOCK AWARDS SARS(2) PAYOUTS ($) - --------------------------- ---------- ------ ------------ ------------ ---------- ------- ------------ Lawrence J. Grill....... 150,000 30,000 2,844 -- -- -- -- President and Chief Executive Officer Guillermo Bron.......... 100,000 -- -- -- -- -- -- Chairman of the Board John T. French.......... 15,082 -- -- -- 131,250 -- -- Chairman of the Board, President and Chief Executive Officer of United PanAm Mortgage Corp.(3) Ray C. Thousand......... 134,879 -- 2,355 -- -- -- -- President and Chief Executive Officer of United Auto Credit Corporation Carol M. Bucci.......... 85,000 5,000 -- -- 56,250 -- -- 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 Company's Stock Incentive Plan. (3) Mr. French was a consultant to United PanAm Mortgage Corp. and the Bank, and in that capacity was acting President and Chief Executive Officer of United PanAm Mortgage Corp. 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 Corp. 85 Stock Option Grants. The following table sets forth certain information concerning the grant of stock options during fiscal 1996 to the Named Executives pursuant to the Stock Incentive Plan. OPTION GRANTS IN FISCAL YEAR 1996
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 DATE 5% 10% ---- ---------- ------------- -------- -------------- ------------- -------------- John T. French(2)....... 131,250 53.9% $0.80 April 30, 2006 $ 62,606 $ 156,975 Carol M. Bucci(3)....... 56,250 23.1% $0.80 April 30, 2006 $ 28,013 $ 70,819
- -------- (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, 1996. 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 1, 1996. (3) The options vest in four equal annual installments, with the first installment vesting on June 1, 1996 and the three remaining installments on March 1, 1997, 1998 and 1999. Option Exercises and Holdings. The following table sets forth certain information with respect to the Named Executives concerning the exercise of options during fiscal 1996 and unexercised options held by the Named Executives as of December 31, 1996. AGGREGATE OPTION EXERCISES IN FISCAL YEAR 1996 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....... -- -- 187,500 187,500 -- -- John T. French.......... -- -- 32,813 98,437 -- -- Carol M. Bucci.......... -- -- 14,063 42,187 -- --
- -------- (1) The value of unexercised "in-the-money" options is the difference between the market price of the Common Stock on December 31, 1996 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 who are not covered under separate employment agreements 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. 86 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, Mr. Bron has been 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. 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 Company 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 180 months upon either (i) the termination of his employment by the Company 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 Company 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 Company without cause or for any reason after the occurrence of a change of control of the Company, (ii) the termination of his employment due to disability or (iii) the voluntary termination of his employment prior to attaining 65 years of age. The Company 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 Company in which Mr. Bron will have no rights. The Company 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, Mr. Grill has been 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. 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 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. 87 The Company 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 180 months upon either (i) the termination of his employment by the Company 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 Company without cause or for any reason after the occurrence of a change of control of the Company, (ii) the termination of his employment due to disability or (iii) the voluntary termination of his employment prior to attaining 67 years of age. The Company 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 Company in which Mr. Grill will have no rights. The Company is not required to make any payments under this agreement if Mr. Grill is terminated for cause. United PanAm Mortgage Corp. 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 25% on the date of the agreement and 25% on each anniversary thereof. 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 based upon the satisfaction of specified performance goals and is exercisable only upon an initial public offering or the sale of United Auto Credit Corporation. The performance goal was satisfied for 1996. Although the Company anticipates that the goal will not be satisfied for 1997 and, accordingly, no portion of the option will vest for 1997, the unearned portion may be earned in the subsequent five years. 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 salary that would have been paid under the agreement. In the event the Company terminates Mr. Thousand's 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. 88 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION All decisions involving executive officer compensation are made by the Company's Compensation Committee, consisting of Messrs. Bron, Kaufman and Villanueva. STOCK INCENTIVE PLAN General. In 1994, the Company adopted a stock option plan and in 1997, amended and restated such plan as the United PanAm Financial Corp. 1997 Stock Incentive Plan. Pursuant to the Stock Incentive Plan, officers, directors, employees and independent contractors 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 stockholders 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, (ii) reducing the amount of shares or other property otherwise issuable pursuant to the award or (iii) delivering a promissory note, the terms and conditions of which will be determined by the Committee. 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 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 89 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 stockholders 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 40,000 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 Corp., 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) 21 current or former employees or consultants of the Company to purchase up to an aggregate of 1,101,250 shares at an average exercise price of $4.77 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 Offering price, (ii) Mr. Grill to purchase up to 60,000 shares of Common Stock at an exercise price equal to the initial offering price and (iii) Mr. Maizel to purchase up to 20,000 shares of Common Stock at an exercise price equal to the initial 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. 90 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. Current tax law limits deductible contributions to 15% of the total amount of salary paid during the plan year 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 or participating employees who are officers, stockholders 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. 91 The account balances of the Named Executives under the 401(k) Plan, consisting solely of such officers' electing deferrals as of September 30, 1997, are as follows.
NAME ACCOUNT BALANCE ---- --------------- Lawrence J. Grill............................................ $36,477.41 Guillermo Bron............................................... $10,187.70 John T. French............................................... $ 9,594.49 Ray C. Thousand.............................................. -0- Carol M. Bucci............................................... $16,193.73
CERTAIN TRANSACTIONS Subsequent to July 1, 1997, the stockholders 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 him. The amount borrowed was used to finance the establishment and initial operations of United PanAm Mortgage Corp. These loans are unsecured, bear interest at an annual rate of 8% payable in semiannual installments 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 are exercisable only upon an initial public offering or the sale of United Auto Credit Corporation, at an exercise price equal to the book value of such interest (subject to certain adjustments). These options vest based upon the satisfaction of specified performance goals generally related to the pre-tax profit of United Auto Credit Corporation. 92 PRINCIPAL STOCKHOLDERS The following table sets forth certain information regarding the shares of Common Stock beneficially owned as of November 7, 1997, 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 BVG West Corp.(6)....... 1,368,750 12.5% 1,368,750 1999 Avenue of the Stars, Suite 2960 Los Angeles, California 90067 Lawrence J. Grill(7).... 521,250 4.8% 521,250 Guillermo Bron(8)....... -- -- -- John T. French(9)....... 95,625 * 95,625 Ray C. Thousand......... -- -- -- Carol M. Bucci(10)...... 28,125 * 28,125 Stephen W. Haley(11).... 15,000 * 15,000 Edmund M. Kaufman(12)... 9,375 * 9,375 Daniel L. 15,000 * 15,000 Villanueva(13)......... Luis Maizel(14)......... -- -- -- All directors and executive officers as a group (nine persons)(15)........... 671,250 6.1% 671,250
- -------- * 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 November 7, 1997 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 60% of the Class A Limited Partnership Units and 52.2% of the Class B Limited Partnership Units of 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) Excludes (i) 93,750 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after November 7, 1997, (ii) 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 (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." Mr. Grill holds 10.1% of the Class B Limited Partnership Units of PAFLP. Mr. Grill disclaims beneficial ownership of the shares of Common Stock held by PAFLP. 93 (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 152,813 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days of November 7, 1997. See "Management--Stock Incentive Plan." Mr. French holds 12.3% of the Class B Limited Partnership Units of 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 68,125 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after November 7, 1997. See "Management--Stock Incentive Plan." (11) Consists of shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes 45,000 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after November 7, 1997. See "Management--Stock Incentive Plan." (12) 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 November 7, 1997. See "Management--Stock Incentive Plan." Mr. Kaufman holds 1.8% of the Class B Limited Partnership Units of PAFLP. Mr. Kaufman disclaims beneficial ownership of the shares of Common Stock held by PAFLP. (13) Consists of shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes (i) 4,688 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after November 7, 1997 and (ii) 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. Mr. Villanueva disclaims beneficial ownership of the shares of Common Stock held by Villanueva Management Inc. or PAFLP. (14) 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. See "Management--Stock Option Plan." (15) Includes 225,000 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan. Excludes (i) 336,250 shares issuable upon the exercise of stock options granted pursuant to the Stock Incentive Plan, which options are not exercisable within 60 days after November 7, 1997 and (ii) 140,000 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." 94 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 20,000,000 shares of Common Stock, $0.01 par value, and 2,000,000 shares of Preferred Stock, $0.01 par value. At November 7, 1997, there were 10,950,000 shares of Common Stock outstanding, held of record by nine persons. COMMON STOCK Holders of Common Stock are entitled to one vote per share in all matters to be voted on by the stockholders. Subject to preferences that may be applicable to any Preferred Stock outstanding at the time, holders of Common Stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. See "Dividend Policy." In the event of a liquidation, dissolution or winding up of the Company, holders of Common Stock are entitled to share ratably in all assets remaining after payment of the Company's liabilities and the liquidation preference, if any, of any outstanding shares of Preferred Stock. Holders of Common Stock have no preemptive rights and no rights to convert their Common Stock into any other securities, and there are no redemption provisions with respect to such shares. All of the outstanding shares of Common Stock are fully paid and non-assessable. The rights, preferences and privileges of holders of Common Stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of Preferred Stock which the Company may designate and issue in the future. PREFERRED STOCK The Board of Directors has the authority, without any further vote or action by the stockholders, to issue up to 2,000,000 shares of Preferred Stock from time to time in one or more series, to establish the number of shares to be included in each such series, to fix the designations, preferences, limitations and relative, participating, optional or other special rights and qualifications or restrictions of the shares of each series, and to determine the voting powers, if any of, such shares. The issuance of Preferred Stock could adversely affect, among other things, the rights of existing stockholders or could delay or prevent a change in control of the Company without further action by the stockholders. The issuance of Preferred Stock could decrease the amount of earnings and assets available for distribution to holders of Common Stock. In addition, any such issuance could have the effect of delaying, deferring or preventing a change in control of the Company and could make the removal of the present management of the Company more difficult. The Company has no current plans to issue any Preferred Stock. DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER PROVISIONS Certain provisions of Delaware law and the Company's Certificate of Incorporation could make more difficult the acquisition of the Company by means of a tender offer, a proxy contest or otherwise and the removal of incumbent officers and directors. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage persons seeking to acquire control of the Company to first negotiate with the Company. The Company believes that the benefits of increased protection of the Company's potential ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure the Company outweigh the disadvantages of discouraging such proposals because, among other things, negotiation of such proposals could result in an improvement of their terms. The Company will be subject to the provisions of Section 203 of the DGCL. In general, this section prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date that the person became an interested stockholder unless (with certain exceptions) the business combination or the transaction in which the person became an interested stockholder is approved in a prescribed manner. Generally, a "business combination" includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the stockholder. Generally, an "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. This provision may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders. 95 The Company's Certificate of Incorporation provides that stockholder action can be taken only at an annual or special meeting of stockholders and may not be taken by written consent. The Certificate of Incorporation provides that special meetings of stockholders can be called only by the Company's Board of Directors, Chairman of the Board, President or Chief Executive Officer, or at the written request of holders of not less than 25% of the voting shares. The Bylaws set forth an advance notice procedure with regard to the nomination, other than by or at the direction of the Board of Directors, of candidates for election as directors and with regard to business to be brought before an annual meeting of stockholders of the Company. The Company's Certificate of Incorporation provides that the Board of Directors is authorized to amend the Bylaws only by the affirmative vote of 60% or more of the entire Board of Directors, and the Company's stockholders may amend the Bylaws only upon the affirmative vote of the holders of 75% or more of the voting shares. In addition, the Company's Certificate of Incorporation provides that certain articles of the Certificate of Incorporation may be amended only upon the affirmative vote of the holders of 75% or more of the voting shares, including articles containing provisions dealing with, among other things: (i) the aforementioned voting requirements for amending the Bylaws; (ii) the directors' indemnification contained in the Certificate of Incorporation; and (iii) denial of cumulative voting and stockholder action by written consent and the procedures for calling special meetings. 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 shares of Common Stock outstanding. Of these shares, the 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 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 shares under Rule 144 without regard to the volume limitations, manner of sale provisions or notice requirements. As of November 7, 1997, 10,950,000 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 96 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 stockholders have agreed that they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (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, Inc. 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, Inc., 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 140,000 shares of Common Stock pursuant to the Stock Incentive Plan. An additional 567,500 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. 97 UNDERWRITING The Underwriters named below represented by NationsBanc Montgomery Securities, Inc. 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, Inc......................... Piper Jaffray Inc.............................................. ---- Total........................................................ ====
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 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 stockholders 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 stockholders have agreed that they will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (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, Inc. 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 98 NationsBanc Montgomery Securities, Inc., 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. The Representatives have advised the Company that, pursuant to Regulation M under the Securities Act, certain persons participating in the Offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, which may have the effect of stabilizing or maintaining the market price of the Common Stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the Common Stock on behalf of the Underwriters for the purpose of fixing or maintaining the price of the Common Stock. A "syndicate covering transaction" is the bid for or the purchase of the Common Stock on behalf of the Underwriters to reduce a short position incurred by the Underwriters in connection with the Offering. A "penalty bid" is an arrangement permitting the Representatives to reclaim the selling concession otherwise accruing to an Underwriter or syndicate member in connection with the Offering if the Common Stock originally sold by such Underwriter or syndicate member is purchased by a Representative in a syndicate covering transaction and has, therefore, not been effectively placed by such Underwriter or syndicate member. The Representatives have advised the Company that such transactions may be effected on Nasdaq or otherwise and, if commenced, may be discontinued at any time. 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. EXPERTS The consolidated financial statements of the Company as of December 31, 1995 and December 31, 1996, for the years then ended and for the period from April 29, 1994 (inception) to December 31, 1994 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. 99 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. 100 UNITED PANAM FINANCIAL CORP. INDEX TO FINANCIAL STATEMENTS Independent Auditors' Report.............................................. F-2 Consolidated Statements of Financial Condition as of September 30, 1997 (unaudited) and December 31, 1996 and 1995............................................... F-3 Consolidated Statements of Operations for the nine months ended September 30, 1997 and 1996 (unaudited) and for the years ended December 31, 1996 and 1995 and for the period from April 29, 1994 (Inception) through December 31, 1994............................... F-4 Consolidated Statements of Stockholders' Equity for the nine months ended September 30, 1997 (unaudited) and for the years ended December 31, 1996 and 1995 and for the period from April 29, 1994 (Inception) through December 31, 1994.................................... F-5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited) and for the years ended December 31, 1996 and 1995 and for the period from April 29, 1994 (Inception) through December 31, 1994..................... F-6 Consolidated Statements of Cash Flows, Continued for the nine months ended September 30, 1997 and 1996 (unaudited) and for the years ended December 31, 1996 and 1995 and for the period from April 29, 1994 (Inception) through December 31, 1994..................... 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, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years ended December 31, 1996 and 1995 and the period from April 29, 1994 (inception), through December 31, 1994. These 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, 1996 and 1995, and the results of their operations and their cash flows for the years ended December 31, 1996 and 1995, and for the period from April 29, 1994 (inception), through December 31, 1994 in conformity with generally accepted accounting principles. /s/ KPMG PEAT MARWICK LLP San Francisco, California August 22, 1997 F-2 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (INFORMATION AS OF SEPTEMBER 30, 1997 IS UNAUDITED)
DECEMBER 31, SEPTEMBER 30, ----------------- 1997 1996 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ------------- -------- -------- (UNAUDITED) ASSETS Cash and due from banks........................ $ 23,791 $ 5,063 $ 1,580 Short term investments......................... 22,000 21,000 21,993 -------- -------- -------- Cash and cash equivalents...................... 45,791 26,063 23,573 Securities available for sale, at fair value... 2,002 -- -- Loans, net..................................... 152,500 134,821 131,794 Loans, held for sale........................... 70,241 20,766 -- Federal Home Loan Bank stock, at cost.......... 1,769 1,288 766 Accrued interest receivable.................... 927 845 1,169 Real estate owned, net......................... 637 988 298 Premises and equipment, net.................... 2,282 822 208 Deferred tax assets............................ 2,105 247 -- Intangible assets.............................. 489 584 716 Other assets................................... 4,519 1,174 1,057 -------- -------- -------- Total assets................................. $283,262 $187,598 $159,581 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits....................................... $210,783 $159,061 $141,924 Notes Payable.................................. 12,870 10,930 10,930 Federal Home Loan Bank advances................ 35,000 4,000 -- Deferred tax liabilities....................... -- -- 173 Accrued expenses and other liabilities......... 14,254 6,846 743 -------- -------- -------- Total liabilities............................ 272,907 180,837 153,770 -------- -------- -------- Commitments and contingencies.................. -- -- -- Common stock (par value $0.01 per share): Authorized, 20,000,000 shares................. Issued and outstanding, 10,668,750 shares at September 30, 1997, December 31, 1996 and 1995......................................... 107 107 107 Additional paid-in capital..................... 5,130 5,130 5,130 Retained earnings.............................. 5,118 1,524 574 -------- -------- -------- Total stockholders' equity................... 10,355 6,761 5,811 -------- -------- -------- Total liabilities and stockholders' equity... $283,262 $187,598 $159,581 ======== ======== ========
See accompanying notes to consolidated financial statements. F-3 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
NINE MONTHS YEARS APRIL 29, 1994 ENDED ENDED (INCEPTION) SEPTEMBER 30, DECEMBER 31, THROUGH --------------- -------------- DECEMBER 31, (DOLLARS IN THOUSANDS. EXCEPT 1997 1996 1996 1995 1994 PER SHARE DATA) ------- ------- ------- ------ -------------- (UNAUDITED) INTEREST INCOME: Loans....................... $17,329 $11,008 $15,159 $9,207 $1,868 Accretion of discount on loans purchased............ 538 576 696 873 127 RTC interest................ -- -- -- 248 1,134 Short term investments and securities available for sale................... 447 532 706 3,205 3,753 ------- ------- ------- ------ ------ Total interest income....... 18,314 12,116 16,561 13,533 6,882 ------- ------- ------- ------ ------ INTEREST EXPENSE: Deposits.................... 6,710 5,330 7,225 7,240 3,385 Federal Home Loan Bank advances................... 1,001 34 72 -- -- Notes payable............... 482 388 556 487 188 ------- ------- ------- ------ ------ Total interest expense...... 8,193 5,752 7,853 7,727 3,573 ------- ------- ------- ------ ------ Net interest income....... 10,121 6,364 8,708 5,806 3,309 Provision for loan losses... 445 98 194 120 50 ------- ------- ------- ------ ------ Net interest income after provision for loan losses................... 9,676 6,266 8,514 5,686 3,259 ------- ------- ------- ------ ------ NON-INTEREST INCOME: Gain on sale of loans, net.. 15,260 854 2,333 90 3 Loan related charges and fees....................... 360 201 116 48 11 Service charges and fees.... 123 93 272 121 51 Other income................ 40 20 55 59 33 ------- ------- ------- ------ ------ Total non-interest income... 15,783 1,168 2,776 318 98 ------- ------- ------- ------ ------ NON-INTEREST EXPENSE: Compensation and benefits... 12,195 3,365 5,248 2,750 1,564 Occupancy expense........... 1,847 529 809 407 371 SAIF special assessment..... -- -- 820 -- -- Marketing................... 932 100 171 78 103 Telephone................... 599 107 185 71 -- Professional fees........... 554 246 339 224 190 Travel and entertainment.... 535 89 170 88 -- Stationary and supplies..... 448 123 217 115 78 Postage and delivery........ 348 90 167 51 -- Data processing............. 354 281 364 284 214 Deposit insurance premiums.. 278 275 371 395 218 Loan servicing expense...... 212 122 168 84 -- Insurance premiums.......... 160 72 93 102 100 Amortization of intangible assets..................... 95 98 132 169 -- Other expenses.............. 728 309 395 344 305 ------- ------- ------- ------ ------ Total non-interest expenses................... 19,285 5,806 9,649 5,162 3,143 ------- ------- ------- ------ ------ Income before income taxes...................... 6,174 1,628 1,641 842 214 Income taxes................ 2,580 698 691 384 98 ------- ------- ------- ------ ------ Net income.................. $ 3,594 $ 930 $ 950 $ 458 $ 116 ======= ======= ======= ====== ====== Earnings per share (pro forma) (unaudited)......... $ .32 $ .09 ======= =======
See accompanying notes to consolidated financial statements F-4 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (INFORMATION AS OF SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
ADDITIONAL TOTAL NUMBER COMMON PAID-IN RETAINED STOCKHOLDERS' OF SHARES STOCK CAPITAL EARNINGS EQUITY (DOLLARS IN THOUSANDS) ---------- ------ ---------- -------- ------------- Balance, April 29, 1994, Inception................ -- $ -- $ -- $ -- $ -- Issuance of common stock.. 10,668,750 107 5,130 -- 5,237 Net income................ -- -- -- 116 116 ---------- ---- ------ ------ ------- 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 (unaudited).... -- -- -- 3,594 3,594 ---------- ---- ------ ------ ------- Balance, September 30, 1997 (unaudited)......... 10,668,750 $107 $5,130 $5,118 $10,355 ========== ==== ====== ====== =======
See accompanying notes to consolidated financial statements. F-5 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (INFORMATION AS OF SEPTEMBER 30, 1997 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
NINE MONTHS YEARS APRIL 29, 1994 ENDED ENDED (INCEPTION) SEPTEMBER 30, DECEMBER 31, THROUGH -------------------- -------------------- DECEMBER 31, (DOLLARS IN THOUSANDS, 1997 1996 1996 1995 1994 EXCEPT PER SHARE DATA) --------- --------- --------- --------- -------------- (UNAUDITED) Cash flows from operating activities: Net income.............. $ 3,594 $ 930 $ 950 $ 458 $ 116 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Gain on sale of loans.. (15,261) (854) (2,333) (90) (3) Origination of mortgage loans held for sale... (339,014) (37,603) (71,796) -- -- Sales of mortgage loans held for sale......... 298,454 22,159 52,224 -- -- Provision for loan losses................ 445 98 194 120 50 Accretion of discount on loans.............. (538) (576) (696) (873) (127) Depreciation and amortization.......... 504 184 270 142 5 FHLB stock dividend.... (74) (51) (74) (37) (19) Deferred loan fees, net................... 801 419 (52) -- -- Decrease (increase) in accrued interest receivable............ (82) 177 324 669 (1,838) Decrease (increase) in other assets.......... (3,345) 207 (117) 3,181 (5,046) Deferred income taxes.. (1,858) (164) (420) 93 80 Increase in accrued expenses and other liabilities........... 7,408 3,537 6,127 114 690 --------- --------- --------- --------- --------- Net cash (used in) provided by operating activities............ (48,966) (11,537) (15,399) 3,777 (6,092) --------- --------- --------- --------- --------- Cash flows from investing activities: Proceeds from maturities of investment securities............ -- -- -- -- 9,857 Originations, net of repayments, of mortgage loans........ 16,859 15,434 19,538 10,728 4,651 Purchase of mortgage loans................. -- -- -- (75,878) (57,176) Sales of mortgage loans................. -- -- -- 3,470 -- Originations, net of repayments, of non- mortgage loans........ (30,346) (18,715) (22,485) (16,771) (235) Purchase of securities available for sale.... (2,002) (3,999) -- -- (9,857) Purchase of premises and equipment......... (1,869) (557) (776) (212) (51) Purchase of FHLB stock................. (407) (451) (448) -- (729) Proceeds from sale of real estate owned..... 1,797 528 923 -- -- --------- --------- --------- --------- --------- Net cash used in investing activities.. (15,968) (7,760) (3,248) (78,663) (53,540) --------- --------- --------- --------- --------- Cash flows from financing activities: Purchase of deposits... -- -- -- -- 179,904 Sale of deposits....... -- -- -- -- (16,031) Net increase (decrease) in deposits........... 51,722 6,055 17,137 (21,190) (759) Proceeds from ICA note.................. -- -- -- -- 10,930 Issuance of common stock and additional capital contribution.......... -- -- -- -- 5,237 Proceeds from notes payable from shareholders.......... 1,940 -- -- -- -- Proceeds, net of repayments, from FHLB advances.............. 31,000 4,000 4,000 -- -- --------- --------- --------- --------- --------- Net cash provided by (used in) financing activities............ 84,662 10,055 21,137 (21,190) 179,281 --------- --------- --------- --------- --------- Net increase (decrease) in cash and cash equivalents............ 19,728 (9,242) 2,490 (96,076) 119,649 Cash and cash equivalents at beginning of period.... 26,063 23,573 23,573 119,649 -- --------- --------- --------- --------- --------- Cash and cash equivalents at end of period................. $ 45,791 $ 14,331 $ 26,063 $ 23,573 $ 119,649 ========= ========= ========= ========= =========
See accompanying notes to consolidated financial statements. F-6 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED (INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED)
APRIL 29, 1994 NINE MONTHS ENDED YEARS ENDED (INCEPTION) SEPTEMBER 30, DECEMBER 31, THROUGH (Dollars in thousands) ----------------- ------------- DECEMBER 31 1997 1996 1996 1995 1994 -------- -------- ------ ------ -------------- (UNAUDITED) Supplemental disclosures of cash flow information: Cash paid for: Interest...................... $ 8,055 $ 5,763 $7,856 $7,720 $3,569 ======== ======== ====== ====== ====== Taxes......................... $ 1,500 $ 745 $1,512 $ 763 $ 10 ======== ======== ====== ====== ====== Supplemental schedule of non- cash investing and financing activities: Acquisition of real estate owned through foreclosure of related mortgage loans............... $ 1,446 $ 944 $1,613 $ 298 $ -- ======== ======== ====== ====== ======
See accompanying notes to consolidated financial statements. F-7 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1996, 1995 AND FOR THE PERIOD FROM APRIL 29, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994 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 by the RTC to be minority owned. The Company is owned substantially by Pan American Financial, LP. PAFI is a wholly-owned subsidiary of the Company and the Bank is a wholly-owned subsidiary of PAFI. 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. 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 Corp. and Pan American Bank, FSB. Substantially all of the Company's revenues are derived from the operations of the Bank and United PanAm Mortgage Corp. and they represent substantially all of the Company's consolidated assets and liabilities as of September 30, 1997 and December 31, 1996 and 1995. 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 5% 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 September 30, 1997 and December 31, 1996 and 1995. 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. F-8 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) LOANS The Company originates and purchases loans for investment as well as for sale in the secondary market. At the date of acquisition, mortgage loans are designated as either held for sale or held for investment, and accounted for 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 loans that are delinquent 90 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. GAIN ON SALE OF LOANS Gains or losses resulting from sales of mortgage loans are recognized at the date of settlement and are based on the difference between the selling price 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. Loan sales have been completed on a whole loan, nonrecourse basis with servicing rights released to the purchasers. 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. 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. In addition, the allowance for loan losses includes a portion of acquisition discounts from the Company's purchase of automobile installment contracts. 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. F-9 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 September 30, 1997, December 31, 1996 and 1995, intangible assets totaling $489,000, $584,000 and $716,000, 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, allowances for estimated losses are established when the recorded value exceeds fair value less estimated costs to sell. As of September 30, 1997, December 31, 1996 and 1995, there were no such allowances. Real estate owned at September 30, 1997 and December 31, 1996 and 1995 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. 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" was issued as an amendment to SFAS No. 125. Implementation of SFAS 125 and SFAS 127 has not had a material effect on the Company's financial condition or results of operations. F-10 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 3. SECURITIES AVAILABLE FOR SALE Securities available for sale are as follows:
SEPTEMBER 30, 1997 DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------ ------------------------------------- AMORTIZED FAIR AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE COST VALUE (DOLLARS IN THOUSANDS) ----------- ------ ---------- ----------------- -------- (UNAUDITED) U. S. Agency securities.............. $2,002 $2,002 $ -- $ -- $ -- $ --
The weighted average yield on U. S. agency securities was 6.15% at September 30, 1997. At September 30, 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 September 30, 1997 (unaudited):
CONTRACTUAL MATURITY --------------------------------------- AFTER ONE AFTER THREE WITHIN THROUGH THROUGH ONE YEAR THREE YEARS FOUR YEARS TOTAL (DOLLARS IN THOUSANDS) -------- ----------- ----------- ------ U. S. Agency securities................ $-- $2,002 $-- $2,002
4. LOANS Loans are summarized as follows:
DECEMBER 31, SEPTEMBER 30, ------------------ 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- -------- -------- (UNAUDITED) Mortgage loans: Fixed rate.................................. $ 16,996 $ 19,505 $ 26,787 Adjustable rate............................. 74,001 84,522 97,696 -------- -------- -------- 90,997 104,027 124,483 -------- -------- -------- Consumer loans: Insurance premium financing................. 47,287 32,058 16,975 Automobile installment contracts............ 32,037 10,830 -- Other....................................... 327 230 31 -------- -------- -------- 79,651 43,118 17,006 -------- -------- -------- Total loans................................ 170,648 147,145 141,489 Less: Unearned discounts and premiums............. (3,135) (3,697) (4,445) Unearned finance charges.................... (8,810) (3,271) -- Allowance for loan losses................... (6,203) (5,356) (5,250) -------- -------- -------- Total loans, net........................... $152,500 $134,821 $131,794 ======== ======== ======== Contractual weighted average interest rate... 12.51% 10.20% 9.19% -------- -------- --------
At September 30, 1997 and December 31, 1996, approximately 99% of the Company's mortgage loans were collateralized by first deeds of trust on one- to-four family residences. At September 30, 1997 and December 31, 1996, approximately 82% and 81%, respectively, of the Company's loan portfolio related to collateral or borrowers located in California. Adjustable rate loans comprise approximately 83% and 81% of total real estate loans at September 30, 1997 and December 31, 1996, respectively. F-11 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The activity in the allowance for loan losses consists of the following:
YEARS APRIL 29, 1994 NINE MONTHS ENDED ENDED (INCEPTION) SEPTEMBER 30, DECEMBER 31, THROUGH ------------------ -------------- DECEMBER 31, 1997 1996 1996 1995 1994 (DOLLARS IN THOUSANDS) -------- -------- ------ ------ -------------- (UNAUDITED) Balance at beginning of period..................... $ 5,356 $ 5,250 $5,250 $ 378 $ -- Provision for loan losses.. 445 98 194 120 50 Purchase discounts allocated to the allowance for loan losses, net...... 1,314 192 356 4,860 328 Charge-offs................ (1,691) (427) (718) (108) -- Recoveries................. 779 200 274 -- -- -------- -------- ------ ------ ---- Net charge-offs........... (912) (227) (444) (108) -- -------- -------- ------ ------ ---- Balance at end of period... $ 6,203 $ 5,313 $5,356 $5,250 $378 ======== ======== ====== ====== ====
The discounts allocated to the allowance for loan losses in 1997 and 1996 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 and 1994 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. The following table sets forth information with respect to the Company's non-performing assets:
DECEMBER 31, SEPTEMBER 30, -------------- 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- ------ ------ (UNAUDITED) Nonaccrual loans................................ $4,668 $5,835 $5,240 Real estate owned, net.......................... 637 988 298 ------ ------ ------ Totals........................................ $5,305 $6,823 $5,538 ====== ====== ====== Percentage of non-performing assets to total assets.......................................... 1.87% 3.64% 3.47% ====== ====== ======
At September 30, 1997, the aggregate investment in loans considered to be impaired was $5,336,000 of which $4,613,000 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. At December 31, 1995, the Company had $6,745,000 in impaired loans of which $6,149,000 were on a nonaccrual basis. An allowance for loan losses was provided for all impaired loans at September 30, 1997 and December 31, 1996 and 1995; the related allowances were $1,035,000, $984,000 and $913,000, respectively. For the years ended December 31, 1996 and 1995, the Company recognized interest income on impaired loans of $408,000 and $367,000, respectively. The average recorded investment in impaired loans during the nine months ended September 30, 1997 and the years ended December 31, 1996 and 1995 was approximately $6,317,000, $7,022,000 and $3,373,000, respectively. F-12 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) A loan is impaired when, based on current information and events, management believes it will be unable to collect all amounts contractually due under the applicable 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. 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 September 30, 1997 and December 31, 1996, such limitation would have been approximately $2.9 million and $2.5 million, respectively, or $4.9 million and $4.1 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 September 30, 1997, December 31, 1996 and 1995, the Bank owned 17,690, 12,880 and 7,660 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, SEPTEMBER 30, ----------- 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- ---- ------ (UNAUDITED) Loans................................................. $854 $824 $1,109 Investment securities................................. 73 21 60 ---- ---- ------ Total............................................... $927 $845 $1,169 ==== ==== ======
7. PREMISES AND EQUIPMENT Premises and equipment are as follows:
DECEMBER 31, SEPTEMBER 30, -------------- 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- ------ ------ (UNAUDITED) Furniture and equipment........................... $2,657 $ 867 $ 220 Leasehold improvements............................ 252 173 43 ------ ------ ----- 2,909 1,040 263 Less accumulated depreciation and amortization.... (627) (218) (55) ------ ------ ----- $2,282 $ 822 $ 208 ====== ====== =====
Depreciation and amortization expense was $410,000, $104,000, $163,000, $50,000 and $5,000 for the nine months ended September 30, 1997 and 1996 and for the years ended December 31, 1996, 1995, and for the period from April 29, 1994 (Inception) through December 31,1994, respectively. F-13 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 8. DEPOSITS Deposits are summarized as follows:
DECEMBER 31, SEPTEMBER 30, ------------------------------------------- 1997 1996 1995 --------------------- --------------------- --------------------- WEIGHTED WEIGHTED WEIGHTED AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE AMOUNT AVERAGE RATE (DOLLARS IN THOUSANDS) -------- ------------ -------- ------------ -------- ------------ (UNAUDITED) Deposits with no stated maturity: Regular and money market passbook....... $ 23,200 3.57% $ 17,054 2.84% $ 14,877 2.18% NOW accounts........... 7,260 .83 7,757 .88 7,814 .88 Money market checking.. 2,577 2.67 2,885 2.49 3,400 2.42 -------- -------- -------- 33,037 2.90 27,696 2.25 26,091 1.82 -------- -------- -------- Time deposits: Less than one year..... 40,290 5.46 24,162 5.01 24,800 4.92 One year to two years.. 76,183 5.56 86,318 5.41 71,615 5.76 Two years to three years................. 21,524 5.70 12,333 6.67 14,867 6.41 Three years and over... 1,442 6.56 1,101 6.70 976 6.69 Certificates $100,000 and over.............. 38,307 5.88 7,451 5.89 3,575 6.12 -------- -------- -------- 177,746 5.63 131,365 5.49 115,833 5.68 -------- -------- -------- Total deposits........ $210,783 5.20% $159,061 4.68% $141,924 4.97% ======== ======== ========
A summary of certificate accounts by remaining maturity is as follows:
DECEMBER 31, SEPTEMBER 30, ----------------- 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- -------- -------- (UNAUDITED) Maturity within one year....................... $139,415 $103,369 $ 76,879 Maturity within two years...................... 37,831 26,819 36,316 Maturity within three years.................... 500 1,177 1,681 Maturity within four years..................... -- -- 957 -------- -------- -------- Total........................................ $177,746 $131,365 $115,833 ======== ======== ========
Broker-originated deposits totaled $7.5 million at September 30, 1997. There were no broker-originated deposits at December 31, 1996 and 1995. 9. FEDERAL HOME LOAN BANK ADVANCES The Company had short term FHLB advances of $35.0 million and $4.0 million at September 30, 1997 and December 31, 1996, respectively. The advances outstanding at September 30, 1997 and December 31, 1996 had a weighted average interest rate of 6.43% and 5.70%, 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 $88.0 million at December 31, 1996. F-14 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. NOTES PAYABLE Notes payable consist of the following:
DECEMBER 31, SEPTEMBER 30, --------------- 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- ------- ------- (UNAUDITED) RTC notes payable................................ $ 10,930 $10,930 $10,930 Notes payable from stockholders.................. 1,940 -- -- -------- ------- ------- $ 12,870 $10,930 $10,930 ======== ======= =======
The RTC notes payable were issued in connection with the Company's acquisition of certain assets and assumption of certain liabilities from the RTC. See note 14 for a description of the terms and conditions of these notes. The notes payable from 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 Corp., 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, 1996 are as follows: Due in 1 year or less........................................... $ -- Due in 1 to 3 years............................................. 12,870 -------- $ 12,870 ========
11. INCOME TAXES The provision for income taxes is comprised of the following:
NINE MONTHS APRIL 29, 1994 ENDED YEARS ENDED (INCEPTION) SEPTEMBER 30, DECEMBER 31, THROUGH -------------- -------------- DECEMBER 31, 1997 1996 1996 1995 1994 (DOLLARS IN THOUSANDS) ------- ----- ------ -------------------- (UNAUDITED) Federal taxes: Current........................... $ 3,323 $ 633 $ 807 $ 233 $24 Deferred.......................... (1,445) (120) (302) 55 50 ------- ----- ------ ----- --- 1,878 513 505 288 74 ------- ----- ------ ----- --- State taxes: Current........................... 1,115 229 304 58 (6) Deferred.......................... (413) (44) (118) 38 30 ------- ----- ------ ----- --- 702 185 186 96 24 ------- ----- ------ ----- --- Total........................... $ 2,580 $ 698 $ 691 $ 384 $98 ======= ===== ====== ===== ===
F-15 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The tax effects of significant items comprising the Company's net deferred taxes are as follows:
DECEMBER 31, SEPTEMBER 30, ------------- 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- ------ ------ (UNAUDITED) Deferred tax assets: Franchise taxes.................................. $ 386 $ 76 $ 26 Loans marked to market for tax purposes.......... 1,894 415 -- Intangible assets................................ 88 67 38 Other............................................ 14 1 1 ------ ----- ------ Total gross deferred tax assets................. 2,382 559 65 ------ ----- ------ Deferred tax liabilities: Loan loss allowances............................. (191) (238) (212) FHLB stock dividends............................. (85) (54) (26) Other............................................ (1) (20) -- ------ ----- ------ Total gross deferred tax liabilities............ (277) (312) (238) ------ ----- ------ Net deferred tax assets (liabilities)............. $2,105 $ 247 $ (173) ====== ===== ======
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:
NINE MONTHS YEARS APRIL 29, 1994 ENDED ENDED (INCEPTION) SEPTEMBER 30, DECEMBER 31, THROUGH -------------- -------------- DECEMBER 31, 1997 1996 1996 1995 1994 ------ ------ ------ ------ -------------- (UNAUDITED) Expected statutory rate........ 34.0% 34.0% 34.0% 34.0% 34.0% State taxes, net of federal benefits....................... 7.5 7.5 7.5 7.5 7.4 Other, net..................... .3 1.4 .6 4.1 4.4 ------ ------ ------ ------ ---- Effective tax rate............. 41.8% 42.9% 42.1% 45.6% 45.8% ====== ====== ====== ====== ====
The Company files its income tax returns using a fiscal year end of June 30. Accordingly, the amounts reflected in this footnote are management's estimates of income tax expenses and deferred income taxes at the dates presented. 12. 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 F-16 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) requirement equal to 8.0% of risk-weighted assets. At December 31, the Bank had the following regulatory capital requirements and capital position:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 -------------------------- ------------------------- ------------------------- ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS (DOLLARS IN THOUSANDS) ------- -------- ------- ------- -------- ------- ------- -------- ------- (UNAUDITED) Tangible capital........ $19,702 $ 4,184 $15,518 $16,499 $2,795 $13,704 $15,654 $2,374 $13,280 Tangible capital ratio.. 7.06% 1.50% 5.56% 8.85% 1.50% 7.35% 9.89% 1.50% 8.39% Core capital............ $19,702 $ 8,369 $11,333 $16,499 $5,590 $10,909 $15,654 $4,747 $10,907 Core capital (leverage) ratio.................. 7.06% 3.00% 4.06% 8.85% 3.00% 5.85% 9.89% 3.00% 6.89% Risk-based capital...... $21,802 $13,217 $ 8,585 $17,893 $8,751 $ 9,142 $15,654 $7,286 $ 8,368 Percent of risk-weighted assets................. 13.20% 8.00% 5.20% 16.36% 8.00% 8.36% 17.19% 8.00% 9.19%
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:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------------------- ------------------------- ------------------------- ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS ACTUAL REQUIRED EXCESS (DOLLARS IN THOUSANDS) ------- -------- ------ ------- -------- ------ ------- -------- ------- (UNAUDITED) Leverage................ $19,702 $13,948 $5,754 $16,499 $ 9,316 $7,183 $15,654 $7,912 $ 7,742 Leverage ratio.......... 7.06% 5.00% 2.06% 8.85% 5.00% 3.85% 9.89% 5.00% 4.89% Tier 1 risk-based....... $19,702 $ 9,913 $9,789 $16,499 $ 6,563 $9,936 $15,654 $5,465 $10,189 Tier 1 risk-based ratio.................. 11.93% 6.00% 5.93% 15.08% 6.00% 9.08% 17.19% 6.00% 11.19% Total risk-based........ $21,802 $16,521 $5,281 $17,893 $10,939 $6,954 $15,654 $9,108 $ 6,546 Total risk-based ratio.. 13.20% 10.00% 3.20% 16.36% 10.00% 6.36% 17.19% 10.00% 7.19%
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. F-17 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 13. 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 $970,000, $310,000, $475,000, $227,000 and $170,000 for the nine months ended September 30, 1997 and 1996 and the years ended December 31, 1996, 1995 and for the period from April 29, 1994 (Inception) through December 31, 1994, respectively. Future minimum rental payments as of December 31, 1996 under existing leases are set forth as follows:
(DOLLARS IN THOUSANDS) YEAR ENDING DECEMBER 31: 1997............................................................ $ 540 1998............................................................ 580 1999............................................................ 508 2000............................................................ 507 2001............................................................ 257 Thereafter...................................................... 487 ------ Total......................................................... $2,879 ======
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 September 30, 1997 and December 31, 1996, the Company had outstanding commitments to originate loans of approximately $116.0 million and $19.1 million, respectively. Commitments outstanding included $96.4 million and $17.1 million of adjustable rate loans at September 30, 1997 and December 31, 1996 and $19.6 million and $2.0 million of fixed rate loans at September 30, 1997 and December 31, 1996. The fixed rate loan commitments have interest rates ranging from 8.38% to 15.75% at September 30, 1997 and 8.88% to 14.90% at December 31, 1996. At September 30, 1997 and December 31, 1996, the Company had outstanding commitments to sell loans on a nonrecourse basis of $25.8 million and $1.3 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 condition and results of operations of the Company. F-18 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 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 condition and results of operations of the Company. 14. 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. 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 by the Company 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. 15. STOCK OPTIONS In 1994, the Company adopted the United PanAm Financial Corp. 1994 Stock Option Plan (the "Plan"). The Plan authorizes the granting of options equal to 1,312,5000 shares of common stock for issuance to executives, key employees, officers, directors and independent contractors. Options granted under the Plan are made at an exercise price of not less than the fair market value on the date of grant. Any stock issued under the Plan is considered "Restricted Stock" and subject to a shareholder's agreement which limits sales or transfers of such stock. Options vest over a four year period commencing on the grant date at a rate of 25% per year.All options granted prior to December 31, 1996 were issued at an exercise price of $0.80 per share, estimated fair value at the date of grant, and have terms of five 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, ----------------- 1996 1995 --------- ------- Balance at beginning of period......................... 900,000 900,000 Granted................................................ 243,750 -- Canceled or expired.................................... -- -- Exercised.............................................. -- -- --------- ------- Balance at end of period............................... 1,143,750 900,000 ========= ======= Options exercisable.................................... 511,875 225,000 ========= ======= Weighted average fair value per share of options granted during the year............................... $0.23 -- ========= =======
The Company applies APB Opinion No. 25 in accounting for its 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 year ended December 31:
YEAR ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) ------------ Net income to common stockholders: As reported................................................ $950 Pro forma.................................................. $918 Net income per common share: As reported (pro forma)(unaudited)......................... $0.09 Pro forma (unaudited)...................................... $0.08
The fair value of options granted under the Plan was estimated on the date of grant using the Black-Scholes 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. 16. FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair values of the Company's financial instruments are as follows at the dates indicated:
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 ------------------- ------------------- ------------------- CARRYING FAIR VALUE CARRYING FAIR VALUE CARRYING FAIR VALUE VALUE ESTIMATE VALUE ESTIMATE VALUE ESTIMATE (DOLLARS IN THOUSANDS) -------- ---------- -------- ---------- -------- ---------- (UNAUDITED) Assets: Cash and cash equivalents........... $45,780 $45,780 $ 26,063 $ 26,063 $ 23,573 $ 23,573 Securities............. 2,002 2,002 -- -- -- -- Loans receivable, net.. 222,741 210,159 155,587 165,693 131,794 141,603 Federal Home Loan Bank Stock................. 1,769 1,769 1,288 1,288 766 766 Accrued interest....... 927 927 845 845 845 845 Liabilities: Deposits............... 210,783 210,689 $159,061 $159,506 $141,924 $142,745 Notes payable.......... 12,870 12,870 10,930 10,930 10,930 10,930 Federal Home Loan Bank advances.............. 35,000 35,000 4,000 4,000 -- --
F-20 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. Loans receivable, 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. 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. 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-21 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 17. HOLDING COMPANY FINANCIAL INFORMATION Following are the financial statements of United PanAm Financial Corp. (holding company only):
SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1997 1996 1995 (DOLLARS IN THOUSANDS) ------------- ------------ ------------ (UNAUDITED) STATEMENTS OF FINANCIAL CONDITION Cash.................................. $ 277 $ 32 $ 27 Other assets.......................... 40 29 36 Investment in subsidiary.............. 12,012 6,700 5,748 ------- ------ ------ Total assets......................... $12,329 $6,761 $5,811 ======= ====== ====== Notes payable......................... 1,940 -- -- Other liabilities..................... 34 -- -- ------- ------ ------ Total liabilities.................... 1,974 -- -- Stockholders' equity.................. 10,355 6,761 5,811 ------- ------ ------ Total liabilities and stockholders' equity.............................. $12,329 $6,761 $5,811 ======= ====== ======
YEARS ENDED APRIL 29, 1994 DECEMBER (INCEPTION) NINE MONTHS ENDED 31, THROUGH SEPTEMBER 30, ---------- DECEMBER 31, 1997 1996 1995 1994 ----------------- ---- ---- -------------- (UNAUDITED) STATEMENTS OF OPERATIONS Equity in income of subsidiary... $3,610 $952 $470 $111 Interest income.................. 9 1 1 55 ------ ---- ---- ---- Total income................... 3,619 953 471 166 ------ ---- ---- ---- Interest expense................. 34 -- -- -- Other expense.................... 2 4 22 47 ------ ---- ---- ---- Total expense.................. 36 4 22 47 ------ ---- ---- ---- Income before income taxes....... 3,583 949 449 119 Income tax benefit (expense)..... 11 1 9 (3) ------ ---- ---- ---- Net income..................... $3,594 $950 $458 $116 ====== ==== ==== ==== STATEMENTS OF CASH FLOWS Cash flows from operating activities: Net income...................... $3,594 $950 $458 $116 Equity in earnings of subsidiary..................... (3,610) (952) (470) (111) (Increase) decrease in other assets......................... (11) 7 (35) 17 Increase in other liabilities... 34 -- -- 52 ------ ---- ---- ---- Net cash provided by (used in) operating activities.......... 7 5 (47) 74 ------ ---- ---- ---- Cash flows from financing activities: Capital contributed to subsidiary..................... (1,702) -- -- -- Increase in notes payable from shareholders................... 1,940 -- -- -- ------ ---- ---- ---- Net cash provided by financing activities..................... 238 -- -- -- ------ ---- ---- ---- Net increase (decrease) in cash and cash equivalents........... 245 5 (47) 74 Cash and cash equivalents at beginning of period............ 32 27 74 -- ------ ---- ---- ---- Cash and cash equivalents at end of period...................... $ 277 $ 32 $ 27 $ 74 ====== ==== ==== ====
F-22 UNITED PANAM FINANCIAL CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 18. UNAUDITED PRO FORMA EARNINGS PER SHARE Earnings per share is based on the weighted average number of combined common shares and common stock equivalents outstanding. Common stock equivalents consist of unexercised stock options. Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No. 83, common stock and common stock equivalents issued below the estimated initial public offering price during the twelve month period prior to the date of the initial filing of the Company's Registration Statement have been included in the calculation of earnings per share, using the treasury stock method, as if they were outstanding for all periods presented. Weighted average shares outstanding were 11,344,000 for the nine months ended September 30, 1997 and 10,886,000 for the year ended December 31, 1996. The number of shares used in all calculations has been adjusted to reflect a 1,875-for-1 stock split effected in November 1997. Historical earnings per share is not presented because it is not indicative of the on-going entity. 19. SUBSEQUENT EVENTS (UNAUDITED) In October 1997, the Company issued 605,000 stock options at an exercise price of $10.50 per share based upon the estimated fair market value of the Company at the time of grant. The options have various vesting schedules over a four to five year period. In November 1997, the Company also effected a 1,875-for-1 stock split. The Bank entered into a $100 million master repurchase agreement in October 1997 under which it may sell and repurchase, at a set price, mortgage loans pending the sale or securitization of such loans. The facility provides for an advance rate approximating 100% of the outstanding principal balance of qualifying mortgage loans and an interest rate of LIBOR plus 0.70%. 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.......................................................... 22 Dividend Policy.......................................................... 22 Dilution................................................................. 23 Capitalization........................................................... 24 Selected Consolidated Financial Data..................................... 25 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 28 Business................................................................. 50 Management............................................................... 83 Principal Stockholders................................................... 93 Description of Capital Stock............................................. 95 Underwriting............................................................. 98 Legal Matters............................................................ 99 Experts.................................................................. 99 Additional Information................................................... 100 Index to Consolidated Financial Statements............................... F-1
--------------- UNTIL , 1997 (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. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SHARES UNITED PANAM FINANCIAL CORP. [LOGO] COMMON STOCK --------------- PROSPECTUS --------------- NationsBanc Montgomery Securities, Inc. PIPER JAFFRAY INC. , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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.................................... 150,000 Legal fees and expenses............................................ 275,000 Accounting fees and expenses....................................... 160,000 Registrar and transfer agent fees.................................. 15,000 Miscellaneous...................................................... 43,415 -------- Total............................................................ $750,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS Under Delaware law, the directors and officers of the Registrant are entitled, under certain circumstances, to be indemnified by the Registrant against all expenses and liabilities incurred or imposed upon them as a result of suits brought against them in their capacities as directors and officers, if they act in good faith and in a manner they reasonably believe to be in or not opposed to the best interests of the Registrant, and, with respect to any criminal action or proceeding, have no reasonable cause to believe their conduct was unlawful, except that no indemnification shall be made against expenses in respect of any claim, issue or matter as to which they have been adjudged to be liable to the Registrant, unless and only to the extent that the court in which such action or suit was brought has determined upon application that, despite the adjudication of liability but in view of all the circumstances of the case, they are fairly and reasonably entitled to be indemnified for such expenses which such court shall deem proper. Any such indemnification may be made by the Registrant only as authorized in each specific case upon a determination by the stockholders or disinterested directors that indemnification is proper because the indemnitee has met the applicable statutory standard of conduct. Article Thirteenth of the Registrant's Certificate of Incorporation, as amended, provides that a director shall not be liable to the Registrant or its stockholders for monetary damages for a breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the Registrant or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under the Delaware statutory provisions making directors personally liable for unlawful dividends or unlawful stock repurchases or redemptions; or (iv) for any transaction from which the director derived an improper personal benefit. The Company's Bylaws provide that the Company shall indemnify its directors and officers to the fullest extent permitted by Delaware law. The Company has also entered into indemnification agreements with its directors and officers, a copy of which agreement is filed as Exhibit 10.46 hereto. The indemnification agreements may require the Company, among other things, to indemnify its directors and officers against certain liabilities that may arise by reason of their status or service as directors or officers (other than liabilities arising from willful misconduct of a culpable nature) and to advance their expenses incurred as a result of any proceedings against them as to which they could be indemnified. The Registrant maintains a standard policy of officers' and directors' liability insurance. II-1 The Underwriting Agreement, a copy 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. 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 Ronald 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 June 1, 1996 and 25% on March 1, 1997, and 25% will vest on March 1, 1998 and 25% 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 September 26, 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 September 26, 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 an exercise price equal to the initial offering price. This option will become II-2 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 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 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 40,000 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 17 current employees options, as partial consideration for their employment with the Registrant, to purchase up to an aggregate of 445,000 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 the Registrant. 3.2 Bylaws of the Registrant. 4.1* Form of stock certificate. 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. 10.11 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 and Pan American Bank, FSB. 10.16* Indemnity Agreement September 9, 1994, between the Resolution Trust Corporation and Pan American Bank, FSB.
II-4
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 January 27, 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 Corp. 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.
II-5
EXHIBIT NO. DESCRIPTION ------- ----------- 10.38* Employment Agreement dated May 1, 1994, between the Registrant and Lawrence J. Grill. 10.39 Employment Agreement dated October 1, 1997, among the Registrant, Pan American Bank, FSB and Lawrence J. Grill. 10.40 Employment Agreement dated October 1, 1997, between the Registrant and Guillermo Bron. 10.41 Employment Agreement dated October 1, 1997, between United PanAm Mortgage Corp. 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 Registrant 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. 10.49* 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 Registrant. 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 December 9, 1996. 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 Registrant. 10.62 Loan and Stock Pledge Agreement dated October 15, 1997, between Lawrence J. Grill and the Registrant.
II-6
EXHIBIT NO. DESCRIPTION ------- ----------- 10.63 Promissory Note in the principal amount of $1,628,000 dated July 1, 1997 by the Registrant to Pan American Financial, L.P. 10.64 Promissory Note in the principal amount of $258,000 dated July 1, 1997 by the Registrant to BVG West Corp. 10.65 Promissory Note in the principal amount of $52,500 dated July 1, 1997 by the Registrant to Lawrence J. Grill. 10.66 Promissory Note in the principal amount of $33,000 dated July 1, 1997 by the Registrant to Robert Wilson. 10.67 Promissory Note in the principal amount of $28,500 dated July 1, 1997 by the Registrant 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. 21.1 Subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP. 23.2* Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1). 24.1 Power of Attorney (see Page II-8).
- -------- * To be filed by amendment. + 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 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-7 (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-8 SIGNATURES PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN MATEO, STATE OF CALIFORNIA, ON NOVEMBER 12, 1997. United Panam Financial Corp. By /s/ Lawrence J. Grill ---------------------------------- LAWRENCE J. GRILL, PRESIDENT, CHIEF EXECUTIVE OFFICER AND SECRETARY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lawrence J. Grill and Carol Bucci, and either of them, his attorneys-in-fact, with full power of substitution, for him in any and all capacities, to sign any amendments to this Registration Statement, or any related registration statement that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact, or their substitutes, may do or cause to be done by virtue thereof. PURSUANT TO THE SECURITIES ACT OF 1933, THIS 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 November 12, 1997 - ------------------------------------- Board GUILLERMO BRON /s/ Lawrence J. Grill President, Chief November 12, 1997 - ------------------------------------- Executive Officer, LAWRENCE J. GRILL Secretary and Director (Principal Executive Officer) /s/ Carol Bucci Senior Vice November 12, 1997 - ------------------------------------- President, CAROL BUCCI Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) /s/ Stephen W. Haley Senior Vice November 12, 1997 - ------------------------------------- President-- STEPHEN W. HALEY Compliance and Risk Management /s/ John T. French Director November 12, 1997 - ------------------------------------- JOHN T. FRENCH /s/ Edmund M. Kaufman Director November 12, 1997 - ------------------------------------- EDMUND M. KAUFMAN /s/ Daniel L. Villanueva Director November 12, 1997 - ------------------------------------- DANIEL L. VILLANUEVA /s/ Luis Maizel Director November 12, 1997 - ------------------------------------- LUIS MAIZEL
II-9 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1 Form of Underwriting Agreement. 3.1 Amended and Restated Certificate of Incorporation of the Registrant. 3.2 Bylaws of the Registrant. 4.1* Form of stock certificate. 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. 10.11 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 and Pan American Bank, FSB. 10.16* Indemnity Agreement 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 January 27, 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 Corp. 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 the Registrant and Lawrence J. Grill. 10.39 Employment Agreement dated October 1, 1997, among the Registrant, Pan American Bank, FSB and Lawrence J. Grill. 10.40 Employment Agreement dated October 1, 1997, between the Registrant and Guillermo Bron. 10.41 Employment Agreement dated October 1, 1997, between United PanAm Mortgage Corp. 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 Registrant 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. 10.49* 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 Registrant. 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 December 9, 1996. 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 Registrant. 10.62 Loan and Stock Pledge Agreement dated October 15, 1997, between Lawrence J. Grill and the Registrant.
EXHIBIT NO. DESCRIPTION ------- ----------- 10.63 Promissory Note in the principal amount of $1,628,000 dated July 1, 1997 by the Registrant to Pan American Financial, L.P. 10.64 Promissory Note in the principal amount of $258,000 dated July 1, 1997 by the Registrant to BVG West Corp. 10.65 Promissory Note in the principal amount of $52,500 dated July 1, 1997 by the Registrant to Lawrence J. Grill. 10.66 Promissory Note in the principal amount of $33,000 dated July 1, 1997 by the Registrant to Robert Wilson. 10.67 Promissory Note in the principal amount of $28,500 dated July 1, 1997 by the Registrant 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. 21.1 Subsidiaries. 23.1 Consent of KPMG Peat Marwick LLP. 23.2* Consent of Manatt, Phelps & Phillips, LLP (see Exhibit 5.1). 24.1 Power of Attorney (see Page II-8).
- -------- * To be filed by amendment. + Confidential treatment requested. EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 Shares United PanAm Financial Corp. Common Stock Underwriting Agreement dated _____________________, 1998 Table of Contents
Section 1. Representations and Warranties of the Company............................... 2 Compliance with Registration Requirements.............................. 2 Offering Materials Furnished to Underwriters........................... 2 Distribution of Offering Material By the Company....................... 3 The Underwriting Agreement............................................. 3 Authorization of the Common Shares..................................... 3 No Applicable Registration or Other Similar Rights..................... 3 No Material Adverse Change............................................. 3 Independent Accountants................................................ 3 Preparation of the Financial Statements................................ 4 Incorporation and Good Standing of the Company and its Subsidiaries.... 4 Capitalization and Other Capital Stock Matters......................... 4 Stock Exchange Listing................................................. 5 Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required.............................................. 5 No Material Actions or Proceedings..................................... 6 Intellectual Property Rights........................................... 6 Compliance with Laws................................................... 6 All Necessary Permits, etc............................................. 7 Title to Properties.................................................... 7 Tax Law Compliance..................................................... 7 Company Not an "Investment Company".................................... 7 Insurance.............................................................. 7 No Price Stabilization or Manipulation................................. 8 Related Party Transactions............................................. 8 No Unlawful Contributions or Other Payments............................ 8 Company's Accounting System............................................ 8 Adequate Environmental Procedures; Compliance with Environmental Laws............................................................... 8 ERISA Compliance....................................................... 9 Bank Matters........................................................... 10 No Banking Orders...................................................... 10 Capital................................................................ 10 Section 2. Purchase, Sale and Delivery of the Common Shares............................ 10 The Firm Common Shares................................................. 10 The First Closing Date................................................. 11 The Optional Common Shares; the Second Closing Date.................... 11 Public Offering of the Common Shares................................... 12 Payment for the Common Shares.......................................... 12 Delivery of the Common Shares.......................................... 12 Delivery of Prospectus to the Underwriters............................. 12
i Section 3. Additional Covenants of the Company......................................... 12 Representatives' Review of Proposed Amendments and Supplements......... 13 Securities Act Compliance.............................................. 13 Amendments and Supplements to the Prospectus and Other Securities Act Matters............................................................ 13 Copies of any Amendments and Supplements to the Prospectus............. 13 Blue Sky Compliance.................................................... 14 Use of Proceeds........................................................ 14 Transfer Agent......................................................... 14 Earnings Statement..................................................... 14 Periodic Reporting Obligations......................................... 14 Agreement Not To Offer or Sell Additional Securities................... 14 Future Reports to the Representatives.................................. 15 Section 4. Payment of Expenses......................................................... 15 Section 5. Conditions of the Obligations of the Underwriters........................... 16 Accountants' Comfort Letter............................................ 16 Compliance with Registration Requirements; No Stop Order; No Objection from NASD............................................... 16 No Material Adverse Change or Ratings Agency Change.................... 17 Opinion of Counsel for the Company..................................... 17 Opinion of Counsel for the Underwriters................................ 17 Officers' Certificate.................................................. 17 Bring-down Comfort Letter.............................................. 18 Lock-Up Agreement from Certain Stockholders of the Company............. 18 Additional Documents................................................... 18 Section 6. Reimbursement of Underwriters' Expenses..................................... 18 Section 7. Effectiveness of this Agreement............................................. 19 Section 8. Indemnification............................................................. 19 Indemnification of the Underwriters.................................... 19 Indemnification of the Company, its Directors and Officers............. 20 Notifications and Other Indemnification Procedures..................... 21 Settlements............................................................ 22 Section 9. Contribution................................................................ 22 Section 10. Default of One or More of the Several Underwriters......................... 23 Section 11. Termination of this Agreement.............................................. 24 Section 12. Representations and Indemnities to Survive Delivery........................ 25 Section 13. Notices.................................................................... 25 Section 14. Successors................................................................. 25 Section 15. Partial Unenforceability................................................... 26
ii Section 16. Governing Law Provisions................................................... 26 Section 17. General Provisions......................................................... 26
SCHEDULE A1 EXHIBIT A1 EXHIBIT B1 iii Underwriting Agreement __________________ ___, 1998 NATIONSBANC MONTGOMERY SECURITIES, INC. PIPER JAFFRAY INC. As Representatives of the several Underwriters c/o NATIONSBANC MONTGOMERY SECURITIES INC. 600 Montgomery Street San Francisco, California 94111 Ladies and Gentlemen: Introductory. United PanAm Financial Corp., a Delaware corporation (the "Company"), proposes to issue and sell to the several underwriters named in Schedule A hereto (the "Underwriters") an aggregate of shares - ---------- (the "Firm Common Shares") of its Common Stock, par value $0.01 per share (the "Common Stock"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional shares of Common Stock (the "Optional Common Shares"), as provided in Section 2 hereof. The Firm Common Shares and, if and to the extent such option is exercised, the Optional Common Shares are collectively called the "Common Shares". NationsBanc Montgomery Securities, Inc. and Piper Jaffray Inc. have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Common Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-___), which contains a form of prospectus to be used in connection with the public offering and sale of the Common Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Common Shares, is called the "Prospectus"; provided, however, if the Company has, with the consent of NationsBanc Montgomery Securities, Inc., elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated _______________ ____, 1998 (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its respective agreements with the Underwriters as follows: Section 1. Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Common Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. (b) Offering Materials Furnished to Underwriters. The Company has delivered to each of the Representatives one complete manually signed copy of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. 2 (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Common Shares, any offering material in connection with the offering and sale of the Common Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Common Shares. The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) No Material Adverse Change. Except as otherwise disclosed in the Prospectus, subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company and its subsidiaries, considered as one entity (any such change is called a "Material Adverse Change"); (ii) the Company and its subsidiaries, considered as one entity, have not incurred any material liability or obligation, indirect, direct or contingent, not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company or, except for dividends paid to the Company or other subsidiaries, any of its subsidiaries on any class of capital stock or repurchase or redemption by the Company or any of its subsidiaries of any class of capital stock. (h) Independent Accountants. KPMG Peat Marwick LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) and supporting schedules (if any) filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants as required by the Securities Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company and its subsidiaries as of and at the dates 3 indicated and the results of their operations and cash flows for the periods specified. The supporting schedules included in the Registration Statement, if any, present fairly the information required to be stated therein. Such financial statements and supporting schedules, if any, have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Selected Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Incorporation and Good Standing of the Company and its Subsidiaries. Each of the Company and its subsidiaries has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation and has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, in the case of the Company, to enter into and perform its obligations under this Agreement. Each of the Company and its subsidiaries is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. All of the issued and outstanding capital stock of each of the Company's subsidiaries has been duly authorized and validly issued, is fully paid and nonassessable and is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or claim. The Company does not own or control, directly or indirectly, any corporation, association or other entity other than the subsidiaries listed in Exhibit 21.1 to the Registration Statement. (k) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options described in the Prospectus). The Common Stock (including the Common Shares) conforms in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding shares of Common Stock were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company or any of its subsidiaries other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. 4 (l) Stock Exchange Listing. The Common Shares have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (m) Non-Contravention of Existing Instruments; No Further Authorizations or Approvals Required. Neither the Company nor any of its subsidiaries is in violation of its charter or by-laws or is in default (or, with the giving of notice or lapse of time, would be in default) ("Default") under any indenture, mortgage, loan or credit agreement, note, contract, franchise, lease or other instrument to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (each, an "Existing Instrument"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. Neither the Company nor any of its subsidiaries was or is in Default under any of the following agreements and instruments: the Standard Purchase and Assumption Terms and Conditions Theta Version dated July 26, 1993 by and between the Resolution Trust Corporation ("RTC") and Pan American Bank, FSB (the "Bank"), the Whole Purchase and Assumption Agreement dated April 29, 1994 by and between the RTC and the Bank, the Indemnity Agreement dated April 29, 1994 by and between the RTC and the Bank, the Interim Capital Assistance Agreement dated April 29, 1994 by and between the RTC and the Bank, the Stock Pledge Agreement dated April 29, 1994 by and between the RTC and Pan American Financial, Inc. ("PAFI"), the Promissory Note for $6,930,000 dated April 29, 1994 issued by PAFI to the RTC, the Standard Purchase and Assumption Terms and Conditions Iota Version dated December 25, 1993, the Limited Branch Purchase and Assumption Agreement dated September 9, 1994 by and between the RTC and the Bank, the Indemnity Agreement dated September 9, 1994 by and between the RTC and the Bank, the Lead Acquiror Waiver and Reimbursement Agreement dated September 9, 1994 by and between Home Savings of America, FSB and the Bank, the Interim Capital Assistance Agreement dated September 9, 1994 by and between the RTC and the Bank, the Stock Pledge Agreement dated September 9, 1994 by and between the RTC and PAFI and the Promissory Note for $4,000,000 dated September 9, 1994 issued by PAFI to the RTC (collectively, the "RTC Agreements"), except for such Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. The Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus (i) have been duly authorized by all necessary corporate action and will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary, (ii) will not conflict with or constitute a breach of, or Default or a Debt Repayment Triggering Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to, or require the consent of any other part to, any Existing Instrument, except for such conflicts, breaches, Defaults, liens, charges or encumbrances as would not, individually or in the aggregate, result in a Material Adverse Change and (iii) will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental or regulatory authority or agency, is required for the Company's execution, delivery and performance of this Agreement and consummation of the transactions contemplated hereby and by the Prospectus, except such as have been obtained or made by the Company and are in full force and effect under the Securities Act, applicable state securities or blue sky laws and from the National Association of Securities Dealers, Inc. (the "NASD"). As used 5 herein, a "Debt Repayment Triggering Event" means any event or condition which gives, or with the giving of notice or lapse of time would give, the holder of any note, debenture or other evidence of indebtedness (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company or any of its subsidiaries. (n) No Material Actions or Proceedings. There are no legal or governmental actions, suits or proceedings pending (including, without limitation, before or by any regulatory, administrative or governmental agency) or, to the best of the Company's knowledge, threatened (i) against or affecting the Company or any of its subsidiaries, (ii) which has as the subject thereof any officer or director of, or property owned or leased by, the Company or any of its subsidiaries or (iii) relating to environmental or discrimination matters, where in any such case (A) there is a reasonable possibility that such action, suit or proceeding might be determined adversely to the Company or such subsidiary and (B) any such action, suit or proceeding, if so determined adversely, would reasonably be expected to result in a Material Adverse Change or adversely affect the consummation of the transactions contemplated by this Agreement. No material labor dispute with the employees of the Company or any of its subsidiaries exists or, to the best of the Company's knowledge, is threatened or imminent. (o) Intellectual Property Rights. The Company and its subsidiaries own or possess sufficient trademarks, trade names, patent rights, copyrights, licenses, approvals, trade secrets and other similar rights (collectively, "Intellectual Property Rights") reasonably necessary to conduct their businesses as now conducted; and the expected expiration of any of such Intellectual Property Rights would not result in a Material Adverse Change. Neither the Company nor any of its subsidiaries has received any notice of infringement or conflict with asserted Intellectual Property Rights of others, which infringement or conflict, if the subject of an unfavorable decision, would result in a Material Adverse Change. (p) Compliance with Laws. The Company and its subsidiaries are conducting their respective businesses in compliance in all material respects with all applicable federal, state and local laws, rules, regulations, decisions, directives and orders (including, without limitation, the rules, regulations, decisions, directives and orders of the OTS and the FDIC, each as defined below, and laws governing the consumer lending activities of the Company and its subsidiaries). (q) All Necessary Permits, etc. Except as otherwise disclosed in the Prospectus, the Company and each subsidiary possess such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any subsidiary has received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (r) Title to Properties. Except as otherwise disclosed in the Prospectus, the Company and each of its subsidiaries has good and marketable title to all the properties and assets 6 reflected as owned in the financial statements referred to in Section 1(i) above (or elsewhere in the Prospectus), in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company or such subsidiary. The real property, improvements, equipment and personal property held under lease by the Company or any subsidiary are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company or such subsidiary. (s) Tax Law Compliance. The Company and its consolidated subsidiaries have filed all necessary federal, state and foreign income and franchise tax returns and have paid all taxes required to be paid by any of them and, if due and payable, any related or similar assessment, fine or penalty levied against any of them. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company or any of its consolidated subsidiaries has not been finally determined. (t) Company Not an "Investment Company". The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (u) Insurance. Each of the Company and its subsidiaries is insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for its businesses including, but not limited to, policies covering real and personal property owned or leased by the Company and its subsidiaries against theft, damage, destruction, acts of vandalism and earthquakes. The Company has no reason to believe that it or any subsidiary will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. Neither the Company nor any subsidiary has been denied any insurance coverage which it has sought or for which it has applied. (v) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Common Shares. (w) Related Party Transactions. There are no business relationships or related-party transactions involving the Company or any subsidiary or any other person required to be described in the Prospectus which have not been described as required. 7 (x) No Unlawful Contributions or Other Payments. Neither the Company nor any of its subsidiaries nor, to the best of the Company's knowledge, any director, officer, employee or agent of the Company or any subsidiary, has made any contribution or other payment to any official of, or candidate for, any federal, state or foreign office in violation of any law or of the character required to be disclosed in the Prospectus. (y) Company's Accounting System. The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (z) Adequate Environmental Procedures; Compliance with Environmental Laws. The Company and each of its subsidiaries making loans secured by real property have in effect policies and procedures at least commensurate with those generally in effect in the consumer finance industry for determining the existence of any Materials of Environmental Concern (as defined below) on, and whether or not there exists a breach of any Environmental Law (as defined below) with respect to, any such real property security prior to the Company's or any of its subsidiary's foreclosure of its lien thereon. Except as would not, individually or in the aggregate, result in a Material Adverse Change (i) neither the Company nor any of its subsidiaries is in violation of any federal, state, local or foreign law or regulation relating to pollution or protection of human health or the environment (including, without limitation, ambient air, surface water, groundwater, land surface or subsurface strata) or wildlife, including without limitation, laws and regulations relating to emissions, discharges, releases or threatened releases of chemicals, pollutants, contaminants, wastes, toxic substances, hazardous substances, petroleum and petroleum products (collectively, "Materials of Environmental Concern"), or otherwise relating to the manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Materials of Environment Concern (collectively, "Environmental Laws"), which violation includes, but is not limited to, noncompliance with any permits or other governmental authorizations required for the operation of the business of the Company or its subsidiaries under applicable Environmental Laws, or noncompliance with the terms and conditions thereof, nor has the Company or any of its subsidiaries received any written communication, whether from a governmental authority, citizens group, employee or otherwise, that alleges that the Company or any of its subsidiaries is in violation of any Environmental Law; (ii) there is no claim, action or cause of action filed with a court or governmental authority, no investigation with respect to which the Company has received written notice, and no written notice by any person or entity alleging potential liability for investigatory costs, cleanup costs, governmental responses costs, natural resources damages, property damages, personal injuries, attorneys' fees or penalties arising out of, based on or resulting from the presence, or release into the environment, of any Material of Environmental Concern at any location owned, leased or operated by the Company or any of its subsidiaries, now or in the past (collectively, "Environmental Claims"), pending or, to the best of the Company's knowledge, threatened against the Company or any of its subsidiaries or any person 8 or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law; and (iii) to the best of the Company's knowledge, there are no past or present actions, activities, circumstances, conditions, events or incidents, including, without limitation, the release, emission, discharge, presence or disposal of any Material of Environmental Concern, that reasonably could result in a violation of any Environmental Law or form the basis of a potential Environmental Claim against the Company or any of its subsidiaries or against any person or entity whose liability for any Environmental Claim the Company or any of its subsidiaries has retained or assumed either contractually or by operation of law. (aa) ERISA Compliance. The Company and its subsidiaries and any "employee benefit plan" (as defined under the Employee Retirement Income Security Act of 1974, as amended, and the regulations and published interpretations thereunder (collectively, "ERISA")) established or maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance in all material respects with ERISA. "ERISA Affiliate" means, with respect to the Company or a subsidiary of the Company, any member of any group of organizations described in Section 414(b), (c), (m) or (o) of the Internal Revenue Code of 1986, as amended, and the regulations and published interpretations thereunder (collectively, the "Code") of which the Company or such subsidiary is a member. No "reportable event" (as defined under ERISA) has occurred or is reasonably expected to occur with respect to any "employee benefit plan" established or maintained by the Company, any of its subsidiaries or any of their ERISA Affiliates. No "employee benefit plan" established or maintained by the Company, any of its subsidiaries or any of their ERISA Affiliates, if such "employee benefit plan" were terminated, would have any "amount of unfunded benefit liabilities" (as defined under ERISA). Neither the Company, any of its subsidiaries nor any of their ERISA Affiliates has incurred or reasonably expects to incur any liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "employee benefit plan" or (ii) Section 412, 4971, 4975 or 4980B of the Code. Each "employee benefit plan" established or maintained by the Company, any of its subsidiaries or any of their ERISA Affiliates that is intended to be qualified under Section 401(a) of the Code is so qualified and nothing has occurred, whether by action or failure to act, which would cause the loss of such qualification. (bb) Bank Matters. Pan American Bank, FSB (the "Bank") is duly chartered as a federal savings bank and is in good standing under the laws of the United States. The Bank is a member in good standing with the Federal Home Loan Bank of San Francisco (the "FHLB"). The deposit accounts and investment certificates of the Bank are duly insured by the Federal Deposit Insurance Corporation (the "FDIC") to the fullest extent permitted by law. No charge, investigation or proceeding for the termination or revocation of such charter, FHLB membership, good standing or FDIC insurance is pending or, to the best of the Company's knowledge, threatened. The Company is a "savings and loan holding company" within the meaning of the Home Owners Loan Act, as amended. The Bank is, and immediately following the issuance and sale of the Common Shares pursuant hereto will continue to be, a "Minority Institution", as defined in Section 21A(s)(2)(A) of the Federal Home Loan Bank Act, 12 U.S.C. 1441a(s)(2)(A), as amended, and the Company currently has no plan or intention of issuing any shares of capital stock or 9 options, warrants or other securities convertible into or exchangeable for shares of its capital stock in such amounts as would cause the Bank to lose its status as a Minority Institution. (cc) No Banking Orders. Neither the Company nor the Bank nor any other subsidiary of the Company is subject to any cease-and-desist order, civil money penalty, supervisory agreement, memorandum of understanding, consent cease-and-desist order or other regulatory action of the Office of Thrift Supervision (the "OTS"), the FDIC, or any other federal or state regulatory agency. (dd) Capital. The Bank is in compliance with all applicable regulatory capital requirements, is "well capitalized" as defined in OTS regulations and is not, to the Company's best knowledge, threatened with or being considered for receivership or any special supervision by the OTS or the FDIC. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. Section 2. Purchase, Sale and Delivery of the Common Shares. The Firm Common Shares. The Company agrees to issue and sell to the several Underwriters the Firm Common Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Common Shares set forth opposite their names on Schedule A hereto. The purchase price per Firm Common Share to be paid by the - ---------- several Underwriters to the Company shall be $___ per share. The First Closing Date. Delivery of certificates for the Firm Common Shares to be purchased by the Underwriters and payment therefor shall be made at the offices of NationsBanc Montgomery Securities, Inc., 600 Montgomery Street, San Francisco, California (or such other place as may be agreed to by the Company and the Representatives) at 6:00 a.m. San Francisco time, on _______, [THIRD/FOURTH BUSINESS DAY AFTER DATE OF THIS AGREEMENT]1998, or such other time and date not later than 10:30 a.m., San Francisco time , on ______________, [TENTH BUSINESS DAY AFTER DATE OF THIS AGREEMENT]1998 as the Representatives shall designate by notice to the Company (the time and date of such closing are called the "First Closing Date"). The Company hereby acknowledges that circumstances under which the Representatives may provide notice to postpone the First Closing Date as originally scheduled include, but are in no way limited to, any determination by the Company or the Representatives to recirculate to the public copies of an amended or supplemented Prospectus or a delay as contemplated by the provisions of Section 10. The Optional Common Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of Optional Common Shares from 10 the Company at the purchase price per share to be paid by the Underwriters for the Firm Common Shares. The option granted hereunder is for use by the Underwriters solely in covering any over-allotments in connection with the sale and distribution of the Firm Common Shares. The option granted hereunder may be exercised at any time (but not more than once) upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. Such notice shall set forth (i) the aggregate number of Optional Common Shares as to which the Underwriters are exercising the option, (ii) the names and denominations in which the certificates for the Optional Common Shares are to be registered and (iii) the time, date and place at which such certificates will be delivered (which time and date may be simultaneous with, but not earlier than, the First Closing Date; and in such case the term "First Closing Date" shall refer to the time and date of delivery of certificates for the Firm Common Shares and the Optional Common Shares). Such time and date of delivery, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Optional Common Shares are to be purchased, each Underwriter agrees, severally and not jointly, to purchase the number of Optional Common Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Optional Common Shares to be purchased as the number of Firm Common Shares set forth on Schedule A hereto opposite the ---------- name of such Underwriter bears to the total number of Firm Common Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. Public Offering of the Common Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Common Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, have determined is advisable and practicable. Payment for the Common Shares. Payment for the Common Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer of immediately available funds to the order of the Company. It is understood that the Representatives have been authorized, for their own accounts and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Common Shares and any Optional Common Shares the Underwriters have agreed to purchase. NationsBanc Montgomery Securities, Inc., individually and not as a Representative of the Underwriters, may (but shall not be obligated to) make payment for any Common Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. Delivery of the Common Shares. The Company shall deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters certificates for the Firm Common Shares at the First Closing Date, against the irrevocable release of a wire transfer of immediately 11 available funds for the amount of the purchase price therefor. The Company shall also deliver, or cause to be delivered, to the Representatives for the accounts of the several Underwriters, certificates for the Optional Common Shares the Underwriters have agreed to purchase at the First Closing Date or the Second Closing Date, as the case may be, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The certificates for the Common Shares shall be in definitive form and registered in such names and denominations as the Representatives shall have requested at least two full business days prior to the First Closing Date (or the Second Closing Date, as the case may be) and shall be made available for inspection on the business day preceding the First Closing Date (or the Second Closing Date, as the case may be) at a location in New York City as the Representatives may designate. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m. on the second business day following the date the Common Shares are released by the Underwriters for sale to the public, the Company shall delivery or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. Section 3. Additional Covenants of the Company. The Company further covenants and agrees with each Underwriter as follows: (a) Representatives' Review of Proposed Amendments and Supplements. During such period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), prior to amending or supplementing the Registration Statement (including any registration statement filed under Rule 462(b) under the Securities Act) or the Prospectus, the Company shall furnish to the Representatives for review a copy of each such proposed amendment or supplement, and the Company shall not file any such proposed amendment or supplement to which the Representatives reasonably object. (b) Securities Act Compliance. After the date of this Agreement, the Company shall promptly advise the Representatives in writing (i) of the receipt of any comments of, or requests for additional or supplemental information from, the Commission, (ii) of the time and date of any filing of any post-effective amendment to the Registration Statement or any amendment or supplement to any preliminary prospectus or the Prospectus, (iii) of the time and date that any post-effective amendment to the Registration Statement becomes effective and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of any order preventing or suspending the use of any preliminary prospectus or the Prospectus, or of any proceedings to remove, suspend or terminate from listing or quotation the Common Stock from any securities exchange upon which the it is listed for trading or included or designated for quotation, or of the threatening or initiation of any proceedings for any of such purposes. If the Commission shall enter any such stop order at any time, the Company will use its best efforts to obtain the lifting of such order at the earliest possible 12 moment. Additionally, the Company agrees that it shall comply with the provisions of Rules 424(b), 430A and 434, as applicable, under the Securities Act and will use its reasonable efforts to confirm that any filings made by the Company under such Rule 424(b) were received in a timely manner by the Commission. (c) Amendments and Supplements to the Prospectus and Other Securities Act Matters. If, during the Prospectus Delivery Period, any event shall occur or condition exist as a result of which it is necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances when the Prospectus is delivered to a purchaser, not misleading, or if in the opinion of the Representatives or counsel for the Underwriters it is otherwise necessary to amend or supplement the Prospectus to comply with law, the Company agrees to promptly prepare (subject to Section 3(A)(a) hereof), file with the Commission and furnish at its own expense to the Underwriters and to dealers, amendments or supplements to the Prospectus so that the statements in the Prospectus as so amended or supplemented will not, in the light of the circumstances when the Prospectus is delivered to a purchaser, be misleading or so that the Prospectus, as amended or supplemented, will comply with law. (d) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the Prospectus Delivery Period, as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (e) Blue Sky Compliance. The Company shall cooperate with the Representatives and counsel for the Underwriters to qualify or register the Common Shares for sale under (or obtain exemptions from the application of) state securities or blue sky laws or Canadian provincial securities laws of those jurisdictions designated by the Representatives, shall comply with such laws and shall continue such qualifications, registrations and exemptions in effect so long as required for the distribution of the Common Shares. The Company shall not be required to qualify as a foreign corporation or to take any action that would subject it to general service of process in any such jurisdiction where it is not presently qualified or where it would be subject to taxation as a foreign corporation. The Company will advise the Representatives promptly of the suspension of the qualification or registration of (or any such exemption relating to) the Common Shares for offering, sale or trading in any jurisdiction or any initiation or threat of any proceeding for any such purpose, and in the event of the issuance of any order suspending such qualification, registration or exemption, the Company shall use its best efforts to obtain the withdrawal thereof at the earliest possible moment. Use of Proceeds. The Company shall apply the net proceeds from the sale of the Common Shares sold by it in the manner described under the caption "Use of Proceeds" in the Prospectus. (g) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Common Stock. (h) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which 13 need not be audited) covering the twelve-month period ending ____________, [LAST DAY OF FIRST QUARTER AFTER 1 YEAR ANNIVERSARY OF EFFECTIVE DATE OF REG. STMT.]1999 that satisfies the provisions of Section 11(a) of the Securities Act. (i) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. Additionally, the Company shall file with the Commission all reports on Form SR as may be required under Rule 463 under the Securities Act. (j) Agreement Not To Offer or Sell Additional Securities. During the period of 180 days following the date of the Prospectus, the Company will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld at the sole discretion of NationsBanc Montgomery Securities, Inc.), directly or indirectly, sell, offer, contract or grant any option to sell, pledge, transfer or 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 or transfer, or announce the offering of, or file any registration statement under the Securities Act in respect of, any shares of Common Stock, options or warrants to acquire shares of the Common Stock or securities exchangeable or exercisable for or convertible into shares of Common Stock (other than as contemplated by this Agreement with respect to the Common Shares); provided, however, that the Company may issue shares of its Common Stock or options to purchase its Common Stock, or Common Stock upon exercise of options, pursuant to any stock option, stock bonus or other stock plan or arrangement described in the Prospectus, but only if the holders of such shares, options, or shares issued upon exercise of such options, agree in writing not to sell, offer, dispose of or otherwise transfer any such shares or options during such 180 day period without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld at the sole discretion of the NationsBanc Montgomery Securities, Inc.). (k) Future Reports to the Representatives. During the period of five years hereafter the Company will furnish to the Representatives at NationsBanc Montgomery Securities, Inc., 600 Montgomery Street, San Francisco, CA 94111 Attention: Kathleen Smythe, and Piper Jaffray Inc., 212 South Ninth Street, Minneapolis, MN 55402 Attention: Stuart C. Harvey: (i) as soon as practicable after the end of each fiscal year, copies of the Annual Report of the Company containing the balance sheet of the Company as of the close of such fiscal year and statements of income, stockholders' equity and cash flows for the year then ended and the opinion thereon of the Company's independent public or certified public accountants; (ii) as soon as practicable after the filing thereof, copies of each proxy statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report on Form 8-K or other report filed by the Company with the Commission, the NASD or any securities exchange; and (iii) as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. Section 4. Payment of Expenses. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses 14 incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Common Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Common Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey" or memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the NASD's review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with including the Common Shares on the Nasdaq National Market, and (ix) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 4 and Section 6, Section 8 and Section 9 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. Section 5. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Common Shares as provided herein on the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Optional Common Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) Accountants' Comfort Letter. On the date hereof, the Representatives shall have received from KPMG Peat Marwick LLP, independent public or certified public accountants for the Company, a letter dated the date hereof addressed to the Underwriters, in form and substance satisfactory to the Representatives, containing statements and information of the type ordinarily included in accountant's "comfort letters" to underwriters, delivered according to Statement of Auditing Standards No. 72 (or any successor bulletin), with respect to the audited and unaudited financial statements and certain financial information contained in the Registration Statement and the Prospectus (and the Representatives shall have received additional conformed copies of such accountants' letter for each of the several Underwriters). (b) Compliance with Registration Requirements; No Stop Order; No Objection from NASD. For the period from and after effectiveness of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: 15 (i) the Company shall have filed the Prospectus with the Commission (including the information required by Rule 430A under the Securities Act) in the manner and within the time period required by Rule 424(b) under the Securities Act; or the Company shall have filed a post-effective amendment to the Registration Statement containing the information required by such Rule 430A, and such post-effective amendment shall have become effective; or, if the Company elected to rely upon Rule 434 under the Securities Act and obtained the Representatives' consent thereto, the Company shall have filed a Term Sheet with the Commission in the manner and within the time period required by such Rule 424(b); (ii) no stop order suspending the effectiveness of the Registration Statement, any Rule 462(b) Registration Statement, or any post- effective amendment to the Registration Statement, shall be in effect and no proceedings for such purpose shall have been instituted or threatened by the Commission; and (iii) the NASD shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (c) No Material Adverse Change or Ratings Agency Change. For the period from and after the date of this Agreement and prior to the First Closing Date and, with respect to the Optional Common Shares, the Second Closing Date: (i) in the judgment of the Representatives there shall not have occurred any Material Adverse Change; and (ii) there shall not have occurred any downgrading, nor shall any notice have been given of any intended or potential downgrading or of any review for a possible change that does not indicate the direction of the possible change, in the rating accorded any securities of the Company or any of its subsidiaries by any "nationally recognized statistical rating organization" as such term is defined for purposes of Rule 436(g)(2) under the Securities Act. (d) Opinion of Counsel for the Company. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the opinion of Manatt, Phelps & Phillips, LLP, counsel for the Company, dated as of such Closing Date, in substantially the form attached hereto as Exhibit A (and --------- the Representatives shall have received additional conformed copies of such counsel's legal opinion for each of the several Underwriters). (e) Opinion of Counsel for the Underwriters. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received the opinion of Gibson, Dunn & Crutcher LLP, counsel for the Underwriters, dated as of such Closing Date, with respect to the incorporation and good standing of the Company, the sufficiency of all corporate proceedings and other legal matters related to this Agreement, the validity of the issuance of the Common Shares, the Registration Statement and the Prospectus and other related matters as the Underwriters may reasonably require (and the Representatives shall have received additional conformed copies of such counsel's legal opinion for each of the several Underwriters). 16 (f) Officers' Certificate. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received a written certificate executed by the Chairman of the Board, Chief Executive Officer or President of the Company and the Chief Financial Officer or Chief Accounting Officer of the Company, dated as of such Closing Date, to the effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5, and further to the effect that: (i) for the period from and after the date of this Agreement and prior to such Closing Date, there has not occurred any Material Adverse Change; (ii) the representations, warranties and covenants of the Company set forth in Section 1 of this Agreement are true and correct with the same force and effect as though expressly made on and as of such Closing Date; and (iii) the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to such Closing Date. (g) Bring-down Comfort Letter. On each of the First Closing Date and the Second Closing Date, the Representatives shall have received from KPMG Peat Marwick LLP, independent public or certified public accountants for the Company, a letter dated such date, in form and substance satisfactory to the Representatives, to the effect that they reaffirm the statements made in the letter furnished by them pursuant to subsection (a) of this Section 5, except that the specified date referred to therein for the carrying out of procedures shall be no more than three business days prior to the First Closing Date or Second Closing Date, as the case may be (and the Representatives shall have received additional conformed copies of such accountants' letter for each of the several Underwriters). (h) Lock-Up Agreement from Certain Stockholders of the Company. On the date hereof, the Company shall have furnished to the Representatives an agreement in the form of Exhibit B hereto from each director, officer and each --------- beneficial owner of Common Stock (as defined and determined according to Rule 13d-3 under the Exchange Act, except that a one hundred eighty day period shall be used rather than the sixty day period set forth therein), and such agreement shall be in full force and effect on each of the First Closing Date and the Second Closing Date. (i) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Common Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 5 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Optional Common Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part 17 of any party to any other party, except that Section 4, Section 6, Section 8 and Section 9 hereof shall at all times be effective and shall survive such termination. Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is terminated by the Representatives pursuant to Section 5, Section 7, Section 10 or Section 11 hereof, or if the sale to the Underwriters of the Common Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Common Shares, including but not limited to reasonable fees and disbursements of counsel, printing expenses, reasonable travel expenses, postage, facsimile and telephone charges. Section 7. Effectiveness of this Agreement. This Agreement shall not become effective until the later of (i) the execution of this Agreement by the parties hereto and (ii) notification by the Commission to the Company and the Representatives of the effectiveness of the Registration Statement under the Securities Act. Prior to such effectiveness, this Agreement may be terminated by the Representatives by notice to the Company or by the Company by notice to the Representatives, and any such termination shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 hereof shall at all times be effective and shall survive such termination. Section 8. Indemnification. (a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or 18 supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Common Stock or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i) or (ii) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence, bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the reasonable fees and disbursements of counsel chosen by NationsBanc Montgomery Securities, Inc.) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Common Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 hereof and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Common Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged 19 omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth (A) as the last paragraph on the inside front cover page of the Prospectus concerning stabilization by the Underwriters and (B) in the table in the first paragraph and as the third and last paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. The indemnity agreement set forth in this Section 8(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 8 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 8, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 8 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 8 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by 20 the indemnifying party (NationsBanc Montgomery Securities, Inc. in the case of Section 8(b) and Section 9 hereof), representing the indemnified parties who are parties to such action) or (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. (d) Settlements. The indemnifying party under this Section 8 shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 8(c) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding. Section 9. Contribution. If the indemnification provided for in Section 8 hereof is for any reason held to be unavailable to or otherwise insufficient to hold harmless an indemnified party in respect of any losses, claims, damages, liabilities or expenses referred to therein, then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party, as incurred, as a result of any losses, claims, damages, liabilities or expenses referred to therein (i) in such proportion as is appropriate to reflect the relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, from the offering of the Common Shares pursuant to this Agreement or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions or inaccuracies in the representations and warranties herein which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriters, on the other hand, in connection with the offering of the Common Shares pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds from the offering of the Common Shares pursuant to this Agreement (before deducting expenses) received by the Company, and the total underwriting discount received by the Underwriters, in each case as set forth on the front cover 21 page of the Prospectus (or, if Rule 434 under the Securities Act is used, the corresponding location on the Term Sheet) bear to the aggregate initial public offering price of the Common Shares as set forth on such cover. The relative fault of the Company, on the one hand, and the Underwriters, on the other hand, shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact or any such inaccurate or alleged inaccurate representation or warranty relates to information supplied by the Company, on the one hand, or the Underwriters, on the other hand, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The amount paid or payable by a party as a result of the losses, claims, damages, liabilities and expenses referred to above shall be deemed to include, subject to the limitations set forth in Section 8(c) hereof, any legal or other fees or expenses reasonably incurred by such party in connection with investigating or defending any action or claim. The provisions set forth in Section 8(c) hereof with respect to notice of commencement of any action shall apply if a claim for contribution is to be made under this Section 9; provided, however, that no additional notice shall be required with respect to any action for which notice has been given under Section 8(c) hereof for purposes of indemnification. The Company and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in this Section 9. Notwithstanding the provisions of this Section 9, no Underwriter shall be required to contribute any amount in excess of the underwriting commissions received by such Underwriter in connection with the Common Shares underwritten by it and distributed to the public. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute pursuant to this Section 9 are several, and not joint, in proportion to their respective underwriting commitments as set forth opposite their names in Schedule A hereto. For purposes of this Section 9, each officer and employee of - ---------- an Underwriter and each person, if any, who controls an Underwriter within the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as such Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company with the meaning of the Securities Act and the Exchange Act shall have the same rights to contribution as the Company. Section 10. Default of One or More of the Several Underwriters. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Common Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Common Shares to be purchased on such date, 22 the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A hereto bears to the aggregate number of Firm Common Shares set forth - ---------- opposite the names of all such non-defaulting Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Common Shares and the aggregate number of Common Shares with respect to which such default occurs exceeds 10% of the aggregate number of Common Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Common Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, Section 8 and Section 9 hereof shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 10. Any action taken under this Section 10 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. Section 11. Termination of this Agreement. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the NASD; (ii) a general banking moratorium shall have been declared by any federal, New York, Delaware or California governmental authority; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective substantial change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 11 shall be without liability on the part of (a) the Company to any Underwriter, 23 except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 8 and Section 9 hereof shall at all times be effective and shall survive such termination. Section 12. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company Parties, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Common Shares sold hereunder and any termination of this Agreement. Section 13. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: NationsBanc Montgomery Securities, Inc. Piper Jaffray Inc. c/o NationsBanc Montgomery Securities, Inc. 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 249-5558 Attention: Richard A. Smith with a copy to: NationsBanc Montgomery Securities, Inc. 600 Montgomery Street San Francisco, California 94111 Facsimile: (415) 249-5553 Attention: David A. Baylor, Esq. If to the Company: United PanAm Financial Corp. 1300 South El Camino Real San Mateo, CA 94402-2962 Facsimile: (415) 349-8504 Attention: Lawrence J. Grill 24 Any party hereto may change the address for receipt of communications by giving written notice to the others. Section 14. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 10 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 8 and Section 9 hereof, and in each case their respective successors, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Common Shares as such from any of the Underwriters merely by reason of such purchase. Section 15. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. Section 16. Governing Law Provisions. (a) THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Section 17. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or 25 more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Table of Contents and the Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. Each of the parties hereto acknowledges that it is a sophisticated business person who was adequately represented by counsel during negotiations regarding the provisions hereof, including, without limitation, the indemnification provisions of Section 8 hereof and the contribution provisions of Section 9 hereof, and is fully informed regarding said provisions. Each of the parties hereto further acknowledges that the provisions of Sections 8 and 9 hereof fairly allocate the risks in light of the ability of the parties to investigate the Company, its affairs and its business in order to assure that adequate disclosure has been made in the Registration Statement, any preliminary prospectus and the Prospectus (and any amendments and supplements thereto), as required by the Securities Act and the Exchange Act. 26 If the foregoing is in accordance with your understanding of our agreement, kindly sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, UNITED PANAM FINANCIAL CORP. By: __________________________ [Title] The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives in San Francisco, California as of the date first above written. NATIONSBANC MONTGOMERY SECURITIES, INC. PIPER JAFFRAY INC. Acting as Representatives of the several Underwriters named in the attached Schedule A. By: NATIONSBANC MONTGOMERY SECURITIES, INC. By: ----------------------------------- 27 SCHEDULE A
Number of Firm Common Shares Underwriters to be Purchased NationsBanc Montgomery Securities, Inc............ Piper Jaffray Inc. ............................... Total............................................. ---------------
EXHIBIT A The final opinion in draft form should be attached as Exhibit A at the time this Agreement is executed. Opinion of counsel for the Company to be delivered pursuant to Section 5(e) of the Underwriting Agreement. References to the Prospectus in this Exhibit A include any supplements --------- thereto at the Closing Date. (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware. (ii) The Company has corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and to enter into and perform its obligations under the Underwriting Agreement. (iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in the State of California and, to the best knowledge of such counsel, in each other jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions (other than the State of California) where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (iv) Each subsidiary of the Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the jurisdiction of its incorporation, has the corporate power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectus and, to the best knowledge of such counsel, is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except for such jurisdictions where the failure to so qualify or to be in good standing would not, individually or in the aggregate, result in a Material Adverse Change. (v) All of the issued and outstanding capital stock of each such subsidiary has been duly authorized and validly issued, is fully paid and non- assessable and, except as set forth in the Prospectus, is owned by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance or, to the best knowledge of such counsel, any pending or threatened claim. (vi) The authorized, issued and outstanding capital stock of the Company (including the Common Stock) conforms to the description thereof set forth in the Prospectus. All of the outstanding shares of Common Stock have been duly authorized and validly issued, are fully paid and nonassessable and, to the best of such counsel's knowledge, have been issued in compliance with the registration and qualification requirements of federal and state securities laws. A-1 The form of certificate used to evidence the Common Stock is in due and proper form and complies with all applicable requirements of the charter and by-laws of the Company and the General Corporation Law of the State of Delaware. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and, to the best knowledge of such counsel, the options or other rights granted and exercised thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. Except as disclosed or specifically contemplated by the Prospectus, to the best knowledge of such counsel, there are no outstanding options, warrants or other rights calling for the issuance of, and no commitments, plans or arrangements to issue, any shares of capital stock of the Company or any security convertible into or exchangeable for capital stock of the Company. (vii) No stockholder of the Company or any other person has any preemptive right, right of first refusal or other similar right to subscribe for or purchase securities of the Company arising (A) by operation of the charter or by-laws of the Company or the General Corporation Law of the State of Delaware or (B) to the best knowledge of such counsel, otherwise. (viii) The Underwriting Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification thereunder may be limited by applicable law and except as the enforcement thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting creditors' rights generally or by general equitable principles. (ix) The Common Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to the Underwriting Agreement and, when issued and delivered by the Company pursuant to the Underwriting Agreement against payment of the consideration set forth therein, will be validly issued, fully paid and nonassessable. (x) Each of the Registration Statement and the Rule 462(b) Registration Statement, if any, has been declared effective by the Commission under the Securities Act. To the best knowledge of such counsel, no stop order suspending the effectiveness of either of the Registration Statement or the Rule 462(b) Registration Statement, if any, has been issued under the Securities Act and no proceedings for such purpose have been instituted or are pending or are contemplated or threatened by the Commission. Any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) under the Securities Act has been made in the manner and within the time period required by such Rule 424(b). (xi) The Registration Statement, including any Rule 462(b) Registration Statement, the Prospectus and each amendment or supplement to the Registration Statement and the Prospectus, as of their respective effective or issue dates (other than the financial statements and supporting schedules included therein or in exhibits to or excluded from the Registration Statement, as to which no opinion need be rendered), comply as to form in all material respects with the applicable requirements of the Securities Act. (xii) The Common Shares have been approved for quotation on the Nasdaq National Market. A-2 (xiii) The statements (A) in the Prospectus under the captions "Risk Factors--Risks Associated with Mortgage Finance--Government Regulation", "Risk Factors--Risks Associated With Automobile Finance--Impact of Government Regulation and Litigation", "Risk Factors--Risks Associated With Insurance Premium Finance--Government Regulation", "Risk Factors--Risks Associated With the Bank--Financial Institution Regulation", "Risk Factors--Risks Associated With the Company--Control by Existing Stockholders", "--Antitakeover Provisions", and "--Shares Eligible for Future Sale", "Description of Capital Stock", "Management's Discussion and Analysis and Results of Operations-- Liquidity and Capital Resources", "Business--Litigation", "Business--Supervision and Regulation", and "Certain Transactions", "Description of Capital Stock-- Shares Eligible for Future Sale" and (B) in Items 14 and 15 of Part II of the Registration Statement, insofar as such statements constitute matters of law, summaries of legal matters, the Company's charter or by-law provisions, documents or legal proceedings, or legal conclusions, has been reviewed by such counsel and fairly present and summarize, in all material respects, the matters referred to therein. (xiv) To the best knowledge of such counsel, there are no legal or governmental actions, suits or proceedings pending or threatened which are required to be disclosed in the Registration Statement, other than those disclosed therein. (xv) To the best knowledge of such counsel, there are no Existing Instruments required to be described or referred to in the Registration Statement or to be filed as exhibits thereto other than those described or referred to therein or filed or incorporated by reference as exhibits thereto; and the descriptions thereof and references thereto are correct in all material respects. (xvi) No consent, approval, authorization or other order of, or registration or filing with, any court or other governmental authority or agency, is required for the Company's execution, delivery and performance of the Underwriting Agreement and consummation of the transactions contemplated thereby and by the Prospectus, except as required under the Securities Act, applicable state securities or blue sky laws and from the NASD. (xvii) The execution and delivery of the Underwriting Agreement by the Company and the performance by the Company of its obligations thereunder (other than performance by the Company of its obligations under the indemnification section of the Underwriting Agreement, as to which no opinion need be rendered) (A) have been duly authorized by all necessary corporate action on the part of the Company; (B) will not result in any violation of the provisions of the charter or by-laws of the Company or any subsidiary; or (C) to the best knowledge of such counsel, will not result in any violation of any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary. (xviii) The Company is not, and after receipt of payment for the Common Shares will not be, an "investment company" within the meaning of Investment Company Act. (xix) Except as disclosed in the Prospectus, to the best knowledge of such counsel, there are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by the Underwriting Agreement, except for such rights as have been duly waived. A-3 (xx) To the best knowledge of such counsel, neither the Company nor any subsidiary is in violation of its charter or by-laws or any law, administrative regulation or administrative or court decree applicable to the Company or any subsidiary or is in Default in the performance or observance of any obligation, agreement, covenant or condition contained in any material Existing Instrument (other than the RTC Agreements), except in each such case for such violations or Defaults as would not, individually or in the aggregate, result in a Material Adverse Change. (xxi) To the best knowledge of such counsel, the Company and each of its subsidiaries have all governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on their respective businesses as described in the Prospectus, except where the failure to have such governmental licenses, permits, consents, orders, approvals and other authorizations would not result in a Material Adverse Change. (xxii) The Bank is duly chartered as a federal savings bank and is in good standing under the laws of the United States. The Bank is a member in good standing with the FHLB. The deposit accounts and investment certificates of the Bank are duly insured by the FDIC to the fullest extent permitted by law. To the best knowledge of such counsel, no charge, investigation or proceeding for the termination or revocation of such charter, FHLB membership, good standing or FDIC insurance is pending or threatened. (xxiii) To the best knowledge of such counsel, the Company and its subsidiaries are not subject to any cease-and-desist order, civil money penalty, supervisory agreement, memorandum of understanding, consent cease-and- desist order or other regulatory action of the OTS, the FDIC or any other federal or state regulatory agency (other than the RTC Agreements). To the best knowledge of such counsel, the Company and its subsidiaries are conducting their respective businesses in compliance in all material respects with all applicable federal, state and local laws, rules, regulations, decisions, directives and orders (including, without limitation, the rules, regulations, decisions, directives and orders of the OTS and the FDIC, and laws governing the consumer lending activities of the Company and its subsidiaries), except for any failure to so comply which would not, individually or in the aggregate, result in a Material Adverse Change. (xxiv) The Company is a "savings and loan holding company" within the meaning of the Home Owners Loan Act, as amended. In addition, such counsel shall state that they have participated in conferences with officers and other representatives of the Company, representatives of the independent public or certified public accountants for the Company and with representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus, and any supplements or amendments thereto, and related matters were discussed and, although such counsel is not passing upon and does not assume any responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement or the Prospectus (other than as specified above), and any supplements or amendments thereto, on the basis of the foregoing, nothing has come to their attention which would lead them to believe that either the Registration Statement or any amendments thereto, at the time the Registration Statement or such amendments became effective, A-4 contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus, as of its date or at the First Closing Date or the Second Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading (it being understood that such counsel need express no belief as to the financial statements or schedules or other financial or statistical data derived therefrom, included in the Registration Statement or the Prospectus or any amendments or supplements thereto). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws of any jurisdiction other than the General Corporation Law of the State of Delaware, the General Corporation Law of the State of California or the federal law of the United States, to the extent they deem proper and specified in such opinion, upon the opinion (which shall be dated the First Closing Date or the Second Closing Date, as the case may be, shall be satisfactory in form and substance to the Underwriters, shall expressly state that the Underwriters may rely on such opinion as if it were addressed to them and shall be furnished to the Representatives) of other counsel of good standing who are satisfactory to counsel for the Underwriters, and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of the Company and public officials; provided, however, that notwithstanding the foregoing, such counsel may rely on the opinion of King, Purtich, Holmes, Paterno & Berliner as to the matters described in clause (B) of paragraph (xiii) above. A-5 EXHIBIT B November __, 1997 NationsBanc Montgomery Securities, Inc. Piper Jaffray Inc. As Representatives of the Several Underwriters c/o NationsBanc Montgomery Securities, Inc. 600 Montgomery Street San Francisco, California 94111 Re: United PanAm Financial Corp. (the "Company") Ladies & Gentlemen: The undersigned is an owner of record or beneficially of certain shares of Common Stock of the Company ("Common Stock") or securities convertible into or exchangeable or exercisable for Common Stock. The Company proposes to carry out a public offering of Common Stock (the "Offering") for which you will act as the representatives of the underwriters. The undersigned recognizes that the Offering will be of benefit to the undersigned and will benefit the Company by, among other things, raising additional capital for its operations. The undersigned acknowledges that you and the other underwriters are relying on the representations and agreements of the undersigned contained in this letter in carrying out the Offering and in entering into underwriting arrangements with the Company with respect to the Offering. In consideration of the foregoing, the undersigned hereby agrees that the undersigned will not, without the prior written consent of NationsBanc Montgomery Securities, Inc. (which consent may be withheld in its sole discretion), directly or indirectly, sell, offer, contract or grant any option to sell (including without limitation 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 shares of Common Stock, or securities exchangeable or exercisable for or convertible into shares of Common Stock currently or hereafter owned either of record or beneficially (as defined in Rule 13d-3 under Exchange Act) by the undersigned, or publicly announce the undersigned's intention to do any of the foregoing, for a period commencing on the date hereof and continuing through the close of trading on the date 180 days after the date of the Prospectus. The undersigned also agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of shares of Common Stock or securities convertible into or exchangeable or exercisable for Common Stock held by the undersigned except in compliance with the foregoing restrictions. With respect to the Offering only, the undersigned waives any registration rights relating to registration under the Securities Act of any Common Stock owned either of record or beneficially by the undersigned, including any rights to receive notice of the Offering. B-1 This agreement is irrevocable and will be binding on the undersigned and the respective successors, heirs, personal representatives, and assigns of the undersigned. - ----------------------------------- Printed Name of Holder By: -------------------------------- Signature - ----------------------------------- Printed Name of Person Signing (and indicate capacity of person signing if signing as custodian, trustee, or on behalf of an entity) B-2 EX-3.1 3 AMENDED & RESTATED CERTIFICATE OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION of UNITED PANAM FINANCIAL CORP., a Delaware corporation FIRST: NAME: The name of the corporation is United PanAm Financial Corp. (the "Corporation"). SECOND: REGISTERED OFFICE AND REGISTERED AGENT. The address of the registered office of the Corporation in the State of Delaware is 15 East North Street, in the City of Dover, County of Kent, 19901. The name of its registered agent at such address is AmeriSearch Corporate Services, Inc. THIRD: PURPOSE. The purpose of the Corporation is to engage in any lawful act or activity for which corporations may now or hereafter be organized under the Delaware General Corporation Law. FOURTH: CAPITAL STOCK. The total number of shares of all classes of capital stock which the Corporation shall have authority to issue is 22,000,000, consisting of 20,000,000 shares of common stock, $0.01 par value per share (the "Common Stock"), and 2,000,000 shares of preferred stock, $0.01 par value per share (the "Preferred Stock"). Upon the amendment and restatement of this Certificate of Incorporation to read as herein set forth, each outstanding share of Common Stock is split up and converted into one thousand eight hundred seventy-five (1875) shares. A description of the different classes and series (if any) of the Corporation's capital stock and a statement of the designations, and the relative rights, preferences, and limitations of the shares of each class of and series (if any) of stock are as follows: A. COMMON STOCK. Except as provided in this Article Fourth (or in any resolution or resolutions adopted by the Board of Directors pursuant hereto), the exclusive voting power shall be vested in the Common Stock, the holders thereof being entitled to one vote for each share of such Common Stock standing in the holder's name on the books of the Corporation. Subject to any rights and preferences of any class or series of stock having preference over the Common Stock with respect to dividends or upon liquidation, holders of Common Stock shall be entitled to such dividends as may be declared by the Board of Directors out of funds lawfully available therefor, which funds shall include, without limitation, the Corporation's capital surplus. Upon any liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, holders of Common Stock shall be entitled to receive pro rata the remaining assets of the Corporation after the holders of any class or series of stock having preference over the Common Stock have been paid in full any sums to which they may be entitled. Holders of Common Stock shall not be entitled to preemptive rights with respect to any shares of Common Stock, Preferred Stock or any other securities, debt or otherwise, issued by the Corporation. B. PREFERRED STOCK. The Board of Directors is hereby expressly authorized, by resolution or resolutions to provide, out of the unissued shares of Preferred Stock, for series of Preferred Stock. Before any shares of any such series are issued, the Board of Directors shall fix, and hereby is expressly empowered to fix, by resolution or resolutions, the following provisions of the shares thereof: (i) the designations of such series, the number of shares to constitute such series and the stated value thereof if different from the par value thereof; (ii) whether the shares of such series shall have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights, which may be general or limited; (iii) the dividends, if any, payable on such series, whether any such dividends shall be cumulative, and, if so, from what dates, the payment date or dates for dividends on shares of the series, and the participating or other special rights, if any, with respect to dividends; (iv) whether the shares of such series shall be subject to redemption by the Corporation, and, if so, the times, prices and other conditions of such redemption; (v) the amount or amounts payable upon shares of such series upon, and the rights of the holders of such series in, the voluntary or involuntary liquidation, dissolution or winding up, or upon any distribution of the assets, of the Corporation; (vi) whether the shares of such series shall be subject to the operation of a retirement or sinking fund and, if so, the extent to and manner in which any such retirement or sinking fund shall be applied to the purchase or redemption of the shares of such series for retirement or other corporate purposes and the terms and provisions relative to the operation thereof; (vii) whether the shares of such series shall be convertible into, or exchangeable for, shares of stock of any other class or any other series of this class or any other securities, and, if so, the price or prices or the rate or rates of conversion or exchange and the method, if any, of adjusting the same, and any other terms and conditions of conversion or exchange; (viii) the limitations and restrictions, if any, to be effective while any shares of such series are outstanding upon the payment of dividends or the making of other distributions on, and upon the purchase, redemption or other acquisition by the Corporation of, the Common Stock or shares of stock of any other class or any other series of this class; 2 (ix) the conditions or restrictions, if any, upon the creation of indebtedness of the Corporation or upon the issue of any additional stock, including additional shares of such series or of any other series of this class or of any other class; and (x) any other powers, preferences and relative, participating, optional and other special rights, and any qualifications, limitations and restrictions thereof. The powers, preferences and relative, participating, optional and other special rights of each series of Preferred Stock, and the qualifications, limitations or restrictions thereof, if any, may differ from those of any and all other series at any time outstanding. All shares of any one series of Preferred Stock shall be identical in all respects with all other shares of such series, except that shares of any one series issued at different times may differ as to the dates from which dividends thereon shall accrue or be cumulative. FIFTH: DIRECTORS. The business and affairs of the Corporation shall be managed by or under the direction of a Board of Directors. Except as otherwise fixed pursuant to the provisions of Article Fourth hereof relating to the rights of the holders of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation to elect additional directors, the number of directors shall be determined as stated in the Corporation's Bylaws, as may be amended from time to time. SIXTH: AUTHORITY OF THE BOARD. In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly authorized: (a) from time to time to set apart out of any funds or assets of the Corporation available for dividends an amount or amounts to be reserved as working capital or for any other lawful purpose and to abolish any reserve so created and to determine whether any, and, if any, what part, of the surplus of the Corporation or its net profits applicable to dividends shall be declared in dividends and paid to its stockholders, and all rights of the holders of stock of the Corporation in respect of dividends shall be subject to the power of the Board of Directors so to do; (b) subject to the laws of the State of Delaware, from time to time to sell, lease or otherwise dispose of any part or parts of the properties of the Corporation and to cease to conduct the business connected therewith or again to resume the same, as it may deem best; and (c) in addition to the powers and authorities hereinbefore and by the laws of the State of Delaware conferred upon the Board of Directors, to execute all such powers and to do all acts and things as may be exercised or done by the Corporation; subject, nevertheless, to the express provisions of said laws, of this Certificate of Incorporation and the Corporation's Bylaws. SEVENTH: AMENDMENT OF BYLAWS. Except as otherwise may be provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, the Bylaws of the Corporation may be adopted, repealed, rescinded, altered or amended 3 only by the affirmative vote of sixty percent (60%) or more of the entire Board of Directors or the affirmative vote of the holders of seventy-five percent (75%) or more of the outstanding shares of stock of the Corporation entitled to vote thereon. EIGHTH: ELECTION OF DIRECTORS AND TERM OF OFFICE. Except as otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, each director shall serve until his or her successor is elected and qualified or until his or her earlier death, resignation, retirement, disqualification or removal from office in the manner provided for in Article Tenth hereof, and no decrease in the authorized number of directors shall shorten the term of any incumbent director. The Board of Directors shall be divided into three classes as nearly equal in number as possible, with one class to be elected annually. The terms of office of the initial directors shall be as follows: the directors first appointed to Class I of the Board of Directors shall serve for a term ending upon the election of directors at the annual meeting of stockholders next following the end of the calendar year 1997; the directors first appointed to Class II of the Board of Directors shall serve for a term ending upon the election of directors at the annual meeting of stockholders next following the end of the calendar year 1998; and the directors first appointed to Class III of the Board of Directors shall serve for a term ending upon the election of directors at the annual meeting of stockholders next following the end of the calendar year 1999. At each annual meeting of stockholders, directors elected to succeed those whose terms are expiring shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders and when their respective successors are elected and qualified. Stockholders of the Corporation shall not be entitled to cumulate their votes for election of directors. NINTH: BOARD VACANCIES. Except as otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification or removal from office shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by the sole remaining director, or, in the event of the failure of the directors or the sole remaining director so to act, by the stockholders at the next election of directors. Newly created directorships resulting from any increase in the number of directors shall be filled by the affirmative vote of a majority of the directors then in office. Any director elected in accordance with this Article Ninth shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which such director has been elected expires and until such director's successor shall have been elected and qualified or until such director's death, resignation or removal, whichever first occurs. If the number of directors is changed, any increase or decrease shall be apportioned among the three classes so as to make all classes as nearly equal in number as possible. TENTH: REMOVAL OF DIRECTORS. Except as otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, at an annual meeting of stockholders or at a special meeting of stockholders called expressly for that purpose, a director may be removed only for cause and only by a vote of the holders of a majority of the outstanding shares of stock of the Corporation then entitled to vote in an election of directors. 4 Cause for removal shall be deemed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such director's duty to the Corporation and such adjudication is no longer subject to direct appeal. ELEVENTH: STOCKHOLDER ACTION. Except as may be otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be taken by written consent. TWELFTH: SPECIAL MEETINGS OF STOCKHOLDERS. Subject to the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, special meetings of the stockholders of the Corporation may be called for any purpose or purposes at any time by a majority of the Board of Directors, by the Chairman of the Board, the Chief Executive Officer or the President and shall be called by the Chairman of the Board, the Chief Executive Officer or the President upon the written request of the holders of not less than twenty-five percent (25%) of the outstanding shares of stock of the Corporation entitled to vote at such meeting. A special meeting shall be held at such date and time as is requested by the person or persons calling the meeting, within the limits fixed by law. THIRTEENTH: INDEMNIFICATION. A director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability: (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) under Section 174 of the Delaware General Corporation Law, as the same exists or as hereafter may be amended; or (iv) for any transaction from which such director derived an improper personal benefit. If the Delaware General Corporation Law hereafter is amended to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation, in addition to the limitation on liability provided for herein, shall be limited to the fullest extent permitted by the Delaware General Corporation Law as so amended. No amendment to or repeal of this Article Thirteenth shall apply to or have an effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. FOURTEENTH: AMENDMENTS. The Corporation reserves the right to adopt, repeal, rescind, alter or amend in any respect any provision contained in this Certificate of Incorporation in the manner now or hereafter prescribed by applicable law, and all rights conferred on stockholders herein are granted subject to this reservation. Notwithstanding the foregoing, or the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation (and notwithstanding the fact that a lesser percentage may be specified by law, this Certificate of Incorporation, or the terms of any class or series of stock having a preference over the Common Stock), the provisions set forth in this Article Fourteenth and in Articles Fifth, Sixth, Seventh, Eighth, 5 Eleventh, Twelfth and Thirteenth hereof may not be repealed, rescinded, altered or amended in any respect, and no other provision or provisions may be adopted which impair(s) in any respect the operation or effect of any such provision, except by the affirmative vote of the holders of not less than seventy-five percent (75%) of the outstanding shares of stock of the Corporation entitled to vote thereon. 6 EX-3.2 4 BYLAWS OF THE REGISTRANT EXHIBIT 3.2 BYLAWS UNITED PANAM FINANCIAL CORP., a Delaware corporation ARTICLE I OFFICES SECTION 1.1 REGISTERED OFFICE. United PanAm Financial Corp. (the "Corporation") shall at all times maintain a registered office in the State of Delaware, which, except as otherwise determined by the Board of Directors of the Corporation (the "Board of Directors"), shall be in the City of Dover, County of Kent. SECTION 1.2 OTHER OFFICES. The Corporation may also have an office or offices at such other place or places, either within or without the State of Delaware, as the Board of Directors may, from time to time, determine or as the business of the Corporation may require. ARTICLE II STOCKHOLDERS SECTION 2.1 ANNUAL MEETINGS. An annual meeting of stockholders shall be held for the election of directors at such date, time and place, either within or without the State of Delaware, as may be designated by the Board of Directors from time to time. Any other proper business may be transacted at the annual meeting. SECTION 2.2 SPECIAL MEETINGS. Subject to the rights of the holders of any class or series of stock having a preference over the Corporation's Common Stock (the "Common Stock") as to dividends or upon liquidation, special meetings of stockholders of the Corporation may be called for any purpose or purposes at any time by a majority of the Board of Directors, by the Chairman of the Board, the Chief Executive Officer or the President and shall be called by the Chairman of the Board, the Chief Executive Officer or the President upon the written request of the holders of not less than twenty-five percent (25%) of the outstanding shares of stock of the Corporation entitled to vote at such meeting. Each special meeting shall be held at such date and time as is requested by the person or persons calling the meeting, within the limits fixed by law. SECTION 2.3 NOTICE OF MEETINGS. Notice stating the place, day and hour of the meeting of stockholders and the purpose or purposes for which the meeting is called shall be given by delivering personally or by mailing a written or printed notice of the same, at the direction of the Chairman of the Board, the President, Secretary or the directors calling the meeting, not less than ten (10) nor more than sixty (60) days prior to the date of the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, addressed to the stockholder at his or her address as it appears 1 on the records of the Corporation. When any stockholders' meeting, either annual or special, is adjourned for thirty (30) days or more, or if a new record date is fixed for an adjourned meeting of stockholders, notice of the adjourned meeting shall be given as in the case of an original meeting. It shall not be necessary to give notice of the time and place of any meeting adjourned for less than thirty (30) days or of the business to be transacted thereat, other than an announcement at the meeting at which such adjournment is taken. SECTION 2.4 ADJOURNMENTS. Except as may be otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, any meeting of stockholders, annual or special, may adjourn from time to time to reconvene at the same or some other place and, except as provided by Section 2.3 of these Bylaws, notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which such adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. SECTION 2.5 QUORUM. At each meeting of stockholders, except where otherwise provided by law, the Certificate of Incorporation, the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, or these Bylaws, the holders of a majority of the outstanding shares of each class of stock entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum. For purposes of the foregoing, two or more classes or series of stock shall be considered a single class if the holders thereof are entitled to vote together as a single class at the meeting. In the absence of a quorum, the stockholders so present or represented at the meeting may, by majority vote, adjourn the meeting from time to time in the manner provided by Section 2.4 of these Bylaws until a quorum shall attend. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally called. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. SECTION 2.6 VOTING BY THE CORPORATION. Shares of its own capital stock belonging on the record date for the meeting to the Corporation or to another corporation, if a majority of the shares entitled to vote in the election of directors of such other corporation is held, directly or indirectly, by the Corporation, shall neither be entitled to vote nor be counted for quorum purposes; provided, however, that the foregoing shall not limit the right of the Corporation to vote stock, including, but not limited to, its own stock, held by it in a fiduciary capacity. SECTION 2.7 CONDUCT OF MEETINGS. Meetings of the stockholders shall be conducted in accordance with Delaware law unless otherwise prescribed by these Bylaws. The Chairman of the Board, or in the absence of the Chairman of the Board, the highest ranking officer of the Corporation who is present, or such other person as the Board of Directors shall have designated, shall call to order any meeting of the stockholders and shall act as chairman of the meeting. The Secretary of the Corporation, if present at the meeting, shall be the secretary of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chairman of the meeting shall appoint. The chairman of any meeting of the stockholders, unless otherwise prescribed 2 by law or regulation or unless the Chairman of the Board has otherwise determined, shall determine the order of business and the procedure at the meeting. SECTION 2.8 VOTING OF SHARES. Unless otherwise provided in the Certificate of Incorporation or the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, each stockholder, on each matter submitted to a vote at a meeting of stockholders, shall have one vote for each share of stock registered in his or her name on the books of the Corporation. If the Certificate of Incorporation provides for more or less than one vote for any share on any matter, every reference in these Bylaws to a majority or other proportion of stock shall refer to such majority or other proportion of the votes of such stock. At all meetings of stockholders for the election of directors or otherwise, all elections and questions shall, unless otherwise provided by law or by the Certificate of Incorporation, be decided by the vote of the holders of a majority of the outstanding shares of all classes of stock entitled to vote thereon present in person or represented by proxy at the meeting. Directors are to be elected by a plurality of votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present. If, at any meeting of stockholders, due to a vacancy or vacancies or otherwise, directors of more than one class of the Board of Directors are to be elected, each class of directors to be elected at the meeting shall be elected in a separate election by a plurality vote. Stockholders shall not be entitled to cumulate their votes for the election of directors. SECTION 2.9 PROXIES. A stockholder may vote the shares owned by him of record either in person or by proxy executed in writing (which shall include writings sent by telex, telegraph, cable or facsimile transmission) by the stockholder himself or his duly authorized attorney-in-fact. No such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A duly executed proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy which is not irrevocable by attending the meeting and voting in person or by filing an instrument in writing revoking the proxy or another duly executed proxy bearing a later date with the Secretary of the Corporation. SECTION 2.10 FIXING OF RECORD DATE. For the purpose of determining the stockholders entitled to notice of or to vote at any meeting of stockholders or at any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board of Directors may fix, in advance, a record date for any such determination of stockholders, which shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting of stockholders nor more than sixty (60) days prior to any other action. If no record date is fixed, the record date for determining stockholders entitled to notice of or to vote at the meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held, and the record date for determining stockholders 3 for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. SECTION 2.11 LIST OF STOCKHOLDERS ENTITLED TO VOTE. The Secretary of the Corporation, or such other officer or agent of the Corporation having charge of the stock transfer books for shares of the capital stock of the Corporation, shall prepare and make, at least ten (10) days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder for any purpose germane to the meeting during ordinary business hours for a period of at least ten (10) days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept open at the time and place of the meeting during the whole time thereof and may be inspected by any stockholder who is present. The original stock transfer books of the Corporation shall constitute the only evidence as to the stockholders entitled to examine such list or the stock transfer books, or to vote in person or by proxy at the meeting. SECTION 2.12 INSPECTORS OF ELECTION. In advance of any meeting of stockholders, the Board of Directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or any adjournment thereof. If no inspectors of election are appointed, the chairman of the meeting may, and on the request of any stockholder or his proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares present in person or represented by proxy at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the Board of Directors before the meeting, or by the chairman of the meeting at the meeting. The duties of the inspectors of election shall include: (i) determining the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (ii) receiving votes, ballots, or consents; (iii) hearing and determining all challenges and questions in any way arising in connection with the right to vote; (iv) counting and tabulating all votes or consents; (v) determining the election results; and (vi) such other acts that may be proper to conduct the election or vote with fairness to all stockholders. SECTION 2.13 VOTING OF SHARES IN THE NAME OF TWO OR MORE PERSONS. When ownership stands in the name of two or more persons, in the absence of written directions to the Corporation to the contrary, at any meeting of the stockholders of the Corporation any one or more of such stockholders may cast, in person or by proxy, all votes to which such ownership is entitled. In the event an attempt is made to cast conflicting votes, in person or by proxy, by the several persons in 4 whose names shares of stock stand, the vote or votes to which those persons are entitled shall be cast as directed by a majority of those holding such stock and present in person or by proxy at such meeting, but no votes shall be cast for such stock if a majority cannot agree. SECTION 2.14 VOTING OF SHARES BY CERTAIN HOLDERS. Shares standing in the name of another corporation may be voted by an officer, agent or proxy as the bylaws of such corporation may prescribe, or, in the absence of such provision, as the Board of Directors of such corporation may determine. Shares held by an administrator, executor, guardian or conservator may be voted by him or her, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him or her, either in person or by proxy, but no trustee shall be entitled to vote shares held by him or her without a transfer of such shares into his or her name. Shares standing in the name of a receiver may be voted by such receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer thereof into his or her name if authority to do so is contained in an appropriate order of the court or other public authority by which such receiver was appointed. A stockholder whose shares are pledged shall be entitled to vote such shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee shall be entitled to vote the shares so transferred. SECTION 2.15 STOCKHOLDER PROPOSALS. At any annual meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been brought before the meeting: (i) by, or at the direction of, a majority of the Board of Directors; (ii) by the Chairman of the Board; or (iii) by any stockholder of the Corporation who complies with the notice procedures set forth in this Section 2.15. For a proposal to be properly brought before the meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be delivered to or received at the principal executive offices of the Corporation not less than 120 calendar days in advance of the date of the Corporation's proxy statement released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or if the date of the annual meeting has been changed by more than thirty (30) calendar days from the date contemplated at the time of the previous year's proxy statement, notice by the stockholder to be timely must be so received 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. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the proposal to be made; (ii) the name and address of the stockholder making such proposal; (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to move such proposal; (iv) the class and number of shares of the Corporation which are owned of record by such stockholder; and (v) a description of any material interest (other than proportionately, as a stockholder) of such stockholder in such proposal. Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.15. Any such proposal may be deemed out of order and need not be discussed, considered, acted or voted upon or laid over for action at any meeting of stockholders if the Chairman of the Board (or 5 such other officer of the Corporation presiding at such meeting of stockholders) determines that such proposal was not delivered in compliance with these Bylaws or that such proposal deals or relates to: (i) any action or matter that, if taken or effected by the Corporation, would be in violation of, or contrary to, any applicable law or regulation or would result in a breach or violation by the Corporation of any contractual obligation; (ii) any action or matter that is impossible or beyond the Corporation's power to take or effect; (iii) any action or matter that is not a proper subject for action by the stockholders of the Corporation; (iv) any action or matter involving or relating to the conduct of the ordinary business of the Corporation; (v) any action or matter that is substantially duplicative of, or counter to, any business or proposal that is to be considered at such meeting of stockholders; (vi) any action or matter that has been rendered moot; or (vii) the redress of a personal claim or grievance against the Corporation or any other person or entity, or any action or matter that is designed to result in a benefit to the stockholder or to further a personal interest, which benefit or interest is not shared with stockholders of the Corporation at large. SECTION 2.16 STOCKHOLDER ACTION. Except as may be otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation and may not be taken by written consent. ARTICLE III BOARD OF DIRECTORS SECTION 3.1 POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, except as may be otherwise required by law or in the Certificate of Incorporation. SECTION 3.2 NUMBER OF DIRECTORS. Except as may be provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, the number of directors of the Corporation shall be fixed from time to time by resolution of the Board of Directors, but shall not be less than five (5) nor more than fifteen (15), divided into three classes as nearly equal in number as possible. If the number of directors is changed by the Board of Directors, then any newly created directorships or any decrease in directorships shall be apportioned among the classes so as to make all classes as nearly equal as possible; provided, however, that no decrease in the number of directors shall shorten the term of any incumbent director. SECTION 3.3 ELECTION AND TERM OF OFFICE. Except as otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, each director shall serve for a term ending on the third annual meeting following the annual meeting of stockholders at which such director was elected and until his or her successor is elected and qualified or until his or her earlier death, resignation, retirement, disqualification or removal from office in the manner provided for in Section 3.14 of these Bylaws; provided, however, 6 that the directors first appointed to Class I of the Board of Directors shall serve for a term ending upon the election of directors at the annual meeting of stockholders next following the end of the calendar year 1997; the directors first appointed to Class II of the Board of Directors shall serve for a term ending upon the election of directors at the annual meeting of stockholders next following the end of the calendar year 1998; and the directors first appointed to Class III of the Board of Directors shall serve for a term ending upon the election of directors at the annual meeting of stockholders next following the end of the calendar year 1999. SECTION 3.4 ELECTION OF CHAIRMAN. At the meeting of the Board of Directors immediately following the annual meeting of stockholders, the directors shall elect a Chairman of the Board from among the directors then in office. Such Chairman of the Board shall hold office until the corresponding meeting of the Board of Directors in the next year and until his or her successor shall have been elected or until his or her earlier death, resignation or removal. Any vacancy in such office may be filled for the unexpired portion of the term in the same manner by the Board of Directors at any regular or special meeting. SECTION 3.5 VACANCIES AND ADDITIONAL DIRECTORSHIPS. Except as may be otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, any vacancies on the Board of Directors resulting from death, resignation or removal shall be filled by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board of Directors, or by the sole remaining director, or, in the event of the failure of the directors or the sole director so to act, by the stockholders at the next election of directors. Newly created directorships resulting from any increase in the number of directors shall be filled by the affirmative vote of a majority of the directors then in office. Any director elected in accordance with this Section 3.5 shall hold office for a term expiring at the annual meeting of stockholders at which the term of the class to which such director has been elected expires and until such director's successor shall have been elected and qualified or until such director's death, resignation or removal, whichever first occurs. SECTION 3.6 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held at such places within or without the State of Delaware and at such times as the Board of Directors may from time to time determine and, if so determined, notice thereof need not be given. SECTION 3.7 SPECIAL MEETINGS. Special meetings of the Board of Directors may be held at any time or place within or without the State of Delaware whenever called by the Chairman of the Board, the Chief Executive Officer, the President, or by a majority of directors then in office. Reasonable notice thereof shall be given by the person or persons calling the meeting. SECTION 3.8 TELEPHONIC MEETINGS PERMITTED. Members of the Board of Directors, or any committee thereof, as the case may be, may participate in a meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 3.8 shall constitute presence in person at such meeting. 7 SECTION 3.9 QUORUM; VOTE REQUIRED FOR ACTION. At all meetings of the Board of Directors a majority of the entire Board of Directors shall constitute a quorum for purposes of the transaction of business. The vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors unless the Certificate of Incorporation or these Bylaws shall require the vote of a greater number. In case at any meeting of the Board of Directors a quorum shall not be present, the members of the Board of Directors present may adjourn the meeting from time to time until a quorum shall attend. SECTION 3.10 REGISTERING DISSENT. A director who is present at a meeting of the Board of Directors at which action on a corporate matter is taken shall be presumed to have assented to such action unless his or her dissent shall be entered in the minutes of the meeting, or unless he or she shall file his or her written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof, or shall forward such dissent by registered mail to the Secretary of the Corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director who voted in favor of such action. SECTION 3.11 CONDUCT OF MEETINGS. Meetings of the Board of Directors shall be presided over by the Chairman of the Board, or in his or her absence by the Chief Executive Office or in his or her absence by the President, or in their absence by a chairman chosen at the meeting. The Secretary shall act as secretary of the meeting, but in his or her absence the chairman of the meeting may appoint any person to act as secretary of the meeting. SECTION 3.12 ACTION BY DIRECTORS WITHOUT A MEETING. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or any committee thereof, may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee thereof. SECTION 3.13 COMPENSATION OF DIRECTORS. The Board of Directors shall have the authority to fix the compensation of directors. SECTION 3.14 REMOVAL. Except as otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, at an annual meeting of stockholders or at a special meeting of stockholders called expressly for that purpose, a director may be removed only for cause and only by a vote of the holders of a majority of the outstanding shares of stock of the Corporation then entitled to vote in an election of directors. Cause for removal shall be deemed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction or has been adjudged by a court of competent jurisdiction to be liable for gross negligence or misconduct in the performance of such director's duty to the Corporation and such adjudication is no longer subject to direct appeal. 8 SECTION 3.15 RESIGNATION. Any director may resign at any time by sending a written notice of such resignation to the Corporation addressed to the Board of Directors, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary. Unless otherwise specified therein, such resignation shall take effect upon receipt thereof. SECTION 3.16 NOMINATIONS. Only persons who are nominated in accordance with the procedures set forth in this Section 3.16 shall be eligible for election as directors. The Board of Directors or, at the discretion of the Board, a committee of the Board of Directors appointed for that purpose, shall act as a nominating committee for selecting the Board of Director's nominees for election as directors. Except in the case of a nominee substituted as a result of the death or other incapacity of the Board of Director's nominee, the nominating committee shall deliver written nominations to the Secretary of the Corporation at least twenty (20) days prior to the date of the annual meeting. Provided such committee makes such nominations, no nominations for directors except those made by the nominating committee shall be voted upon at the annual meeting unless other nominations by stockholders are made in accordance with the following. Nominations for directors may be made by any stockholder of the Corporation entitled to vote for the election of directors at that meeting pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to or received at the principal executive offices of the Corporation not less than twenty (20) days prior to the meeting; provided, however, that in the event that less than thirty (30) days' notice of the date of the meeting is given to stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the meeting was mailed. Such stockholder's notice shall set forth: (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director: (a) the name, age, business address and residence address of such person; (b) the principal occupation or employment of such person; and (c) such person's written consent to serving as a director, if elected; and (ii) as to the stockholder giving the notice: (a) the name and address of such stockholder; and (b) the class and number of shares of the Corporation which are owned of record by such stockholder. At the request of the Board of Directors any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation the information required to be set forth in a stockholders' notice of nomination which pertains to the nominee together with the required written consents. Ballots bearing the names of all persons nominated by the nominating committee and by stockholders shall be provided for use at the annual meeting. If the nominating committee shall fail or refuse to act at least twenty (20) days prior to the annual meeting, nominations for directors may be made at the annual meeting by any stockholder entitled to vote and shall be voted upon. ARTICLE IV COMMITTEES SECTION 4.1 COMMITTEES. The Board of Directors may by resolution passed by a majority of the Board of Directors, designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member 9 at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they, constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in place of any such absent or disqualified member. Any such committee, to the extent provided for in the resolution of the Board of Directors designating such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that no such committee shall have power or authority to: (i) amend the Certificate of Incorporation; (ii) adopt an agreement of merger or consolidation; (iii) recommend to the stockholders the sale, lease or exchange of all, or substantially all, of the Corporation's property and assets; (iv) recommend to the stockholders a dissolution of the Corporation or a revocation of dissolution; (v) remove or indemnify directors; or (vi) amend these Bylaws; provided, further, that unless the resolution of the Board of Directors designating such committee expressly so provides, no such committee shall have the power or authority to declare a dividend or to authorize the issuance of stock. SECTION 4.2 COMMITTEE RULES. Unless the Board of Directors otherwise provides, each committee designated by the Board of Directors may adopt, amend and repeal rules for the conduct of its business, and in the absence of a provision by the Board of Directors or a provision in the rules of such committee to the contrary, a majority of the entire authorized number of members of such committee shall constitute a quorum for the transaction of business, the vote of a majority of the members present at a meeting at the time of such vote if a quorum is then present shall be the act of such committee, and in other respects each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to Article III of these Bylaws. ARTICLE V OFFICERS SECTION 5.1 OFFICERS; ELECTION. As soon as practicable after the annual meeting of stockholders in each year, the Board of Directors shall elect a President, a Chief Executive Officer and a Secretary, and it may, if it so determines, designate the Chairman of the Board as an officer. The Board of Directors may also elect one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, one or more Assistant Secretaries, a Treasurer, one or more Assistant Treasurers and such other officers as the business of the Corporation may require, and may give any of them such further designations or alternate titles as it considers desirable. Any number of offices may be held by the same person. SECTION 5.2 TERM OF OFFICE; RESIGNATION; REMOVAL; VACANCIES. Except as otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until the first meeting of the Board of Directors after the annual meeting of stockholders next succeeding his election, and until his successor is elected and qualified or until his earlier death, resignation or removal. Any officer may resign at any time upon written notice to the Board of 10 Directors, the Chairman of the Board, the Chief Executive Officer, the President or the Secretary of the Corporation. Such resignation shall take effect at the time specified therein, and unless otherwise specified therein, no acceptance of such resignation shall be necessary to make it effective. The Board of Directors may remove any officer with or without cause at any time. Any such removal, other than for cause, shall be without prejudice to the contractual rights of such officer, if any, with the Corporation, but the election of an officer by the Board of Directors shall not of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board of Directors at any regular or special meeting. SECTION 5.3 POWERS AND DUTIES. The officers of the Corporation shall have such powers and duties in the management of the Corporation as shall be stated in these Bylaws or in a resolution of the Board of Directors which is not inconsistent with these Bylaws and, to the extent not so stated, as generally pertain to their respective offices, subject to the control of the Board of Directors. The Secretary shall have the duty to record the proceedings of the meetings of stockholders, the Board of Directors and any committees in a book to be kept for that purpose and shall have custody of the corporate seal of the Corporation with the authority to affix such seal to any instrument requiring it. The Board of Directors may require any officer, agent or employee to give security for the faithful performance of his duties. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER CORPORATE AGENTS SECTION 6.1 RIGHT TO INDEMNIFICATION. Each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation, or was serving at the request of the Corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, or was a director or officer of a foreign or domestic corporation which was a predecessor of the Corporation or of another enterprise at the request of such predecessor corporation, whether the basis of such proceeding is alleged action in an official capacity as a director or officer or in any other capacity while serving as a director or officer shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended (but, in the case of any such amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than said law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement, if the settlement is approved in advance by the Corporation) actually and reasonably incurred or suffered by such person in connection therewith if the person acted in good faith and in a manner the person reasonably believed to be in or not 11 opposed to the best interests of the Corporation, and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of his or her heirs, executors and administrators; provided, however, that, except as provided in Section 6.3 of this Article VI, the Corporation shall indemnify such person seeking indemnification in connection with a proceeding (or part thereof) initiated by such person only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation. The right to indemnification conferred in this Section 6.1 shall include the right to be paid by the Corporation the expenses incurred in defending any such proceeding in advance of its final disposition; provided, however, that any such expenses shall only be paid upon receipt by the Corporation of an undertaking by or on behalf of such director or officer to repay all amounts so advanced if it shall ultimately be determined that such director or officer is not entitled to be indemnified under this Section or otherwise. The Corporation may by action of its Board of Directors, provide indemnification to employees and agents of the Corporation with the same scope and effect as the foregoing indemnification of directors and officers. This Article VI shall create a right of indemnification for each such indemnifiable party whether or not the proceeding to which the indemnification relates arose in whole or in part prior to adoption of this Article VI. SECTION 6.2 DETERMINATION OF ELIGIBILITY. Any indemnification under this Article VI (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the director or officer is proper in the circumstances because such person has met the applicable standard of conduct set forth in the Delaware General Corporation Law. Such determination shall be made: (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum; or (ii) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion; or (iii) by a majority vote of the stockholders. SECTION 6.3 RIGHT OF CLAIMANT TO BRING SUIT. If a claim under Section 6.1 of this Article VI is not paid in full by the Corporation within thirty (30) days after a written claim has been received by the Corporation, or if applicable, whatever time is reasonably necessary for the Corporation to complete an investigation of such claim, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition where the required undertaking, if any is required, has been tendered to the Corporation) that the claimant has not met the standards of conduct which make it permissible under the Delaware General Corporation Law for the Corporation to indemnify the claimant for the amount claimed, but the burden of proving such defense shall be on the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper into the circumstances because he or she has met the applicable standard of conduct set forth in the Delaware General Corporation Law nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the claimant has not met the applicable standard of conduct. 12 SECTION 6.4 NONEXCLUSIVITY OF RIGHTS. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this Article VI shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, provision of these Bylaws, agreement or contract, vote of stockholders or of the disinterested members of the Board of Directors of the Corporation or otherwise. SECTION 6.5 INSURANCE. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation, or a person who is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. ARTICLE VII STOCK SECTION 7.1 CERTIFICATES. Certificates representing shares of the capital stock of the Corporation shall be issued in numerical order, and each stockholder shall be entitled to a certificate signed by the President or a Vice President, and the Secretary or the Treasurer. The signatures of such officers may be facsimiles if the certificate is manually signed on behalf of a transfer agent, or registered by a registrar, other than the Corporation itself or an employee of the Corporation. If an officer who has signed or whose facsimile signature has been placed upon such certificate ceases to be an officer before the certificate is issued, it may be issued by the Corporation with the same effect as if the person were an officer on the date of issue. Each certificate of stock shall state: (i) that the Corporation is organized under the laws of the State of Delaware; (ii) the name of the person to whom issued; (iii) the number and class of shares and the designation of the series, if any, which such certificate represents; and (iv) the par value of each share represented by such certificate, or a statement that such shares are without par value. SECTION 7.2 TRANSFERS. Transfers of stock shall be made only upon the stock transfer books of the Corporation, kept at the registered office of the Corporation or at its principal place of business, or at the office of its transfer agent or registrar, and before a new certificate is issued the old certificate shall be surrendered for cancellation. The Board of Directors may, by resolution, open a share register in any state of the United States, and may employ an agent or agents to keep such register, and to record transfers of shares therein. Shares of stock shall be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificate or an assignment separate from the certificate, or by a written power of attorney to sell, assign and transfer the same, signed by the holder of said certificate. No shares of stock shall be transferred on the books of the Corporation until the outstanding certificates therefor have been surrendered to the Corporation. 13 SECTION 7.3 REGISTERED OWNER. Registered stockholders shall be treated by the Corporation as the holders in fact of the stock standing in their respective names and the Corporation shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as provided in this Section 7.3 or as required by the laws of the State of Delaware. The Board of Directors may adopt by resolution a procedure whereby a stockholder of the Corporation may certify in writing to the Corporation that all or a portion of the shares registered in the name of such stockholder are held for the account of a specified person or persons. The resolution shall set forth: (i) the classification of stockholder who may certify; (ii) the purpose or purposes for which the certification may be made; (iii) the form of certification and information to be contained therein; (iv) if the certification is with respect to a record date or closing of the stock transfer books, the date within which the certification must be received by the Corporation; and (v) such other provisions with respect to the procedure as are deemed necessary or desirable. Upon receipt by the Corporation of a certification complying with the above requirements, the persons specified in the certification shall be deemed, for the purpose or purposes set forth in the certification, to be the holders of record of the number of shares specified in place of the stockholders making the certification. SECTION 7.4 MUTILATED, LOST OR DESTROYED CERTIFICATES. In case of any mutilation, loss or destruction of any certificate of stock, another may be issued in its place upon receipt of proof of such mutilation, loss or destruction. The Board of Directors may impose conditions on such issuance and may require the giving of a bond or indemnity to the Corporation in such sum as they might determine or establish such other procedures as they deem necessary. SECTION 7.5 FRACTIONAL SHARES OR SCRIP. The Corporation may: (i) issue fractions of a share which shall entitle the holder to exercise voting rights, to receive dividends thereon, and to participate in any of the assets of the Corporation in the event of liquidation; (ii) arrange for the disposition of fractional interests by those entitled thereto; (iii) pay in cash the fair value of fractions of a share as of the time when those entitled to receive such shares are determined; or (iv) issue scrip in registered or bearer form which shall entitle the holder to receive a certificate for a full share upon the surrender of such scrip aggregating a full share. SECTION 7.6 SHARES OF ANOTHER CORPORATION. Shares owned by the Corporation in another corporation, domestic or foreign, may be voted by such officer, agent or proxy as the Board of Directors may determine or, in the absence of such determination, by the President of the Corporation. ARTICLE VIII MISCELLANEOUS SECTION 8.1 FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. 14 SECTION 8.2 SEAL. The Corporation may have a corporate seal which shall have the name of the Corporation inscribed thereon and shall be in such form as may be approved from time to time by the Board of Directors. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. SECTION 8.3 WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS AND COMMITTEES. Whenever notice is required to be given by law or under any provision of the Certificate of Incorporation or these Bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice unless so required by the Certificate of Incorporation or these Bylaws. Unless either proper notice of a meeting of the Board of Directors, or any committee thereof, has been given, where required by law, by the Certificate of Incorporation or by these Bylaws, or else the persons entitled thereto have waived such notice (either in writing or by attendance as set forth above), any business transacted at such meeting shall be null and void. SECTION 8.4 FORM OF RECORDS. Any records maintained by the Corporation in the regular course of its business, including its stock ledger, books of account and minute books, may be kept on, or be in the form of, punch cards, magnetic tape, photographs, microphotographs or any other information storage device, provided that the records so kept can be converted into clearly legible form within a reasonable time. The Corporation shall so convert any records so kept upon the request of any person entitled to inspect the same. 15 SECTION 8.5 AMENDMENT OF BYLAWS. Except as may be otherwise provided by the terms of any class or series of stock having a preference over the Common Stock as to dividends or upon liquidation, these Bylaws may be amended or repealed, and new Bylaws adopted, by the affirmative vote of sixty percent (60%) or more of the entire Board of Directors or by the affirmative vote of the holders of seventy-five percent (75%) or more of the outstanding shares of stock of the Corporation entitled to vote thereon. 16 EX-10.1 5 INSURANCE PREMIUM MANAGEMENT AGREEMENT EXHIBIT 10.1 INSURANCE PREMIUM FINANCING MANAGEMENT AGREEMENT DATED MAY 17, 1995, BETWEEN PAN AMERICAN BANK and BPN CORPORATION TABLE OF CONTENTS 1. Term.............................................................. 1 2. Contractor's Obligations.......................................... 1 2.1 Managerial Services........................................ 2 2.2 Computer Software.......................................... 2 2.3 Compliance with Policies and Procedures.................... 2 2.4 Satisfaction of Loan Standards............................. 2 2.5 Contractor's Managers and Other Employees.................. 3 2.6 Cooperation................................................ 3 2.7 Program Documents.......................................... 3 2.8 Audit of Records........................................... 3 2.9 Professional Liability Insurance........................... 3 2.10 No Changes................................................. 4 2.11 Licenses and Other Authorities............................. 4 2.12 Financial Statements....................................... 4 3. Bank's Obligations................................................ 4 3.1 Bank Employees............................................. 4 3.2 Cooperation................................................ 4 3.3 Policies and Procedures.................................... 4 3.4 Business Plan.............................................. 5 4. Representations and Warranties of Bank; Certain Covenants......... 5 4.1 Bank....................................................... 5 4.2 Contractor................................................. 6 5. Compensation...................................................... 7 5.1 Residual Income............................................ 7 5.2 Service Fees............................................... 8 5.3 Bank Accounts.............................................. 8 5.4 Payment of Compensation.................................... 9 6. Non-Performing Loans; Receipt of Amounts Charged-Off.............. 9 6.1 Non-Performing Loans and Charged-Off Loans................. 9 6.2 Subsequent Receipt of Charge-Off Amounts................... 10 7. Program Expenses.................................................. 10 7.1 General Expenses........................................... 10 7.2 Program Expenses Shared Equally by Bank and Contractor............................................... 10 7.3 Expenses Paid by Contractor................................ 11 8. Non-Competition................................................... 11
-i- 8.1 Similar Agreement and A1ternative Financing................ 11 8.2 Post-Term Activities....................................... 11 9. Computer Software and Program Documentation........................ 11 9.1 Limited License During the Term............................ 11 9.2 Limited License Upon Termination of this Agreement......... 12 9.3 Return of the Computer Software............................ 12 9.4 Program Documentation...................................... 12 10. Confidentiality and Nonsolicitation............................... 12 10.1 Confidential Information................................... 12 10.2 Nonsolicitation............................................ 13 11. Termination....................................................... 13 11.1 Termination by Mutual Agreement............................ 13 11.2 Termination Without Cause.................................. 13 11.3 Termination for Cause...................................... 13 11.4 Obligation Upon Termination................................ 14 12. Independent Contractor............................................ 15 13. Indemnification................................................... 15 13.1 Indemnification of Bank.................................... 15 13.2 Indemnification of Contractor.............................. 16 13.3 Indemnification Claims Subject to Section 7.2 (b).......... 16 13.4 Notice of Claim for Indemnification........................ 16 13.5 Defense of Third Party Claims.............................. 16 13.6 Survival of Indemnification................................ 17 14. General Provisions................................................ 17 14.1 Further Instruments........................................ 17 14.2 Severability............................................... 17 14.3 Notices.................................................... 17 14.4 Waivers.................................................... 18 14.5 Entire Agreement........................................... 18 14.6 Successors and Assigns..................................... 18 14.7 Governing Law.............................................. 18 14.8 Venue and Jurisdiction..................................... 18 14.9 Gender and Number.......................................... 18 14.10 Paragraph and Subparagraph Headings........................ 19 14.11 Third Parties.............................................. 19 14.12 Legal Action............................................... 19 14.13 Counterparts............................................... 19
-ii- INSURANCE PREMIUM FINANCING MANAGEMENT AGREEMENT ------------------------------------------------ THIS INSURANCE PREMIUM FINANCING AGREEMENT, (this "Agreement") is made and entered into as of May 17, 1995, (the "Execution Date"), by and between PAN AMERICAN BANK, a federal savings bank ("Bank"), and BPN CORPORATION, a California corporation ("Contractor") , with reference to the following recitals: RECITALS A. Bank desires to make insurance premium finance loans to consumers and small commercial enterprises for the purpose of assisting those consumers and enterprises in obtaining automobile insurance and other types of property and casualty insurance coverage (the "IPF Loans" or, as the context may require, an "IPF Loan"). B. Contractor is experienced in arranging IPF Loans on behalf of financial institutions and providing related marketing and administrative services with respect thereto. Contractor provides those services under its registered fictitious business name, "ClassicPlan." C. In connection with providing IPF Loan-related services, Contractor has developed and is the owner of a computer software program designed to process and assist in the management and administration of IPF Loans (the "Computer Software"). D. Bank desires to engage Contractor to perform management and related administrative services with respect to the operation of its IPF Loan portfolio and related lending program (the "Program"), and Contractor desires to perform such services for Bank, in accordance with the terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Term. ---- The term of this Agreement shall commence immediately upon expiration of the one hundred twenty (120) day notice of termination period set forth in that certain Restatement and Amendment of the Management Services Agreement (Insurance Premium Financing) between Contractor and Republic Bank, a California corporation, or such earlier date following the Execution Date if deemed permissible by Contractor under such agreement (the "Effective Date"), and continue until terminated in accordance with Section 11 hereof (the "Term"). 2. Contractor's Obligations. Commencing immediately upon the Effective ------------------------ Date, Contractor will faithfully perform the following duties as required within the scope of this Agreement to the best of Contractor's professional knowledge, skill and judgment: 2.1 Managerial Services. Render managerial and other related ------------------- services to Bank with respect to the operation and administration of the Program, including but not limited to, (a) processing IPF Loan applications, (b) collecting on behalf of Bank all IPF Loan proceeds, loan fees, and unearned premium and commission; (c) acting as a liaison with insurance producers whose customers desire to obtain IPF Loans; (d) recommending to Bank, on an ongoing basis, for Bank's consideration, amendments and modifications to Bank's Policies and Procedures (as defined below); (e) performing such marketing and business development and other additional services for the Program as Bank may reasonably request consistent with the Policies and Procedures as in effect from time to time; (f) assuring the Program's compliance with the requirements in the Policies and Procedures with respect to truth-in-lending and other consumer protection and disclosure laws and insurance laws applicable to the Program; provided, however, Contractor shall not be responsible for the IPF Loan forms - --------- ------- and documentation or the rate tables used in connection with the IPF Loans; (g) maintaining and updating at Contractor's expense the Computer Software; (h) maintain all original IPF Loan and related documents and a computer data base for such records in such manner as may reasonably be required by Bank, consistent with the capacity of the Computer Software. 2.2 Computer Software. Utilize the Computer Software in performing ----------------- its obligations hereunder; 2.3 Compliance with the Policies and Procedures. Comply with all ------------------------------------------- written policies, procedures, standards, guidelines, underwriting requirements, and instructions for the management, operation and administration of the Program adopted by the Bank respecting the Program (the "Policies and Procedures") in performing its obligations hereunder; 2.4 Satisfaction of Loan Standards. Ensure that borrowers for IPF ------------------------------ Loans under the Program satisfy the following requirements: (a) The borrower makes a down payment in an amount consistent with industry practices and approved by Bank in accordance with the Policies and Procedures; (b) The borrower purchases a policy from an insurer listed in the Policies and Procedures; (c) The borrower assigns to Bank as security for the IPF Loan all unearned premium attributable to the financed insurance policy; and (d) The borrower or the borrower's designated agent executes all required loan documents, including a promissory note and power of attorney form; -2- 2.5 Contractor's Managers and Other Employees. Provide the services ----------------------------------------- of Peter Walski, Barbara Walski, and Cornelius J. O'Shea or such other person(s) as may be approved by Bank (collectively, the "Managers") to oversee Contractor's operations in performing its obligations hereunder. Contractor shall cause the Managers to devote as much of their regular business time to the affairs of the Program as is reasonably necessary to carry out Contractor's obligations hereunder. Contractor shall direct, supervise, and control the Managers as well as its other employees, and the Managers and such other employees of Contractor shall report solely to Contractor for instructions and directions. In addition, Contractor shall maintain sufficient computer capacity and support staff as required to fully carry out its responsibilities hereunder; 2.6 Cooperation. Cooperate at all times with Bank (a) to ensure the ----------- proper management, operation and administration of the Program and (b) in connection with the sale of the IPF Loans by Bank; 2.7 Program Documents. Utilize only Bank-approved documents, forms or ----------------- other written materials disseminated to customers or the public with respect to the Program; 2.8 Audit of Records. Upon forty-eight (48) hours advance written ---------------- notice to Contractor or as may otherwise be required by the Office of Thrift Supervision ("OTS") or any other bank regulatory or supervisory agency which has jurisdiction to examine Bank, permit representatives of Bank or such authorities or agencies to visit, inspect, examine, and audit at Contractor's office during regular business hours, Contractor's records and any of the properties, accounts, files, computer data bases, systems, documents, books, reports, work papers and other records (other than documents subject to an attorney-client privilege) belonging to or in the possession or control of Contractor relating to the services provided by Contractor hereunder or to the customers of Bank, provided that such audit shall not unreasonably interfere with Contractor's normal course of business; 2.9 Professional Liability Insurance. Contractor shall maintain in -------------------------------- full force and effect during the Term a policy for errors and omissions insurance coverage with an insurance carrier reasonably acceptable to Bank (A.M. Best Rating of "A-" or better) with limits of liability in no event less than $1 million, and Contractor shall seek obtain $2 million in such coverage or such greater amount as may be required by Bank, in its reasonable discretion, should applicable bank regulatory authorities require increased coverage (the "Policy"). The annual premium on the Policy shall be paid by Contractor provided that the amount thereof does not exceed the greater of $50,000.00 or the cost of insurance for coverage in an amount equal to five percent (5%) of the principal balance of the then outstanding performing and non-performing IPF Loans, in which case the Program shall be responsible for the payment of all premium in excess of such amount as a Program expense as set forth in Section 7.2 hereof. The Policy shall name Bank as -3- an additional insured and shall require by its terms that it cannot be cancelled except on at least thirty (30) days' written notice to Bank. Contractor shall provide Bank with such evidence of coverage under the Policy as Bank may reasonably request, including evidence of the renewal thereof. Contractor also agrees to satisfy all reasonable requirements for extending fidelity bond coverage to Contractor and its employees; provided that all premiums with respect thereto shall be paid by Bank; 2.10 No Changes. Except with respect to a transfer to an entity which ---------- is an affiliate of Bank as of the Execution Date, no change shall be made in the ownership, management, control or form of business of Contractor without the prior written consent of Bank; 2.11 Licenses and Other Authorities. Maintain in full force and ------------------------------ effect all licenses or other government authorizations required in connection with its business; and 2.12 Financial Statements. Within ninety (90) days following the end -------------------- of each year during which this Agreement is in effect, Contractor shall provide Bank unaudited financial statements reflecting the operations for the year then ended and the financial condition of Contractor as of such date, meeting the requirements for Contractor Financial Statements set forth in Section 4.2(a) hereof, and, upon the written request of Bank, shall provide Bank with quarterly Contractor Financial Statements within forty-five (45) days of the end of each quarter. 3. Bank's Obligations. Commencing on the Effective Date, Bank ------------------ will faithfully perform the following duties as required within the scope of this Agreement to the best of Bank's professional knowledge, skill and judgment: 3.1 Bank Employees. Maintain a staff of necessary employees to -------------- underwrite and fund IPF Loans under the Program; 3.2 Cooperation. Cooperate at all times with Contractor to ensure ----------- the proper management, operation and administration of the Program; 3.3 Policies and Procedures. Provide Contractor with the Policies ----------------------- and Procedures. The Policies and Procedures shall include, among such other requirements as may be included by Bank, the following with respect to the Program: (a) A list of insurers on whose policies IPF Loans may be made (and any individual or aggregate policy limits applicable to such insurers); (b) Fees to be charged borrowers; (c) Interest rates on IPF Loans; (d) Borrower underwriting requirements; (e) Allow for IPF Loans to be made on commercial insurance products, the aggregate amount of which loans shall not exceed, without further review of the commercial lines business by Bank, $500,000.00; and (f) Allow for advances to be made on IPF Loans financing broker's fees, the aggregate amount of which -4- shall not exceed, without further review by Bank, $200,000.00. The Policies and Procedures are subject to reasonable amendment consistent with then current industry practices at any time by Bank upon notice to Contractor. In accordance with the Business Plan (as hereinafter defined in Section 3.4 hereof), the insurance companies listed in Exhibit A attached hereto and incorporated herein by this reference are acceptable insurers on whose personal lines automobile insurance policies IPF Loans may be made under the Program; and 3.4 Business Plan. Bank shall fund IPF Loans under the Program in ------------- accordance with its Revised Fiscal 1995/96 (June 30, 1995 through June 30, 1996) Business Plan that was filed with and acknowledged by the OTS (the "Business Plan"), subject to the regulations, policies, directions and required approvals of the OTS and other bank regulatory authorities and provided Contractor supplies sufficient IPF Loans satisfying the requirements of the Program. 4. Representations and Warranties of Bank; Certain Covenants. --------------------------------------------------------- 4.1 Bank. Bank hereby represents and warrants to Contractor, as of ---- the Execution Date as follows: (a) Licenses and Other Authorization. Bank is duly chartered as -------------------------------- a Federal Savings Bank and each of its required licenses have been lawfully obtained and are in full force and effect in accordance with their terms by reason of performing its obligations hereunder. Without limiting the foregoing, (a) Bank is in full compliance with the terms and conditions of its charter and all such licenses, (b) there are no disputes or proceedings pending, or, to the knowledge of Bank after reasonable investigation, threatened with respect to the suspension, revocation, nonrenewal or limitation of any such license, (c) no event has occurred which, whether with notice or lapse of time or both, will or may result in the suspension, revocation, nonrenewal or limitation of any such license, and (d) all filings, submissions and other actions required to have been made or taken in order to renew any such license have been made or taken within the time periods required or reasonably necessary for such renewal. Bank covenants that it shall keep all necessary licenses and authorizations in full force and effect during the term of this Agreement. (b) Usury Laws. The IPF Loans to be made under the Program by ---------- Bank are not subject to interest rate or usury limitations under California or federal law. (c) Financial Statements of Bank. Bank has delivered to ---------------------------- Contractor true and complete copies of Bank's financial statements for the period ended June 30, 1994, accompanied by the opinion of its accountant (the "Bank Financial Statements") . The Bank Financial Statements, together with the notes thereto, have been prepared in accordance with generally accepted accounting -5- principles ("GAAP") applied on a consistent basis with prior periods (except as may be indicated in the notes thereto) and represent fairly the financial position of Bank as of the date shown. The Financial Statements do not fail to disclose any material liabilities of Bank as of the date thereof that are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed, contingent or inchoate. (d) Non-Contravention. The execution, delivery and performance ----------------- of this Agreement and the consummation of the transactions contemplated hereby will not violate, conflict with or constitute a default or breach under any agreement, lease, or contract to which Bank is a party or by which Bank is bound. (e) Authority. The execution, delivery and performance of this --------- Agreement and the transactions contemplated by this Agreement by Bank have been duly authorized by any necessary corporate action, including, without limitation, any necessary director or shareholder approval. Bank has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 4.2 Contractor. Contractor hereby represents and warrants to Bank, ---------- as of the Execution Date as follows: (a) Financial Statements of Contractor. Contractor has delivered --------------------------------- to Bank true and complete copies of Contractor's unaudited financial statements for the period ended December 31, 1994, maintained by Contractor on a consistent basis with prior periods (except as may be indicated in any note thereto) (the "Contractor Financial Statements") . The Contractor Financial Statements do not fail to disclose any material liabilities of Contractor as of the date thereof including any liabilities which, to the knowledge of Contractor, are required to be reflected or reserved against under GAAP, whether liquidated or unliquidated, fixed, contingent or inchoate. No material liabilities have been incurred by Contractor since December 31, 1994, other than those liabilities incurred in the ordinary course of business, consistent with past practices. Notwithstanding the foregoing, Contractor does not maintain reserves for processing any outstanding IPF Loans. (b) Non-Contravention. The execution, delivery and performance ----------------- of this Agreement and the consummation of the transactions contemplated hereby will not violate, conflict with or constitute a default or breach under any agreement, lease, or contract to which Contractor is a party or by which Contractor is bound. (c) Licenses and Other Authorization. Contractor is a corporation -------------------------------- duly organized, validly existing and in good standing under the laws of the State of California and each of its required licenses have been lawfully obtained and are in full force and effect in accordance with their terms by reason of -6- performing its obligations hereunder. Without limiting the foregoing, (i) Contractor is in full compliance with the terms and conditions of all such licenses, (ii) there are no disputes or proceedings pending, or, to the knowledge of Contractor after reasonable investigation, threatened with respect to the suspension, or revocation, nonrenewal or limitation of any such license, (iii) no event has occurred which, whether with notice or lapse of time or both, will or may result in the suspension, revocation, nonrenewal or limitation of any such license, and (iv) all filings, submissions and other actions required to have been made or take in order to renew any such license have been made or taken within the time periods required or reasonably necessary for such renewal. Contractor covenants that it shall keep all necessary licenses and authorizations in full force and effect during the term of this Agreement. (d) No Infringement. Contractor owns or shall have the right to --------------- use and it shall maintain the right to use throughout the term of this Agreement, all computer software, proprietary designs, trademarks, trademark applications, trade names, trade secrets, service marks, brand marks, brand names, and copyrights utilized by Contractor in connection with the operation of the Program and Bank shall be entitled to utilize such Program assets as provided herein without restriction or infringement upon the rights of any third party as contemplated under this Agreement. (c) Authority. The execution, delivery and performance of this --------- Agreement and the transactions contemplated by this Agreement by Contractor have been duly authorized by any necessary corporate action, including, without limitation, any necessary director or shareholder approval. Contractor has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder. 5. Compensation. ------------ 5.1 Residual Income. On all performing and nonperforming IPF Loans --------------- made under the Program, Contractor shall be credited one half of the Residual Income (as hereinafter defined) less a mutually agreed upon reserve for uncollectible interest. The "Residual Income" shall be the accrued interest with respect to the performing and non-performing IPF Loans, less accrued interest on the outstanding principal balance on the then outstanding performing and non- performing IPF Loans in the amount of two percent (2%) per annum above the prime rate as published in the Money Rates column of The Wall Street Journal ("Prime ----------------------- Rate"), or, in the event such rate shall cease to be published, such rate as may be mutually agreed upon by Bank and Contractor in substitution therefor, as such prime rate of interest is published from time to time; provided, however, -------- ------- interest shall cease to accrue on such performing and non-performing IPF Loans on the Pay-Off Date (as defined in Section 6.1 hereof). For the purposes of this Agreement, "performing" IPF Loans are all loans except for non-performing IPF Loans as defined in Section 6 -7- hereof. Non-performing IPF Loans and charged-off IPF Loans shall be treated as provided in Section 6 hereof. 5.2 Service Fees. Contractor shall be entitled to the following ------------ amounts as provided in the Policies and Procedures (the "Service Fees") with respect to each IPF Loan made under the Program, which amounts are subject to change from time to time by mutual agreement of Bank and Contractor in order to remain consistent with then current industry practices: (a) A loan service fee equal to the amount of the IPF Loan- related fee charged to the borrowers, the amount of which is currently $40.00 per IPF Loan; (b) All cancellation fees charged by Bank, the amounts of which are currently $10.00 per IPF Loan; and (c) Fifty percent (50%) of all fees charged by Bank to borrowers, including but not limited to, returned check fees and late charges. 5.3 Bank Accounts. ------------- (a) Post Office Box and IPF Loan Account. All borrowers under ------------------------------------ the IPF Loans shall be directed to submit their respective loan payments made payable to "Classic Plan/Pan American Bank" to a post office box designated by and under the control of Bank and Contractor. Contractor shall deposit all such payments in an account maintained in the name of Bank at Bank or such other bank as Bank may approve (the "IPF Loan Account"). Bank shall take all necessary steps in order to and shall authorize and permit Contractor to make deposits to the IPF Loan Account. (b) Operating Account. Contractor and Bank shall take all ----------------- necessary steps in order to and shall authorize and permit Contractor to issue, sign or countersign checks or other orders for the payment of money on an account designated by and in the name of Bank (the "Operating Account") so that Contractor may pay return unearned premium to borrowers of the IPF Loans, and make other payments to third parties necessary for the operation of the Program. In accordance with the Policies and Procedures, Bank shall maintain sufficient funds in the Operating Account to clear all such checks. (c) Draft Clearing Account. Contractor and Bank shall take all ---------------------- necessary steps in order to and shall authorize and permit Contractor to issue, sign or countersign drafts for the payment of money on a draft clearing account designated by and in the name of Bank (the "Draft Clearing Account") . The Draft Clearing Account shall be established in accordance with and for the purposes set forth in the Policies and Procedures, and in accordance therewith, Bank shall maintain sufficient funds in the Draft Clearing Account to clear all drafts properly issued on said account. -8- 5.4 Payment of Compensation. ----------------------- (a) Payment of the Section 5.2(a) Loan Service Fees. Contractor ----------------------------------------------- shall provide Bank with a weekly accounting of the IPF Loans initiated during the immediately preceding week in form acceptable to Bank and with sufficient detail to permit Bank to compute the loan service fees referred to in Section 5.2(a) due Contractor (the "Weekly Accounting"). Within two (2) business days following Bank's receipt of the Weekly Accounting, Bank shall deposit directly into an interest bearing bank account of Contractor designated by Contractor and maintained at Bank the loan service fees referred to in Section 5.2(a) hereof with respect to such IPF Loans; provided, however, such amounts to be paid to -------- ------- Contractor shall be reduced by the amount of any loan service fees referred to in Section 5.2(a) previously paid to Contractor that relate to insurance policies that were never issued by an insurer or otherwise rescinded from inception. (b) Payment of Residual Income and Other Amounts. On such date -------------------------------------------- of each calendar month as Bank and Contractor shall mutually agree, Bank shall provide Contractor with an accounting, based on data provided by Contractor, computed on a daily basis and in form acceptable to Bank and Contractor showing the principal balance outstanding and interest calculated at the rate of two percent (2%) per annum above the Prime Rate with respect to the IPF Loans and such information as may be reasonably required by Contractor or Bank to reflect income accrued on the performing IPF Loans and non-performing IPF Loans after an appropriate allowance for the reserve for uncollectible interest referred to in Section 5.1 hereof. Within two (2) business days following the approval of the accounting by the parties, Bank shall pay Contractor fifty percent (50%) of the Residual Income for such month with respect to the performing and non-performing IPF Loans, and Bank shall pay itself and Contractor such parties' respective share of amounts referred to in Sections 5.2(b) and (c) hereof that are then due, less, in the case of any payments otherwise due to Contractor, any sums then due Bank under Section 6.1 hereof. 6. Non-Performing Loans; Receipt of Amounts Charged-Off. ---------------------------------------------------- 6.1 Non-Performing and Charged-Off Loans. An IPF Loan shall be ------------------------------------ considered to be non-performing on the first date that a notice of cancellation may be sent under the policy to which the IPF Loan in question relates. Any amount of unearned premium received from an insurer on a non-performing IPF Loan shall be applied first to the payment of principal, then to the payment of Bank's share of accrued interest with respect thereto, then to Residual Income, and then to Service Fees. The date that such unearned premium is received shall be deemed the "Unearned Premium Receipt Date." Unpaid amounts with respect to non-performing IPF Loans shall be charged-off on the date which is eight (8) weeks following the earlier of (i) the Unearned Premium Receipt Date or (ii) the date it is determined that no unearned premium with respect thereto is receivable (the "Charge-Off Date"). IPF Loan charge-off -9- amounts (including principal, interest and Service Fees) (the "Charge-Off Amounts") shall be borne fifty percent (50%) by Bank and fifty percent (50%) by Contractor, except that Contractor shall be responsible for one hundred percent (100%) of the Charge-Off Amounts incurred as the result of the gross negligence of Contractor, provided, however, no loss incurred in connection with the --------- ------- insolvency of any insurance producer or other loan originator or insurer shall be deemed under any circumstances to be the result of the negligence or gross negligence of Contractor on any Charge-Off Amounts. Contractor shall pay to Bank its share of Charge-Off Amounts within five (5) days of Bank's demand therefor; provided, that Bank may, at its option, deduct any amounts owed by Contractor in respect of charged-off IPF Loans against any current or future compensation or distributions due Contractor hereunder. The date that Charge- Off Amounts are paid by Contractor in accordance with this Section 6.1 shall be hereinafter referred to as the "Charge-Off Payment Date." The date that all amounts of principal and Bank's share of accrued interest are paid in full, which may be the Unearned Premium Receipt Date or the Charge-Off Payment Date, as the case may be, shall be referred to herein as the "Pay-Off Date." 6.2 Subsequent Receipt of Charge-Off Amounts. Funds received from ---------------------------------------- borrowers, insurers, insurance producers, collection agencies or any other source that relate to IPF Loans previously charged-off under the Program, shall be divided equally between Bank and Contractor. 7. Program Expenses. ---------------- 7.1 General Expenses. Except as otherwise provided in Sections 7.2 ---------------- and 7.3 hereof, all expenses of Contractor and Bank incurred in connection with the Program, including but not limited to, legal fees, automobile expenses, computer expenses, insurance, employment, licenses, memberships, dues, publications, office supplies, postage, rent, payroll and other taxes, telephone, travel and entertainment, and utilities, shall be borne solely by the party incurring such expenses. 7.2 Program Expenses Shared Equally by Bank and Contractor. The ------------------------------------------------------ following expenses shall be shared equally by Bank and Contractor: (a) The cost of the initial printing of loan forms, stationary and other related documents utilized by Contractor that refer to Bank as the lender on the IPF Loans, which documents shall reflect any and all changes or revisions requested by Bank as a consequence of the initial compliance review thereof by legal counsel to Bank; (b) All costs, losses, expenses, judgments, attorneys' fees and settlements relating to any first party or third party claims arising from IPF Loans made under the Program as a consequence of Contractor's negligence or otherwise, the cost of defense and indemnification of which does not exceed $10,000.00 per claim; provided, however, claims for fees made by insurance producers or others -------- ------- originating IPF Loans under the Program shall be the sole responsibility of Contractor; and (c) The reasonable -10- salaries of the individuals (currently two) reasonably determined by Contractor to be required for collection activities with respect to the non-performing and charged-off IPF Loans. For the purposes of Section 7.2(b) above, two or more claims arising out of a single act or a series of related acts shall be treated as a single claim thereunder. The reimbursement of amounts referred to in this Section 7.2 shall be made monthly on such date of each month as mutually agreed upon by the parties hereto. 7.3 Expenses Paid by Contractor. Contractor shall be responsible for --------------------------- the costs that it incurs in marketing and promoting the Program. Contractor shall promptly pay or cause to be paid from its funds at its sole expense all sums due insurance producers or others for originating IPF Loans under the Program. 8. Non-Competition --------------- 8.1 Similar Agreement and Alternative Financing. Contractor shall ------------------------------------------- provide Bank with written notice in the event that Contractor reasonably believes that it will require funding for IPF Loans in an amount in excess of Bank's current lending capacity with respect to the Program or if it desires to obtain funding for IPF Loans that do not conform to the Program. If, within ninety (90) days following the date of such written notice, Bank declines to fund IPF Loans that do not conform to the Program or declines or is unable to increase its lending capacity or is unable to obtain a lender to provide additional financing with respect to the Program, Contractor may enter into like agreements to obtain alternative direct financing for IPF Loans that do not conform to the Program or IPF Loans that conform to the Program in excess of Bank's current lending capacity. Contractor shall advise Bank of all discussions it has with other lenders at the time such discussions commence and will provide Bank with a copy of any agreement with any such lender. Such agreement will not provide more favorable terms to the lender thereunder than those offered to Bank under this Agreement and Contractor's services under such agreement shall not interfere with or restrict Contractor's ability to perform Contractor's obligations to provide services for Bank hereunder. Contractor may utilize the Computer Software in managing and processing IPF Loans funded by such alternative sources of financing. 8.2 Post-Term Activities. At any time during or after the Term, -------------------- Contractor may take any and all steps that it deems appropriate to secure alternative sources of financing for IPF Loans to policyholders to be made following termination of this Agreement and to arrange for the use of the Computer Software in connection therewith; provided that Contractor first notifies Bank of any action that it proposes to take in such regard. 9. Computer Software and Program Documentation. ------------------------------------------- 9.1 Limited License During the Term. During the Term, Contractor ------------------------------- hereby grants to Bank a personal nonexclusive and -11- nontransferable license to use the Computer Software. Bank acknowledges and agrees that the computer Software and all copies thereof are Contractor's exclusive property and constitute a valuable trade secret and "Confidential Information" (as defined in Section 10.1 hereof) of Contractor. Without Contractor's prior written consent, Bank shall neither make copies of nor disclose or make available to third parties the Computer Software or any portion thereof. 9.2 Limited License Upon Termination of this Agreement. If -------------------------------------------------- this Agreement is terminated by either party, Contractor shall, at no cost to Bank, grant Bank a personal nonexclusive and nontransferable license to use the Computer Software for a period of two (2) years following the effective date of termination of this Agreement (the "Post Termination License Period") . During the Post Termination License Period and thereafter, Bank shall neither make copies of nor disclose or make available to third parties the Computer Software or any portion thereof, except to such servicing or processing firms as may be retained by Bank to service or process IPF Loans and collections, all of which shall be required to agree to use such Computer Software only in accordance with the terms hereof. The failure of Bank to comply with the requirements of the preceding sentence will result in the immediate terminating of the license granted pursuant to this Section 9.2. 9.3 Return of the Computer Software. Upon expiration of the ------------------------------- Post Termination License Period, Bank shall cease any further use of the Computer Software or any portion thereof and return the same and all copies thereof to Contractor. 9.4 Program Documentation. Bank and Contractor acknowledge --------------------- that except for the Computer Software, which is the sole property of Contractor, and the Policies and Procedures, which is the sole property of Bank, all Program-related manuals, documents, files, reports, studies, instruments, and other materials that were developed jointly by Bank and Contractor may be used without limitation by each following the termination of this Agreement. The right of joint use provided for in this Section 9.4 shall not extend to the Computer Software or the Policies and Procedures or any modifications, enhancements, updates or revisions that were made thereto during the Term. 10. Confidentiality and Nonsolicitation. ----------------------------------- 10.1 Confidential Information. During the Term, Bank and ------------------------ Contractor may acquire access to confidential or proprietary information of one another, including, but not limited to, the identities of one another's respective clients, customers, prospective client and customer lists, computer software, marketing surveys, cost analyses and procedures (collectively, "Confidential Information") . The parties agree that, except for the Computer Software, or as provided in Section 11.4(a), such Confidential Information that relates to the Program may be used by the Bank -12- without compensation except as expressly provided herein or by future agreement, and, without limiting the foregoing, the parties agree that Bank shall be free to market services or products other than IPF Loans to clients and customers or prospective clients and custorners of Contractor. Any Confidential Information of a party, except as otherwise provided in the preceding sentence, shall not be used by the other party except to carry out its obligations under this Agreement; shall be maintained in confidence by the other party; and shall not be revealed, disclosed, published or used by such party except as provided hereunder. 10.2 Nonsolicitation. For a period of one (1) year following --------------- the termination of this Agreement, Contractor shall not directly or indirectly call on, solicit, take away, or attempt to call on, solicit or take away, either for Contractor or for any other person, firm, corporation or entity, any of Bank's borrowers, other than obligors under the IPF Loans, existing before or at the time of termination of this Agreement. The provisions of this Section 10 shall survive the termination of this Agreement. 11. Termination. ----------- 11.1 Termination by Mutual Agreement. Bank and Contractor may ------------------------------- mutually agree to terminate this Agreement at anytime. 11.2 Termination Without Cause. Either party may terminate this ------------------------- Agreement without cause upon one hundred twenty (120) days prior written notice to the other party. 11.3 Termination for Cause. --------------------- (a) Termination for Cause by Bank or Contractor. At any time ------------------------------------------- during the Term, Bank or Contractor may terminate this Agreement immediately for cause upon written notification to the other party of such termination. Such written notice shall state the "cause" with specificity. As used in this Section 11.3(a), the term "cause" shall mean any one or more of the following events: (i) Misappropriation of Funds. The misappropriation by a party ------------------------- of funds or property of the other party; (ii) License Suspension or Revocation. The expiration or -------------------------------- cancellation of or refusal to renew by a regulatory authority any license, certificate or other regulatory approval required in order for a party to perform its duties under this Agreement; or (iii) Breach. A party's failure to pay amounts due hereunder to ------ the other party which is not paid within ten (10) days following notice from the other party with respect to -13- such nonpayment or, with respect to matters other than nonpayment of amounts due hereunder, a party's material breach of this Agreement which is not cured within sixty (60) days following notice from the other party of such breach. (b) Termination for Cause by Bank. At any time during the Term, ----------------------------- Bank may terminate this Agreement immediately for cause upon written notification to Contractor of such termination. Such written notice shall state the "cause" with specificity. As used in this Section 11.3(b), the term "cause" shall mean any one or more of the following events: (i) Malfeasance. Contractor engaging in acts of malfeasance ----------- in performing its obligations hereunder; (ii) Bankruptcy of Contractor. The institution of any ------------------------ bankruptcy, reorganization, insolvency or similar proceedings by or against Contractor; (iii) Regulatory Action. The OTS or any other regulatory ----------------- authority or agency having jurisdiction over the Bank's officers shall require that Bank terminate this Agreement; or (iv) Termination of Insurance. The Policy is cancelled or ------------------------ nonrenewed and Contractor does not obtain replacement coverage that is effective as of the effective date of such cancellation or nonrenewal. (c) Termination for cause by Contractor. At any time during the ----------------------------------- Term, Contractor may terminate this Agreement immediately for cause upon written notification to Bank and such termination. Such written notice shall state the "cause" with specificity. As used in this Section 11.3(c), the term "cause" shall mean any one or more of the following events: (i) Insolvency. The issuance of any rehabilitation, ---------- conservation or liquidation order by the OTS or other regulatory authority against Bank or issuance of any order or directive requiring that Bank terminate this Agreement; or (ii) Business Plan. Bank's failure or inability to make IPF ------------- Loans under the Program in accordance with the Business Plan. 11.4 Obligations Upon Termination. ---------------------------- (a) Return of Property and Use of Names. In addition to the ----------------------------------- requirements set forth in Section 9 hereof with respect to the use of the Computer Software, upon the termination of this Agreement or the expiration of the Term, Contractor shall return the Policies and Procedures to Bank without retaining any copy thereof and each party shall immediately return to the other all records and other property of the party that owns such property. In addition, Contractor and Bank shall not use the other's -14- trademarks, service marks, trade names, trade styles or logos, or any other words or logos similar to that of Bank or Contractor, as the case may be. (b) Loan Servicing. In the event of any termination of this -------------- Agreement, Bank and Contractor shall continue to perform and satisfy their respective duties and obligations with respect to all uncollected IPF Loans that were made under the program during the Term. Such duties and obligations shall be performed in accordance with the terms of this Agreement as if this Agreement had not been terminated, until all such loans have been fully collected or charged-off (the "Run-off Period") . During the Run-off Period, Bank and Contractor shall continue to allocate the expenses pertaining to the Program as described in Section 7 hereof. (c) Payments Due Following Termination. If this Agreement is ---------------------------------- terminated as provided in this Section 11, Bank shall continue to pay Contractor the amounts described in Section 5 hereof in respect of IPF Loans with application dates on or before the date of such termination. 12. Independent Contractor. ---------------------- This Agreement is not a contract of employment. Nothing contained in this Agreement shall be construed to create the relationship of joint venture, partnership or employer and employee between Bank and Contractor. Each party is an independent contractor and shall be free, subject to the terms and conditions of this Agreement, to exercise judgment and discretion with regard to the conduct of its business. Each party shall be solely responsible with respect to, and will promptly pay or withhold, as required, all taxes or sums due to federal, state or local taxing authorities for its respective employees. 13. Indemnification. --------------- 13.1 Indemnification of Bank. Contractor shall indemnify, defend and ----------------------- hold harmless Bank and its affiliates as well as its and their respective directors, officers, agents, employees and shareholders from and against any and all claims, suits, hearings, actions, damages, liabilities, fines, penalties, costs, losses or expenses, including reasonable attorney's fees (in the singular, an "Indemnification Claim" and collectively, "Indemnification Claims"), caused by or resulting from any breach of this Agreement by Contractor, or any misconduct, error, omission, or other unauthorized act by Contractor or by Contractor's managers, officers, directors, shareholders, employees, agents or representatives with respect to the IPF Loans made under the Program (except to the extent that such alleged misconduct, act, error, omission or other unauthorized or improper act or claim with respect thereto is primarily attributable to Bank), or any breach or alleged breach or termination of any agreement of Contractor to which Contractor has been or will at any time be a party respecting the making of IPF Loans or any claim that any person indemnified -15- hereunder induced Contractor to breach or terminate or otherwise interfere with any such agreement; provided, however, Contractor's responsibility for IPF Loan --------- ------- losses is subject to indemnification only as provided in Section 6.1 hereof, and not pursuant to this Section 13.1 or Section 7.2(b). 13.2 Indemnification of Contractor. Bank shall indemnify, defend ----------------------------- and hold harmless Contractor and its affiliates as well as its and their respective directors, officers, agents, employees and shareholders from and against any and all indemnification Claims, caused by or resulting from any breach of this Agreement by Bank, or any misconduct, error, omission, or other unauthorized act by Bank or by bank's officers, directors, shareholders, employees, agents or representatives with respect to the IPF Loans made under the Program or otherwise, except to the extent that such alleged misconduct, act, error, omission or other unauthorized or improper act or claim with respect thereto is primarily attributable to Contractor; provided, however, Bank will --------- ------- have no liability to Contractor in the event that Bank is unable to fund IPF Loans under the Program as a consequence of its receipt of a written directive from the OTS or other bank regulatory authorities. 13.3 Indemnification Claims Subject to Section 7.2 (b). Any claims ------------------------------------------------- subject to Section 7.2(b) hereof shall not be subject to indemnification under this Section 13 unless and until the amount of claims and expenses involved equal $10,000.00 at which point the entire claim and related expenses shall be subject to Section 13 rather than Section 7.2, including the first $10,000.00 thereof. 13.4 Notice of Claim for Indemnification. Upon obtaining ----------------------------------- knowledge of an Indemnification Claim which could give rise to indemnification under this Section 13, the party demanding such indemnification (the "Indemnitee") shall promptly notify the party from whom indemnification is sought (the "Indemnitor"), in writing, of any Indemnification Claim which the Indemnitee has determined has given or could give rise to a right of indemnification under Sections 13.1 or 13.2 hereof (the "Notice of Claim"). The Notice of Claim shall specify, in reasonable detail, the nature of any such Indemnification Claim giving rise to the right of indemnification. 13.5 Defense of Third Party Claims. With respect to any third ----------------------------- party Indemnification Claim set forth in a Notice of Claim, the Indemnitor may defend, in good faith and at is own expense, any such Indemnification Claim and the Indemnitee, at its expense, shall have the right to participate in the defense of any such third party Indemnification Claim. In connection with its defense of a third party Indemnification Claim, the Indemnitor shall have the right to choose or approve counsel for the defense or prosecution of such action, subject to the reasonable approval of the Indemnified Party. So long as the Indemnitor is defending in -16- good faith any such third party Indemnification Claim, the Indemnitee shall not settle or compromise such third party Indemnification Claim without the consent of the Indemnitor, which shall not be unreasonably withheld. The Indemnitee shall make available to the Indemnitor or its representatives all records and other materials reasonably required by them for its use in contesting any third party Indemnification Claim and shall cooperate fully with the Indemnitor in the defense of all such Indemnification Claims. The Indemnitor shall furnish, at its expense, any bond or other security required to release any lien, garnishment, attachment or execution required in connection with any third party proceeding. The Indemnitor may settle any claim without the consent of the Indemnitee in the event that the sole relief requested is money damages and such money damages are paid in full by the Indemnitor and all litigation against the Indemnitee with respect thereto is dismissed with prejudice (or an unconditional release satisfactory to Indemnitee is entered into). 13.6 Survival of Indemnification. The indemnification provided --------------------------- under this Section 13 shall survive the termination of this Agreement. 14. General Provisions. ------------------ 14.1 Further Instruments. Each party shall execute and deliver ------------------- all further instruments, documents and papers, and shall perform any and all acts necessary, to give full force and effect to all of the terms and provisions of this Agreement. 14.2 Severability. If any provision of this Agreement, as applied to ------------ any party or to any circumstance, shall be found by a court of competent jurisdiction to be void, invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of any such provision in any other circumstance, or the validity or enforceability of this Agreement. 14.3 Notices. All notices, statements or demands shall be in ------- writing and shall be served in person, by telegraph, by express mail, by certified mail or by private overnight delivery. Service shall be deemed conclusively made (a) at the time of service, if personally served, (b) at the time received, if sent by facsimile, and receipt is confirmed, (c) seventy-two (72) hours after deposit in the United States mail, (d) five (5) days after deposit in the United States mail, properly addressed and postage prepaid, return receipt requested, if served by certified mail and (e) twenty-four (24) hours after delivery by the party giving the notice, statement or demand to the private overnight deliverer, if served by private overnight delivery. -17- Any notice or demand to Contractor shall be given to: BPN Corporation 13750 Pipeline Avenue Chino, California 91710 Attention: Peter A. Walski, Barbara R. Walski and Cornelius J. O'Shea Any notice or demand to Bank shall be given to: Pan American Bank, FSB 1300 South El Camino Real San Mateo, California 94401-0986 Attention: Lawrence J. Grill, President Any party may, by virtue of written notice in compliance with this Paragraph, alter or change the address or the identity of the person to whom any notice, or copy thereof, is to be sent. 14.4 Waivers. A waiver by any party of any of the terms and ------- conditions of this Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach thereof, nor shall it be deemed a waiver of performance of any other obligation hereunder. 14.5 Entire Agreement. This Agreement contains the entire ---------------- understanding of the parties hereto relating to the subject matter hereof and supersedes all prior and collateral agreements, understandings, statements and negotiations of the parties. Each party acknowledges that no representations, inducements, promises, or agreements, oral or written, with reference to the subject matter hereof have been made other than as expressly set forth herein. 14.6 Successors and Assigns. This Agreement shall be binding upon ---------------------- and shall inure to the benefit of the parties hereto and their respective estates, successors, legal or personal representatives, heirs, distributees, designees and assigns. 14.7 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of California. 14.8 Venue and Jurisdiction. Any and all actions to enforce any of ---------------------- the terms or conditions of this Agreement or to resolve any disputes between the parties hereto shall be brought only in the United States District Court for the Central District of California or the Superior or Municipal Court of the State of California, County of Los Angeles, as appropriate. 14.9 Gender and Number. In all matters of interpretation, whenever ----------------- necessary to give effect to any provision of this Agreement, each gender shall include the other, the singular shall include the plural, and the plural shall include the singular. -18- 14.10 Paragraph and Subparagraph Headings. The titles of the ----------------------------------- paragraphs of this Agreement are for convenience only and shall not in any way affect the interpretation of any provision or condition of this Agreement. 14.11 Third Parties. Except as may be expressly set forth ------------- herein, the parties hereto do not intend to confer any rights or remedies upon any person other than the parties hereto. 14.12 Legal Action. In the event of any litigation between or ------------ among the parties hereto respecting or arising out of this Agreement, the prevailing party or parties shall be entitled to recover reasonable attorneys' fees and costs, whether or not such litigation proceeds to final judgment or determination. 14.13 Counterparts. This Agreement may be executed in ------------ counterparts which, taken together, shall constitute the whole of the Agreement as between the parties. IN WITNESS WHEREOF, the parties have executed this Agreement by their duly appointed and authorized officer whose incumbency and authority to bind Bank and Contractor, respectively, are warranted by execution hereof, as of the day and year first above written. BANK: PAN AMERICAN BANK By: /s/ LARRY GRILL ---------------------------- Its: PRESIDENT --------------------------- Printed Name: LARRY GRILL ------------------ CONTRACTOR: BPN CORPORATION By: /s/ PETER A. WALSKI ---------------------------- Its: President --------------------------- Printed Name: PETER A. WALSKI ------------------ -19- EX-10.2 6 FIRST AMENDMENT TO INSURANCE PREMIUM EXHIBIT 10.2 FIRST AMENDMENT TO INSURANCE ---------------------------- PREMIUM FINANCING MANAGEMENT AGREEMENT AND GUARANTIES ----------------------------------------------------- THIS FIRST AMENDMENT TO INSURANCE PREMIUM FINANCING MANAGEMENT AGREEMENT AND GUARANTIES is made as of the ___ day of October, 1995, by and among Pan American Bank, a federal savings bank ("Bank"), BPN Corporation, a California corporation ("Contractor"), and Cornelius J. O'Shea and Peter Walski and Barbara Walski (individually, a "Guarantor" and collectively the "Guarantors"). R E C I T A L S: --------------- A. Bank and Contractor are parties to that certain Insurance Premium Financing Management Agreement, dated May 17, 1995 under which Contractor is to provide Bank with management and related administrative services in connection with the operation of the insurance premium finance loan business to be conducted by the Bank (the "Agreement"). Guarantors are the sole shareholders of Contractor and have guarantied the payment of certain obligations of Contractor arising under the Agreement under Guaranties dated as of May 17, 1995 (each a "Guaranty" and collectively the "Guaranties"), subject to the dollar limitations set forth therein. B. Guarantors and Contractor have requested that the Bank increase the aggregate amount of IPF Loans (as defined in the Agreement) to be provided to brokers in accordance with the provisions of Section 3.3(f) of the Agreement from $200,000 to $1,500,000. C. The Bank is willing to extend such additional credit in accordance with the terms of the Agreement to brokers provided that the Guarantors agree to increase the dollar limitations applicable to the Guaranties as provided herein. D. All capitalized terms used herein and not otherwise defined shall have the meaning set forth therefor in the Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Modifications to the Agreement. The Agreement is hereby amended ------------------------------ by replacing subsection 3.3(f) with the following: "(f) Allow for advances to be made on IPF Loans financing broker's fees, the aggregate amount of which shall not exceed, without further review by Bank, $1,500,000, and which loans shall comply with the requirements of Schedule 1 hereto and such other requirements as may be reasonably imposed by Bank." 2. Modifications to the Guaranties. The Guaranties are hereby ------------------------------- amended as provided below: -1- (a) The Guaranty of Cornelius J. O'Shea is amended by replacing paragraph 13 thereof with the following: "13. The amount of this Guaranty and the liability of the Guarantor hereunder shall be limited to $500,000 plus any costs of enforcement of this Guaranty, including attorneys' fees." (b) The Guaranty of Peter Walski and Barbara Walski shall be amended by replacing paragraph 13 thereof as follows: "13. The amount of this Guaranty and the liability of the Guarantor hereunder shall be limited to $750,000 plus any costs of enforcement of this Guaranty, including attorneys' fees." 3. Except as modified by this Amendment, all other terms and provisions of the Agreement and the Guaranties shall remain in full force and effect, without modification. IN WITNESS WHEREOF, the undersigned have executed the foregoing Amendment. BANK: PAN AMERICAN BANK - ---- A FEDERAL SAVINGS BANK By: /s/ LAWRENCE J. GRILL ----------------------------------- Its: President ---------------------------------- CONTRACTOR: BPN CORPORATION - ---------- A CALIFORNIA CORPORATION By: /s/ PETER A. WALSKI ----------------------------------- Its: President ---------------------------------- /s/ CORNELIUS J. O'SHEA -------------------------------------- GUARANTORS: CORNELIUS J. O'SHEA - ---------- /s/ PETER A. WALSKI -------------------------------------- PETER WALSKI /s/ BARBARA WALSKI -------------------------------------- BARBARA WALSKI -2- SCHEDULE 1 ---------- Customer Financed Broker Fees - Requirements a. A minimum broker reserve target based on a multiple of 2 times average monthly volume of financed broker fees with a minimum reserve accumulation rate of 25% per contract of gross fees financed. b. Maximum individual gross fee to be financed per contract. $ 300 c. Maximum net outstandings related to fees financed through individual $ 100,000 producer source subject to an offsetting reserve of $25,000. d. Maximum net outstandings related to fees financed through Eastwood. $ 500,000 (Above $200,000 based on separate justification and support.) e. Maximum net outstandings at any time as follows before broker reserve $ 750,000 (assumed to be a minimum of $375,000) f. The reserve multiple of 2 times average monthly volume as well as the reserve accumulation rate of 25% are factors based on a 30% average cancellation rate and timely settlement of any receivables. Any significant variation from these base assumptions may be cause for revision of the aforementioned factors are relates to any individual producer. g. Broker must be billed within 30 days for unpaid amount of broker fees financed on customer accounts cancelled and collected within 30 days. h. Overview of underlying assumptions: Gross broker fees financed. $1,500,000 Less: Amount paid by customer from downpayment. (225,000) Less: Customer contract payments allocated to broker fees financed. (465,000) Less: Collected from brokers to reimburse for cancelled contracts. (181,500) Resulting net outstanding $ 628,500 Maximum net outstandings at any time as follows before broker reserve $ 750,000 (assumed to be a minimum of $375,000) NOTE: Any significant variation from these underlying assumptions may be cause for changes in the program.
-3- EX-10.3 7 SECOND AMENDMENT TO INSURANCE PREMIUM EXHIBIT 10.3 SECOND AMENDMENT TO INSURANCE ----------------------------- PREMIUM FINANCING MANAGEMENT AGREEMENT AND GUARANTIES ----------------------------------------------------- THIS SECOND AMENDMENT TO INSURANCE PREMIUM FINANCING MANAGEMENT AGREEMENT AND GUARANTIES is made as of the 28th day of February, 1996, by and among Pan American Bank, a federal savings bank (the "Bank"), BPN Corporation, a California corporation (the "Contractor"), and Cornelius J. O'Shea and Peter Walski and Barbara Walski (individually, a "Guarantor" and collectively the "Guarantors"). RECITALS: --------- A. Bank and Contractor are parties to that certain Insurance Premium Financing Management Agreement, dated May 17, 1995 under which Contractor is to provide Bank with management and related administrative services in connection with the operation of the insurance premium finance loan business to be conducted by the Bank (the "Agreement"). Guarantors are the sole shareholders of Contractor and have guarantied the payment of certain obligations of Contractor arising under the Agreement under Guaranties dated as of May 17, 1995 (each a "Guaranty" and collectively the "Guaranties"), subject to the dollar limitations set forth therein. B. Guarantors and Contractor and the Bank agreed to increase the gross aggregate amount of IPF Loans for broker fee financing (as defined in the Agreement) to be provided to brokers in accordance with the provisions of Section 3.3(f) of the Agreement from $200,000 to $1,500,000 and as amended and more fully set forth in The First Amendment to the Insurance Premium Financing ------------------- Management Agreement and Guaranties dated October 1995, including Schedule 1 thereof ("The First Amendment"). C. Under the terms of The First Amendment, while aggregate broker loans could increase to $1,500,000, the maximum net brokers fees outstanding at any time before broker cash reserves (assumed to be a minimum of $375,000) would not exceed $750,000 (as more fully set forth in Schedule 1 to The First Amendment) or $375,000 after the broker reserves; and accordingly the Bank's risks exposure from loss was to be limited to $187,500 (50% share of losses up to $375,000). D. Furthermore, Schedule 1 to The First Amendment provided that the maximum net brokers fees outstanding to the Eastwood Insurance Broker before their broker cash reserves would not exceed $500,000, as part of the $750,000 limit referred to in C. above. E. Guarantors and Contractor desire to have the Bank increase its funding to allow for an increase in IPF loans so that the amount of net brokers fees outstanding may exceed $750,000 and increase the single amount limit to Eastwood beyond $500,000. F. The Bank is willing to increase such financing but only if its total exposure from broker fee financing does not exceed $187,500, the original amount agreed to, and Guarantors and Contractor guaranty,indemnify and hold harmless the Bank from any losses up to 50% of the first $375,000 of losses but not exceeding $187,500. - 1 - G. All capitalized terms used herein and not otherwise defined shall have the meaning set forth therefor in the Agreement. NOW, THEREFORE, the parties hereto agree as follows: 1. Modifications to the Agreement, the Agreement is hereby amended by adding ------------------------------ to the end of subsection 13.1 as follows: "further provided, however and included in the foregoing contractor's indemnification of the Bank, Contractor hereby agrees that from this date forward until June 30, 1996 it will assume all risk, liabilities and costs resulting from losses in financing IPF broker fee loans in an amount exceeding the sum determined as follows, a. The amount of IPF loans for brokers' fees financed by the Bank will be aggregated, as well as tracked by each individual broker loan, and accounted for, including payments and advances, on a daily basis by Contractor. b. Any cash reserves collected from brokers as security in connection with financing brokers' fees and deposited with the Bank, shall be available to offset losses resulting from uncollected and unearned brokers' fees upon IPF contract cancellation and as to each broker based on their deposits. c. If any broker fee is not repaid from customer contract payments or directly from a broker to reimburse for unearned brokers fee resulting from canceled contract within 90 days after presentment of the claim to the broker by Contractor (which presentment will be within 60 days after contract cancellation), then the balance owning shall be recovered from the cash reserve account, and to the extent the reserve is not sufficient to pay the unearned broker fee portion of the total loan, then the unsecured and unpaid portion shall be deemed to be a loss. d. The Bank's share of such losses shall in no event exceed $187,500, based on 50% of the amount such unsecured loan losses up to $375,000; and Contractor shall assume all losses in excess thereof. e. The total net outstanding amount of IPF broker loans financed (as defined in Schedule 1 to The First Amendment to now) by the Bank at any time, shall not exceed $1.25 million. f. Contractor shall deliver to the Bank from time to time current financial statements and adequate collateral as may be reasonably required by the Bank to secure its obligation to the Bank. g. On or before July 1, 1996 and in no event later than May 17, 1997 the parties shall take the steps necessary to track and document the actual performance of the broker loan financing and reassess the risk therefrom and reach a mutual agreement to modify or replace this Second Amendment; however it shall remain in full force and effect until either mutually modified or replaced. 2. Modification to the Guaranties. The Guaranties are hereby amended as follows: a. The Guaranty of Cornelius J. O'Shea is amended adding to the end of paragraph 13 thereof the following sentence: -2- "In addition to the foregoing liability of Guarantor there shall be an amount equal to 40% of any loss resulting from any sums owing to Bank and not paid by BPN Corporation under the last phrase of Section 13.1 of that certain Insurance Premium Financing Management Agreement dated May 17, 1995, as modified by the Second Amendment to such Agreement. b. The Guaranty of Peter Walski and Barbara Walski shall be amended by adding to the end of paragraph 13 hereof the following sentence: "In addition to the foregoing liability of Guarantor there shall be an amount equal to 60% of any loss resulting from any sums owing to Bank and not paid by BPN Corporation under the last phrase of Section 13.1 of that certain Insurance Premium Financing Management Agreement dated May 17, 1995, as modified by the Second Amendment to such Agreement. 3. Guarantors jointly agree to deliver to the Bank from time to time current individual financial statements and adequate collateral as may be reasonably required by the Bank to secure their obligation to the Bank. 4. Except as modified by this Amendment and The First Amendment, all other ------------------- terms and provisions of the Agreement and the Guaranties shall remain in full force and effect, without modification. IN WITNESS WHEREOF, the undersigned have executed the foregoing Amendment. BANK: PAN AMERICAN BANK - ---- a Federal Savings Bank By: /s/ LAWRENCE J. GRILL ---------------------------- Its: President --------------------------- CONTRACTOR: BPN CORPORATION - ---------- a California Corporation By: /s/ PETER A. WALSKI ---------------------------- Its: PRES --------------------------- GUARANTORS: /s/ CORNELIUS J. O'SHEA - ---------- ------------------------------- CORNELIUS J. O'SHEA /s/ PETER A. WALSKI ------------------------------- PETER A. WALSKI /s/ BARBARA WALSKI ------------------------------- BARBARA WALSKI -3- EX-10.4 8 GUARANTY - MAY 17, 1995 BY PETER WALSKI EXHIBIT 10.4 GUARANTY TO: PAN AMERICAN BANK, FSB FOR GOOD AND valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned (hereinafter referred to as the "Guarantors") hereby jointly and severally guarantee, promise and undertake as follows: 1. Guarantors unconditionally, absolutely and irrevocably guarantee and promise to pay to PAN AMERICAN BANK, FSB ("Bank"), on demand, any sums owing to Bank and not paid by BPN Corporation ("Contractor") under that certain Insurance Premium Financing Management Agreement of even date herewith between Contractor and Bank (the "Agreement") within fifteen (15) days of Bank's demand therefor given on or after the date on which Contractor's performance is due thereunder: 2. This Guaranty ("Guaranty") shall remain effective so long as any amounts remain due under the Agreement to Bank or until the "Closing Date" as defined in that certain Stock Option Agreement of even date herewith by and among Contractor, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust, whichever occurs earlier; provided, however, any claim asserted by Bank prior to the Closing Date that is - -------- ------- subject to this Guaranty shall not be affected by the limitations contained in this sentence. Guarantors agree that nothing shall discharge or satisfy their obligations created hereunder except for the full payment of all sums due and owing to Bank by Contractor under the Agreement. This Guaranty is a personal and direct obligation of Guarantors, irrespective of the regularity, validity, or enforceability of any provision of the Agreement against Contractor and shall not be affected or impaired by any compromise, release, renewal, extension, indulgence, alteration, change in or modification of the Agreement, nor by any failure, negligence, or omission on the part of Bank to realize upon any obligations of Contractor or any other security therefor. 3. Guarantors agree that they are directly and primarily liable to Bank, that their obligations hereunder are independent of the obligations of Contractor under the Agreement, or of any other guarantor, and that a separate action or actions may be brought and prosecuted against Guarantors or any of them, whether action is brought against Contractor or any other guarantor or whether Contractor or Guarantors are joined in any such action or actions. In the event that any bankruptcy, insolvency, receivership or similar proceeding is instituted by or against Contractor, the obligations of the Guarantors hereunder shall be immediately due, payable and enforceable against Guarantors without Bank's prior demand of any kind for performance given to Contractor. As a condition to payment or performance by Guarantors under this Guaranty, Bank shall not be required to, and Guarantors hereby waive any and all rights to require Bank to prosecute or seek to enforce any remedies against Contractor or any other party liable to Bank and/or to require Bank to seek to enforce or resort to any remedies with respect to any security interests, liens or encumbrances granted to Bank by Contractor or any other party. 1 4. Guarantors hereby authorize Bank to assign, without notice, the benefit of this Guaranty in whole or in part and/or Bank's rights hereunder to any assignee of the Agreement or of any loans originated thereunder. 5. Guarantors hereby waive any right to assert against Bank any defense (legal or equitable), set-off, counterclaims, and/or claim which Guarantors may now or at any time hereafter have against Contractor and/or any other party liable to Bank in any way or manner. Guarantors hereby waive any defenses arising by reason of any claim based upon an election of remedies by Bank, which, in any manner impairs, affects, reduces, releases, destroys and/or extinguishes Guarantors' subrogation rights, rights to proceed against Contractor for reimbursement, and/or any other rights of the Guarantors to proceed against Contractor, against any other guarantor, or against any other person or security, including without limitation any defense that may arise by reason of the incapacity, lack of authority, death or disability of, or revocation hereof by, any other or others or the failure of Bank to file or enforce a claim against the estate (either in administration, bankruptcy, or other proceeding) of any other or others. Any and all present and future debts of Contractor to Guarantors are hereby postponed in favor of and subordinated to the full payment and performance of all present and future debts and obligations of Contractor to Bank. All monies or other property of Guarantors at any time in Bank's possession may be held by Bank as security for any and all obligations of Guarantors to Bank no matter how or when arising, whether absolute or contingent, whether due or to become due, and whether under this Guaranty or otherwise. 6. Guarantors are presently informed of the financial condition of Contractor and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of any obligation of Contractor to Bank under the Agreement. Guarantors hereby covenant that they will continue to keep themselves informed of Contractor's financial condition and of all other circumstances which bear upon the risk of nonpayment. Guarantors hereby waive their rights, if any, to require Bank to disclose to them any information which Bank may now or hereafter acquire concerning such condition or circumstances. 7. This Guaranty shall continue in full force and effect until the earlier to occur of (i) the Closing Date, provided, however, that any claim --------- ------- asserted by Bank prior to the Closing Date that is subject to this Guaranty shall not be affected by such limitation, or (ii) Contractor's obligations to Bank under the Agreement are fully paid, performed and discharged and Bank gives the Guarantors written notice of that fact. In connection with subpart (ii) of this paragraph 7, Contractor's obligations shall not be considered fully paid, performed and discharged unless and until all payments by Contractor to Bank are no longer subject to any right on the part of any person whomsoever, including but not limited to Contractor, Contractor as a debtor-in-possession, and/or any trustee in bankruptcy, to set aside such payments or seek to recoup the amount of such payments, or any part thereof. The foregoing shall include, by way of example and not by way of limitation, all 2 rights to recover preferences voidable under Title 11 of the United States Bankruptcy Code. In the event that any such payments by Contractor to Bank are set aside after the making thereof, in whole or in part, or settled without litigation, to the extent of such settlement, all of which is within Bank's discretion, Guarantors shall be liable for the full amount Bank is required to repay up to the amount of the dollar limit of this Guaranty plus costs, interest, attorneys' fees and any and all reasonable expenses which Bank paid or incurred in connection therewith. 8. This Guaranty shall be binding upon the successors and assigns of the Guarantors and shall inure to the benefit of Bank's successors and assigns. The death of any Guarantor and the incapacity, lack of authority, death, disability or revocation hereof by any other Guarantor shall not terminate or otherwise impair this Guaranty. 9. No modification of this Guaranty shall be effective for any purpose unless it is in writing and executed by an officer of Bank authorized to do so. This Guaranty merges all negotiations, stipulations and provisions relating to the subject matter of this Guaranty which preceded or may accompany the execution of this Guaranty. 10. Guarantors agree to pay reasonable attorneys' fees and all costs and expenses which may be incurred by Bank in the enforcement of this Guaranty or in any way arising out of, following, or consequential to the enforcement of Contractor's obligations under the Agreement. 11. All acts and transactions hereunder and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California. 12. No action which Bank may take or omit to take in connection with the Agreement, nor any course of dealing with Contractor or any other person shall release undersigned's obligations hereunder, affect this Guaranty in any way or afford undersigned any recourse, claims or offsets against Bank, which undersigned hereby waives. 13. The amount of this Guaranty and the joint and several liability of the Guarantors hereunder shall be limited to $600,000.00 plus any costs of enforcement of this Guaranty, including attorneys' fees. IN WITNESS WHEREOF, the undersigned has executed this Guaranty this 17th day of May , 1995. - ---- ------ "Guarantors" /s/ PETER WALSKI ---------------------------- PETER WALSKI /s/ BARBARA WALSKI ---------------------------- BARBARA WALSKI 3 EX-10.5 9 GUARANTY - MAY 17, 1995 BY CORNELIUS J. O'SHEA Exhibit 10.5 GUARANTY TO: PAN AMERICAN BANK, FSB FOR GOOD AND valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned (hereinafter referred to as the "Guarantor") hereby guarantees, promises and undertakes as follows: 1. Guarantor unconditionally, absolutely and irrevocably guarantees and promises to pay to PAN AMERICAN BANK, FSB ("Bank"), on demand, any sums owing to Bank and not paid by BPN Corporation ("Contractor") under that certain Insurance Premium Financing Management Agreement of even date herewith between Contractor and Bank (the "Agreement") within fifteen (15) days of Bank's demand therefor given on or after the date on which Contractor's performance is due thereunder. 2. This Guaranty ("Guaranty") shall remain effective so long as any amounts remain due under the Agreement to Bank or until the "Closing Date" as defined in that certain Stock Option Agreement of even date herewith by and among Contractor, Pan American Group, Inc., Peter A. Walski, Barbara R. Walski, Cornelius J. O'Shea and The Walski Family Trust, whichever occurs earlier; provided, however, any claim asserted by Bank prior to the Closing Date that is - -------- ------- subject to this Guaranty shall not be affected by the limitations contained in this sentence. Guarantor agrees that nothing shall discharge or satisfy his obligations created hereunder except for the full payment of all sums due and owing to Bank by Contractor under the Agreement. This Guaranty is a personal and direct obligation of Guarantor, irrespective of the regularity, validity, or enforceability of any provision of the Agreement against Contractor and shall not be affected or impaired by any compromise, release, renewal, extension, indulgence, alteration, change in or modification of the Agreement, nor by any failure, negligence, or omission on the part of Bank to realize upon any obligations of Contractor or any other security therefor. 3. Guarantor agrees that he is directly and primarily liable to Bank, that his obligation hereunder is independent of the obligations of Contractor under the Agreement, or of any other guarantor, and that a separate action or actions may be brought and prosecuted against Guarantor, whether action is brought against Contractor or any other guarantor or whether Contractor or Guarantor are joined in any such action or actions. In the event that any bankruptcy, insolvency, receivership or similar proceeding is instituted by or against Contractor, the obligations of the Guarantor hereunder shall be immediately due, payable and enforceable against Guarantor without Bank's prior demand of any kind for performance given to Contractor. As a condition to payment or performance by Guarantor under this Guaranty, Bank shall not be required to, and Guarantor hereby waives any and all rights to require Bank to prosecute or seek to enforce any remedies against Contractor or any other party liable to Bank and/or to require Bank to seek to enforce or resort to any remedies with respect to any security interests, liens or encumbrances granted to Bank by Contractor or any other party. 4. Guarantor hereby authorizes Bank to assign, without notice, the benefit of this Guaranty in whole or in part and/or Bank's rights hereunder to any assignee of the Agreement or of any loans originated thereunder. 5. Guarantor hereby waives any right to assert against Bank any defense (1egal or equitable), set-off, counterclaims, and/or claim which Guarantor may now or at any time hereafter have against Contractor and/or any other party liable to Bank in any way or manner. Guarantor hereby waives any defenses arising by reason of any claim based upon an election of remedies by Bank, which, in any manner impairs, affects, reduces, releases, destroys and/or extinguishes Guarantor' subrogation rights, rights to proceed against Contractor for reimbursement, and/or any other rights of the Guarantor to proceed against Contractor, against any other guarantor, or against any other person or security, including without limitation any defense that may arise by reason of the incapacity, lack of authority, death or disability of, or revocation hereof by, any other or others or the failure of Bank to file or enforce a claim against the estate (either in administration, bankruptcy, or other proceeding) of any other or others. Any and all present and future debts of Contractor to Guarantor are hereby postponed in favor of and subordinated to the full payment and performance of all present and future debts and obligations of Contractor to Bank. All monies or other property of Guarantor at any time in Bank's possession may be held by Bank as security for any and all obligations of Guarantor to Bank no matter how or when arising, whether absolute or contingent, whether due or to become due, and whether under this Guaranty or otherwise. 6. Guarantor is presently informed of the financial condition of Contractor and of all other circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of any obligation of Contractor to Bank under the Agreement. Guarantor hereby covenants that he will continue to keep himself informed of Contractor's financial condition and of all other circumstances which bear upon the risk of nonpayment. Guarantor hereby waives his right, if any, to require Bank to disclose to him any information which Bank may now or hereafter acquire concerning such condition or circumstances. 7. This Guaranty shall continue in full force and effect until the earlier to occur of (i) the Closing Date, provided, however, that any claim -------- ------- asserted by Bank prior to the Closing Date that is subject to this Guaranty shall not be affected by such limitation, or (ii) Contractor's obligations to Bank under the Agreement being fully paid, performed and discharged and Bank giving the Guarantor written notice of that fact. In connection with subpart (ii) of this paragraph 7, Contractor's obligations shall not be considered fully paid, performed and discharged unless and until all payments by Contractor to Bank are no longer subject to any right on the part of any person whomsoever, including but not - 2 - limited to Contractor, Contractor as a debtor-in-possession, and/or any trustee in bankruptcy, to set aside such payments or seek to recoup the amount of such payments, or any part thereof. The foregoing shall include, by way of example and not by way of limitation, all rights to recover preferences voidable under Title 11 of the United States Bankruptcy Code. In the event that any such payments by Contractor to Bank are set aside after the making thereof, in whole or in part, or settled without litigation, to the extent of such settlement, all of which is within Bank's discretion, Guarantor shall be liable for the full amount Bank is required to repay up to the amount of the dollar limit of this Guaranty plus costs, interest, attorneys' fees and any and all reasonable expenses which Bank paid or incurred in connection therewith. 8. This Guaranty shall be binding upon the successors and assigns of the Guarantor and shall inure to the benefit of Bank's successors and assigns. The death of Guarantor and the incapacity, lack of authority, death, disability or revocation hereof by Guarantor shall not terminate or otherwise impair this Guaranty. 9. No modification of this Guaranty shall be effective for any purpose unless it is in writing and executed by an officer of Bank authorized to do so. This Guaranty merges all negotiations, stipulations and provisions relating to the subject matter of this Guaranty which preceded or may accompany the execution of this Guaranty. 10. Guarantor agrees to pay reasonable attorneys' fees and all costs and expenses which may be incurred by Bank in the enforcement of this Guaranty or in any way arising out of, following, or consequential to the enforcement of Contractor's obligations under the Agreement. 11. All acts and transactions hereunder and the rights and obligations of the parties hereto shall be governed, construed and interpreted in accordance with the laws of the State of California. 12. No action which Bank may take or omit to take in connection with the Agreement, nor any course of dealing with Contractor or any other person shall release undersigned's obligations hereunder, affect this Guaranty in any way or afford undersigned any recourse, claims or offsets against Bank, which undersigned hereby waives. 13. The amount of this Guaranty and the liability of the Guarantor hereunder shall be limited to $400,000.00 plus any costs of enforcement of this Guaranty, including attorneys' fees. IN WITNESS WHEREOF, the undersigned has executed this Guaranty this 17th day of May, 1995. "Guarantor" /s/ CORNELIUS J. O'SHEA ----------------------------------- CORNELIUS J. O'SHEA - 3 - EX-10.6 10 STOCK OPTION AGREEMENT - MAY 17, 1995 Exhibit 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 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- STOCK OPTION AGREEMENT This STOCK OPTION AGREEMENT (this "Agreement") is entered into effective as of _____ __, 1995 (the "Effective Date") by and among BPN CORPORATION, a California corporation ("BPN"), PAN AMERICAN GROUP, INC., a Delaware corporation ("PAGI"), and PETER A. WALSKI, an individual ("P. Walski"), BARBARA R. WALSKI, an individual ("B. Walski") (B. Walski and P. Walski collectively, the "Walskis"), CORNELIUS J. O'SHEA, an individual ("O'Shea"), and THE WALSKI FAMILY TRUST, dated August 30, 1989 (the "Trust") (P. Walski, B. Walski and O'Shea, each a "Principal" and collectively, the "Principals") (the Trust and O'Shea each, a "Shareholder" and collectively, the "Shareholders"), with reference to the following recitals: RECITALS A. As of the Effective Date, the Shareholders own beneficially and of record all the issued and outstanding shares (the "Shares") of BPN as follows:
Shareholder No. of Shares ----------- ------------- Trust 750 O'Shea 350
B. BPN is engaged in the business of arranging insurance premium financing loans and providing related marketing and servicing activities for consumers and small commercial enterprises, primarily for the purposes of obtaining automobile insurance, as well as other types of property and casualty coverages (the "Program"). BPN currently operates the Program pursuant to the terms of that certain Restatement and Amendment of the Management Services Agreement (the "Republic Agreement") between BPN and Republic Bank, a California corporation ("Republic"). C. The Principals are currently organizing and subsequent to the Effective Date may organize corporations in certain other states, jurisdictions or territories of the United States of America outside the State of California for the purpose of operating the Program in such other states, jurisdictions or territories (collectively, the "BPN Affiliates"). In connection therewith, the Walskis' shares of each of the BPN Affiliates will be issued to the Trust. The BPN Affiliates shall not, however, include corporations organized by the Principals following the Closing Date (as defined in Section 4.2 hereof). D. Subject to the terms and conditions contained herein, PAGI desires to acquire options to purchase, and each Shareholder desires to grant to PAGI such options to purchase, the Shares and all the issued and outstanding shares of each of the BPN Affiliates (the "Affiliate Shares"). E. The Shareholders and the Walskis are each a party to a "Stock Retirement Agreement" dated August 25, 1990, that provides for the disposition of the Shares in certain situations. A copy of the Stock Retirement Agreement is attached hereto as Exhibit A. The Shareholders and the Walskis shall cause the Stock Retirement Agreement to be amended to provide that the rights of the parties thereto, including such parties' respective estates, successors, legal or personal representatives, heirs, distributees, designees and assigns, shall be subordinated to terms and conditions of this Agreement. NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. GRANT OF OPTION --------------- Each of the Shareholders hereby grants to PAGI the right to purchase such Shareholder's Shares (the "Share Option") and the Affiliate Shares (the "Affiliate Share Option") at a price and subject to the conditions set forth in this Agreement. 2. CONSIDERATION FOR OPTION ------------------------ As consideration for the Share Option and the Affiliate Share Option, on the Effective Date PAGI shall pay each of the Shareholders the following amount (the "Option Payment")
Shareholder Amount ----------- ------ Trust $6,500.00 O'Shea $3,500.00
The Option Payment shall be deemed earned upon receipt by each of the Shareholders and nonrefundable. 3. OPTION PERIOD ------------- The Share Option and the Affiliate Share Option shall have a term (the "Option Period") commencing on the Effective Date after BPN has given the appropriate notice of termination under the Republic Agreement and ending March 31, 2000 (the "Option Termination Date"). Sections 2, 11 and 12 hereof shall survive the expiration of the Option Termination Date or any termination of this Agreement. -2- 4. EXERCISE OF OPTION ------------------ 4.1 The Shares and the Affiliate Shares. The Share Option and ----------------------------------- the Affiliate Share Option may be exercised as provided herein prior to the Option Termination Date or the termination of this Agreement, whichever occurs sooner, and shall only be exercised once during the Option Period in whole and not in part with respect to the Shares, and if appropriate, all the Affiliate Shares. The Affiliate Share Option may only be exercised if (a) the Share Option is exercised simultaneously therewith and (b) it is exercised with respect to all of the Affiliate Shares. 4.2 Written Notice. In the event that PAGI desires to exercise -------------- the Share Option, alone, or the Share Option and the Affiliate Share Option, together, it shall do so by concurrently delivering an executed written notice to each of the Shareholders and BPN, on or before the Option Termination Date, of its election to exercise the same (the "Exercise Notice"). In the event that the closing of the transaction described in the Exercise Notice (the "Closing") is not consummated within twelve (12) months following the date of said notice, BPN shall have the right, by providing written notice in accordance with Section 13.6 hereof, to terminate the Share Option and the Affiliate Share Option upon such written notice to and without the consent or prior approval of PAGI. PAGI shall provide the Shareholders and BPN with at least fifteen (15) days prior written notice in accordance with Section 13.6 hereof of the date that it desires to consummate the transactions described in the Exercise Notice (the "Closing Date") 5. EXERCISE PRICE OF THE SHARE OPTION AND THE AFFILIATE SHARE OPTION ----------------------------------------------------------------- 5.1 Exercise Price of the Share Option. BPN shall provide ---------------------------------- written notice to PAGI (the "Lending Target Notice") in the event that it has had $30 million or more in premium finance loans outstanding for six (6) consecutive months (the "Lending Target") under that certain Insurance Premium Financing Management Agreement (the "PAB Agreement") to be entered into as of the Effective Date between BPN and PAGI's wholly-owned subsidiary, Pan American Bank, FSB, a federal savings bank ("PAB"). If, prior to the Lending Target Notice being met or within ninety (90) days following the date of the Lending Target Notice, PAGI delivers an Exercise Notice as required pursuant to Section 4.2 hereof concerning its desire to exercise the Share Option, the exercise price with respect thereto shall be $2 million. In the event that PAGI does not deliver such Exercise Notice prior to the expiration of the aforementioned ninety (90) day period, the exercise price of the Share Option shall thereafter be the greater of (a) $2 million or (b) four (4) times BPN's pre-tax earnings for the twelve (12) complete consecutive calendar months immediately preceding the date of the Exercise Notice less the "Non-Competition Consideration" (as defined in Section 10.4 hereof). For the purposes of this Section 5.1 and Section 5.2 hereof, BPN's "pre-tax earnings" shall include the gross -3- amounts of the salaries and other compensation and distributions, excluding amounts paid with respect to the Facility Lease (as hereinafter defined), that BPN paid to the Shareholders and the Walskis to the extent that such amounts exceed $330,000 for such twelve (12) month period. For a period of two years following the Closing Date, any Principal remaining as an employee of BPN shall be paid an annual base salary of $110,000.00 for providing services to BPN similar to those provided by the employed Principal immediately prior to the Closing Date. The preceding sentence shall not be construed to create an employment agreement between or be binding upon BPN or any Principal, but merely represents the intention of the parties in the event that a Principal is employed by BPN following the Closing Date. The exercise price described in this Section 5.1 shall hereinafter be referred to as the "Share Option Exercise Price." 5.2 Exercise Price of the Share Option and the Affiliate Share ---------------------------------------------------------- Option. In the event that PAGI desires to exercise both the Share Option and - ------ the Affiliate Share Option, the exercise price with respect thereto shall be the sum of (i) four (4) times the BPN Affiliates pre-tax earnings for the twelve (12) complete consecutive calendar months immediately preceding the date of the Exercise Notice, plus (ii) the Share Option Exercise Price. The exercise price described in this Section 5.2 shall hereinafter be referred to as the "Affiliate Share Option Exercise Price." 5.3 Determination of Pre-Tax Earnings. The pre-tax earnings of BPN --------------------------------- and, if appropriate, the BPN Affiliates, shall be determined in accordance with generally accepted accounting principles ("GAAP"), consistently applied with prior periods, except as modified by Section 5.1 hereof respecting the treatment of compensation and distributions paid to the Shareholders and the Walskis. In the event that PAGI desires to exercise the Share Option and, if appropriate, the Affiliate Share Option, within forty-five (45) days of BPN's receipt of an Exercise Notice, BPN shall provide PAGI with a statement of income for the relevant twelve (12) month period for which pre-tax earnings are to be calculated, computed on an accrual basis prepared in accordance with GAAP, consistently applied with prior periods, together with such supporting detail as PAGI may reasonably request. The calculation of pre-tax earnings contained in the income statement shall be deemed to be accepted by PAGI unless PAGI notifies BPN in writing within thirty (30) days following its receipt of the income statement that it rejects the calculation of pre-tax earnings contained therein. In the event of such rejection, the Shareholders shall, at PAGI's expense, engage the Big 6 Accounting Firm of their choice to conduct an audit of BPN for the twelve (12) month period covered by the income statement in question. The accounting firm's determination of pre-tax earnings as a consequence of conducting that audit shall be binding on the parties hereto. 5.4 Lending Target Audit. In order to verify whether BPN has -------------------- reached the Lending Target, PAGI shall, at its own expense and during BPN's regular business hours, have the right to -4- conduct an audit of BPN's insurance premium financing activities under the Program. 6. TERMINATION AND OPTION PERIOD REDUCTION --------------------------------------- 6.1 Termination of the Share Option and the Affiliate Share Option. -------------------------------------------------------------- The Share Option and the Affiliate Share Option shall terminate immediately upon the occurrence of any of the following events prior to the Option Termination Date: (a) The institution of any bankruptcy, reorganization, insolvency or similar proceedings by or against PAGI; (b) The assignment of the Share Option and/or the Affiliate Share Option by PAGI for the benefit of its creditors; or (c) PAGI's failure to exercise the Share Option and the Affiliate Share Option, if appropriate, within thirty (30) days following the date of a "Notice of Curtailment" (as defined in Section 6.2 hereof). 6.2 Option Period Reduction. In the event that the Lending ----------------------- Capacity is reduced below $30 million on an annual basis and such reduction results in the inability of BPN to fund then existing available loans under the Program that satisfy PAB's lending and underwriting criteria as consistently applied during the Option Period, BPN shall provide PAGI with written notice in accordance with Section 13.6 hereof of any such curtailment (a "Notice of Curtailment") and PAGI shall have thirty (30) days from the date thereof to deliver an Exercise Notice as required pursuant to Section 4.2 hereof. The Option Period shall terminate without the further action of the Shareholders or PAGI in the event that PAGI fails to exercise the Share Option and, if appropriate, the Affiliate Share Option, within such thirty (30) day period. 7. CLOSING OF THE SHARE OPTION AND THE AFFILIATE SHARE OPTION ---------------------------------------------------------- 7.1 Purchase and Sale. Subject to the terms, conditions, ----------------- representations and warranties set forth herein, on the Closing Date the Shareholders shall sell to PAGI and PAGI shall purchase from the Shareholders the Shares and, if appropriate, the Affiliate Shares. 7.2 Consideration. On the Closing Date, the Shareholders shall ------------- deliver to PAGI all certificates for the Shares and, if appropriate, the Affiliate Shares, duly assigned and endorsed to PAGI in good form for transfer or accompanied by stock powers duly endorsed, and PAGI shall deliver to (a) the Shareholders cashier's checks made payable to each of the Shareholders in an -5- amount equal to each Shareholder's respective portion of the Share Option Price or Affiliate Share Option Price, as is appropriate and (b) the Principals cashier's checks made payable to each of the Principals in an amount equal to each Principal's respective portion of the Non-Competition Consideration (as defined in Section 10.4 hereof). 7.3 Closing Location. The Closing shall take place on the Closing ---------------- Date at the offices of counsel to the Shareholders and BPN, Barger & Wolen, 515 South Flower, 34th Floor, Los Angeles, California 90071. 8. REPRESENTATIONS AND WARRANTIES ------------------------------ 8.1 Representations and Warranties of the Shareholders and the ---------------------------------------------------------- Walskis. - ------- The Shareholders and the Walskis hereby jointly and severally represent and warrant to PAGI, as of the Effective Date and the Closing Date, as follows: (a) Capitalization of BPN. The authorized capital stock of --------------------- BPN consists of 10,000 shares of common stock, $0.10 par value per share, of which one thousand (1,000) shares are issued and outstanding. Provided, however, -------- ------- the number of issued and outstanding Shares referred to above in this Section 8.1(a) may be subject to reduction in accordance with the terms of the Stock Retirement Agreement. The Shares, which represent all the issued and outstanding equity interests of BPN, are validly issued, fully paid and nonassessable. BPN has no other shares of capital stock of any kind authorized, issued or outstanding and there are no outstanding subscriptions, options, warrants, calls, convertible or exchangeable securities, or other rights or commitments of any kind to issue, sell or acquire any shares of capital stock of BPN. (b) Corporate Existence, Power and Authorization of BPN. BPN --------------------------------------------------- is a corporation duly organized, validly existing and in good standing under the laws of the State of California, with full power and authority, corporate and other, to carry on its business as it is now being conducted and to own or lease the properties and assets which it now owns or leases. (c) Authority. The Shareholders and the Walskis have full --------- power and authority to execute and deliver this Agreement and to perform their respective obligations hereunder and such actions will not constitute a default under or be prohibited or restricted by any other agreements or obligations to which the Shareholders or the Walskis are or BPN is a party. (d) Compliance with Covenants. As of the Closing Date, the ------------------------- Shareholders and the Walskis shall have complied and, as applicable, shall have caused BPN to comply with each of the covenants set forth in Section 9 hereof. -6- (e) No Other Representations and Warranties. Except as set --------------------------------------- forth in subsections (a), (b), (c) and (d) of this Section 8.1, the Shareholders and the Walskis are not making any other representations or warranties whatsoever with respect to BPN. 8.2 Representations and Warranties of PAGI. -------------------------------------- PAGI hereby represents and warrants to the Shareholders and the Walskis, as of the Effective Date and as of the Closing Date, as follows: (a) Corporate Existence, Power and Authorization of PAGI. ---------------------------------------------------- PAGI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware, with full power and authority, corporate and other, to carry on its business as it is now being conducted and to own or lease the properties and assets which it now owns or leases. (b) Authority. The execution, delivery and performance of --------- this Agreement and the transactions contemplated by this Agreement by PAGI have been duly authorized by any necessary corporate action, including, without limitation, any necessary director or shareholder approval. PAGI has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder and such actions will not constitute a default under or be prohibited or restricted by any other agreements or obligations to which PAGI is a party. (c) Title to Shares of PAB. As of the Effective Date only, ---------------------- PAGI has full and valid title, both legal and beneficial, to all the issued and outstanding shares of PAB. (d) Regulatory Approvals. The Execution of this Agreement is -------------------- not subject to any federal, state or local regulatory approvals or notification requirements. 8.3 Survival of Representations and Warranties. The ------------------------------------------ representations and warranties in Sections 8.1 and 8.2 hereof shall survive the Closing Date. 9. COVENANTS OF THE SHAREHOLDERS AND THE WALSKIS --------------------------------------------- The Shareholders and the Walskis hereby jointly and severally covenant and agree as follows: 9.1 Operations of BPN. BPN shall engage in no business other than ----------------- the insurance premium financing business in a manner consistent with the terms of the PAB Agreement and, to the extent applicable, the Republic Agreement. Each of the Principals shall devote such time to the business of BPN as shall be required to fully develop, implement and manage the Program. -7- 9.2 Legend on Share Certificates. During the Option Period, all ---------------------------- certificates representing the Shares and the Affiliate Shares shall bear a legend reflecting the restrictions on transfer imposed by this Agreement. 9.3 Statements of Income and Loss. The Shareholders and Principals ----------------------------- shall cause BPN to provide PAGI with quarterly statements of income and loss, cash flow and capitalization, together with such other financial information as PAGI may reasonably request in order to keep fully apprised of the financial condition, prospects and results of operations of BPN or to satisfy any applicable regulatory requirements. 9.4 No Shop. Unless this Agreement is otherwise terminated in ------- accordance with its terms, from the Effective Date until the Option Termination Date, the Shareholders and the Walskis will cause BPN to conduct its affairs only in the ordinary course of business consistent with past practices and the Shareholders and the Principals will not enter into any discussions, negotiations or agreements for the purpose of merging BPN with or selling BPN's assets to any other person, or issuing any stock or other equity interests or any options, warrants or other rights to purchase stock or other equity interests of BPN. 9.5 Liabilities. Except for the lease obligation on BPN's office ----------- facility located at 13750 Pipeline Avenue, Chino, California 91710 (the "Facility Lease"), on the Closing Date, BPN shall have no liabilities, whether fixed or contingent, which are reflected, or are required to be reflected, as liabilities on the balance sheet of BPN as prepared in accordance with GAAP other than current liabilities incurred in the ordinary course of business. Except upon six (6) months prior written notice to PAGI and BPN given on or after the Closing Date, the rent payable under the Facility Lease shall not be increased following the Closing Date to an amount exceeding the rent paid on a monthly basis for the twelve (12) consecutive months preceding the Closing Date. 9.6 Termination of the Facility Lease. On or following the Closing --------------------------------- Date, either PAGI or the Principals may terminate the Facility Lease upon six (6) months prior written notice. In the event of the termination of the Facility Lease, a Principal may terminate his or her employment agreement then in force between such Principal and BPN as of the date of such termination. 9.7 Program Assets. -------------- (a) On the Closing Date, BPN shall own the computer hardware and own or have the right to use all computer software (the "Program Software"), proprietary designs, trademarks, trademark applications, trade names, trade secrets, service marks, brand marks, brand names, and copyrights utilized by BPN in connection with its operation of the Program, all of which shall hereinafter be referred to as the "Program Assets." The rights to -8- the Program Assets as a whole for use in connection with insurance premium finance applications will be exclusive to BPN except as otherwise provided herein. (b) In the event that PAGI does not exercise the Affiliate Share Option, the BPN Affiliates and any and all other entities organized by the Principals, jointly or severally, following the Closing Date shall automatically be deemed to have an irrevocable license at no cost to use the Program Assets (excluding the computer hardware) in connection with insurance premium financing-related activities by such entities (the "License"). In the event that the covenant not to compete set forth in Section 10 hereof is violated or breached in any way, the License shall be immediately revoked. PAGI acknowledges that it has been informed by the Principals that for a period of two (2) years following the date of termination of the Republic Agreement, Republic has nonexclusive license to use the Program Software at no cost, and PAGI does not object to nor will it interfere with such nonexclusive license. (c) The cost of all upgrades or modifications to the Program Software made by or on behalf of BPN, the BPN Affiliates, or PAB shall be shared equitably by such parties, and all such upgrades or modifications shall be provided to any of such parties entitled to use the Program Software. 9.8 Distribution of Assets. At any time and from time to time ---------------------- prior to the Closing Date, the Shareholders may cause BPN to distribute to the Shareholders all or any portion of its income and/or assets, other than the Facility Lease, the Program Assets and BPN's books and records. 9.9 Minimum Net Worth. On the Closing Date the Shareholders shall ----------------- cause BPN to have a net worth of at least $0, which shall be determined in accordance with GAAP. 9.10 Organization of BPN Affiliates. Prior to the Closing Date, the ------------------------------ shares of each of the BPN Affiliates shall be owned by the Shareholders in the same proportion as the share ownership of BPN and the Shareholders shall cause all certificates representing the Affiliate Shares to bear a legend reflecting the restrictions on transfer imposed by this Agreement. 9.11 Stock Retirement Agreement. As of the Effective Date, the -------------------------- Stock Retirement Agreement shall be amended to provide that the rights of the parties thereto, including such parties' respective estates, successors, legal or personal representatives, heirs, distributees, designees and assigns, shall be subordinated to the terms and conditions of this Agreement. The Shareholders and the Walskis shall not amend the Stock Retirement Agreement without the prior written consent of PAGI prior to the earlier of either the Option Termination Date or the termination of this Agreement. The redemption of any of the Shares pursuant to the Stock Retirement Agreement shall not constitute a breach of this Agreement. -9- 10. COVENANT NOT TO COMPETE ----------------------- 10.1 California Non-Compete. For a period of five (5) years ---------------------- commencing on the Closing Date (the "Non-Competition Period"), within the State of California, each of the Principals and the BPN Affiliates, if not acquired hereunder, shall not, jointly or severally, directly or indirectly, organize, own, manage, operate, control, consult with or otherwise participate in or carry on any business (either financially as a shareholder of or lender to such business or of the entity that controls such business, or as an employee, director, officer, partner, consultant or agent or in any capacity that calls for the rendering of personal services, advice, or acts of management, operation or control or in any other manner whatsoever) that is competitive with the premium finance business conducted by BPN on the Closing Date. Notwithstanding the foregoing, a Principal may own as a passive investment up to five percent (5%) of the outstanding voting securities of any publicly held entity that is engaged in the insurance premium finance business that competes with the operations of BPN. 10.2 BPN Affiliates Non-Compete. During the Non-Competition Period -------------------------- within any state, jurisdiction or territory of the United States of America in which a BPN Affiliate that was acquired hereunder by PAGI is engaged in operating the Program, each of the Principals shall not, jointly or severally, directly or indirectly, organize, own, manage, operate, control, consult with or otherwise participate in or carry on any business (either financially as a shareholder of or lender to such business or of the entity that controls such business, or as an employee, director, officer, partner, consultant or agent or in any capacity that calls for the rendering of personal services, advice, or acts of management, operation or control or in any other manner whatsoever) that is competitive with the premium finance business conducted by BPN Affiliates on the Closing Date. Notwithstanding the foregoing, a Principal may own as a passive investment up to five percent (5%) of the outstanding voting securities of any publicly held entity that is engaged in the insurance premium finance business that competes with the operations of a BPN Affiliate. 10.3 Survival of Non-Competition Provision. The covenants contained ------------------------------------- in each of Sections 10.1 and 10.2 hereof (the "Non-Competition Provisions") are separate and distinct. If any Non-Competition Provision or any provision or portion thereof is held invalid, inoperative or unenforceable, the remaining Non-Competition Provision and the provisions or portions thereof shall be considered valid, operative and enforceable, and, to the extent possible, effect shall be given to the intent manifested by the Non-Competition Provision or the Non-Competition Provisions, or the provisions of portions thereof, held invalid, inoperative or unenforceable. The Non-Competition Provisions may be specifically enforced by a court of competent jurisdiction and the parties hereto acknowledge that monetary damages will not adequately compensate PAGI or BPN for any violation thereof. Such remedy shall not, -10- however, limit any other remedy available to PAGI, BPN or their respective successors or assigns. 10.4 Consideration for Covenant Not to Compete. As consideration ----------------------------------------- for the covenant not to compete contained in this Section 10, on the Closing Date PAGI shall pay the Principals the aggregate amount of $2 million (the "Non- Competition Consideration"), which shall be allocated among the Principals in accordance with the following percentages:
Principal Percentage --------- ---------- P. Walski 35% B. Walski 30% O'Shea 35%
In the event that one or more of the aforementioned Principals is not employed by BPN on the Closing Date, the Non-Compensation Consideration consisting of $2 million shall be divided among the remaining Principals consistent with the above table. For example, in the event that (a) B. Walski is no longer employed by BPN, P. Walski and O'Shea shall each receive fifty percent (50%) of the Non- Compensation Consideration, or (b) O'Shea is no longer employed by BPN, P. Walski shall receive 53.85 percent of the Non-Competition Consideration and B. Walski shall receive 46.15 percent of the Non-Competition Consideration. 11. INDEMNIFICATION --------------- 11.1 Indemnification of PAGI. The Shareholders and the Walskis ----------------------- shall jointly and severally indemnify, defend and hold harmless PAGI, PAB and their respective affiliates as well as their respective directors, officers, agents, employees and shareholders (each, an "Indemnified Party" and collectively, the "Indemnified Parties") from and against any and all claims, suits, hearings, actions, damages, liabilities, fines, penalties, costs, losses or expenses, including reasonable attorney's fees (in the singular, an "Indemnification Claim" and collectively, "Indemnification Claims"), caused by or resulting from the relationship of BPN and the Principals with Republic with respect to any period of time prior to the Closing Date, including but not limited to any breach or alleged breach or termination of the Republic Agreement, any claim that any Indemnified Party induced BPN or the Principals to breach or terminate the Republic Agreement or otherwise interfered with the Republic Agreement, or, as to PAGI only, any misconduct, error, omission, or other unauthorized act by BPN or by BPN's officers, directors, shareholders, employees, agents or representatives that occurred prior to the Closing Date. 11.2 Notice of Claim for Indemnification. Upon obtaining knowledge ----------------------------------- of an Indemnification Claim which could give rise to indemnification under this Section 11, the Indemnified Party demanding such indemnification (the "Indemnitee") shall promptly -11- notify the party from whom indemnification is sought (the "Indemnitor"), in writing, of any Indemnification Claim which the Indemnitee has determined has given or could give rise to a right of indemnification under Section 11.1 hereof (the "Notice of Claim") The Notice of Claim shall specify, in reasonable detail, the nature of any such Indemnification Claim giving rise to the right of indemnification. 11.3 Defense of Third Party Claims. With respect to any third party ----------------------------- Indemnification Claim set forth in a Notice of Claim, the Indemnitor may defend, in good faith and at its own expense, any such Indemnification Claim and the Indemnitee, at its expense, shall have the right to participate in the defense of any such third party Indemnification Claim. In connection with its defense of a third party Indemnification Claim, the Indemnitor shall have the right to choose or approve counsel for the defense or prosecution of such action, subject to the reasonable approval of the Indemnified Party. So long as the Indemnitor is defending in good faith any such third party Indemnification Claim, the Indemnitee shall not settle or compromise such third party Indemnification Claim without the consent of the Indemnitor, which shall not unreasonably be withheld. The Indemnitee shall make available to the Indemnitor or its representatives all records and other materials reasonably required by them for its use in contesting any third party Indemnification Claim and shall cooperate fully with the Indemnitor in the defense of all such Indemnification Claims. The Indemnitor shall furnish, at its expense, any bond or other security required to release any lien, garnishment, attachment or execution required in connection with any third party proceeding subject to this Section 11. The Indemnitor may settle any claim without the consent of the Indemnitee in the event that the sole relief requested is money damages and such money damages are paid in full by the Indemnitor and all litigation against the Indemnitee with respect thereto is dismissed with prejudice (or an unconditional release satisfactory to Indemnitee is entered into). 12. CONFIDENTIALITY --------------- Subject to disclosure as otherwise required by law, pursuant to legal process, PAGI shall, and shall cause its agents, accountants and attorneys, to keep confidential any and all trade secrets and confidential information (unless readily ascertainable from public or published information or resources) obtained from BPN, the Shareholders or the Walskis in connection with this Agreement. In the event that this Agreement shall terminate or upon the Option Termination Date, promptly following any such termination, all documents, including copies and reproductions thereof, obtained by PAGI in connection with the transactions contemplated by this Agreement and not previously made public, shall be returned to BPN. No information concerning BPN (except such that is readily ascertainable from public sources) obtained in connection with the transactions contemplated by this Agreement shall be used by PAGI for any purposes whatsoever other than purposes consistent with this Agreement. -12- 13. GENERAL PROVISIONS ------------------ 13.1 Press Release. No press release or other public announcement ------------- in respect of the transactions contemplated by this Agreement shall be made except upon the mutual agreement of the Shareholders, the Walskis and PAGI. 13.2 Costs. Each party hereto shall pay its own costs and expenses ----- associated with the preparation of this Agreement. 13.3 Assignment. This Agreement and the rights, duties and ---------- obligations of the parties hereto shall not be assignable by either party hereto without the prior written consent of the other party and any purported assignment in the absence of such consent shall be void; provided, however, PAGI -------- ------- may assign the Share Option or the Affiliate Share Option to any affiliate of PAGI. In addition, PAB may assign participations in or sell loans made under the PAB Agreement, which loans shall be included, as necessary, in determining if the Lending Capacity has been satisfied. 13.4 Further Instruments. Each party shall execute and deliver all ------------------- further instruments, documents and papers, and shall perform any and all acts necessary, to give full force and effect to all of the terms and provisions of this Agreement. 13.5 Severability. If any provision of this Agreement, as applied ------------ to any party or to any circumstance, shall be found by a court of competent jurisdiction or panel of arbitrators to be void, invalid or unenforceable, the same shall in no way affect any other provision of this Agreement, the application of any such provision in any other circumstance, or the validity or enforceability of this Agreement. 13.6 Notices. All notices which are required to be given or ------- submitted pursuant to this Agreement shall be made in writing and shall be deemed given when deposited with the United States Postal Service, postage prepaid, registered or certified mail, return receipt requested, or when deposited with an overnight mail delivery service, to the last address of record of each party being notified which is maintained by the other party in the ordinary course of business. Any notice or demand required to be made under this Agreement to P. Walski shall be given to: Mr. Peter A. Walski 2820 English Road Chino Hills, California 91709 -13- Any notice or demand required to be made under this Agreement to B. Walski shall be given to: Ms. Barbara R. Walski 2820 English Road Chino Hills, California 91709 Any notice or demand required to be made under this Agreement to O'Shea shall be given to: Mr. Cornelius J. O'Shea 17038 Geanine Place Granada Hills, California 91344 Any notice or demand required to be made under this Agreement to the Trust shall be given to: The Walski Family Trust 2820 English Road Chino Hills, California 91709 Any notice or demand required to be made under this Agreement to BPN shall be given to: BPN Corporation 13750 Pipeline Avenue Chino, California 91710 Attention: Peter A. Walski, Barbara R. Walski and Cornelius J. O'Shea Any notice or demand required to be made under this Agreement to PAGI shall be given to: Pan American Group, Inc. 1999 Avenue of the Stars Suite 2960 Los Angeles, California 90067 Attention: Guillermo Bron Any party may, by virtue of written notice in compliance with this paragraph, alter or change the address or the identity of the person to whom any notice, or copy thereof, is to be sent. 13.7 Waivers. A waiver by any party of any of the terms and ------- conditions of this Agreement in any one instance shall not be deemed or construed to be a waiver of such term or condition for the future, or of any subsequent breach thereof, nor shall it be deemed a waiver of performance of any other obligation hereunder. 13.8 Entire Agreement. This Agreement contains the entire ---------------- understanding of the parties hereto relating to the subject matter hereof and supersedes all prior and collateral agreements, understandings, statements and negotiations of the parties. Each party acknowledges that no representations, inducements, promises or -14- agreements, oral or written, with reference to the subject matter hereof have been made other than as expressly set forth herein. 13.9 Governing Law. This Agreement shall be governed by and ------------- construed in accordance with the laws of the State of California. 13.10 Gender and Number. In all matters of interpretation, whenever ----------------- necessary to give effect to any provision of this Agreement, each gender shall include the other, the singular shall include the plural and the plural shall include the singular. 13.11 Section and Subsection Headings. The titles of the sections of ------------------------------- this Agreement are for convenience only and shall not in any way affect the interpretation of any provision or condition of this Agreement. 13.12 Third Parties. Except as may be expressly set forth herein, ------------- the parties hereto do not intend to confer any rights or remedies upon any person other than the parties hereto. 13.13 Successors and Assigns. This Agreement shall be binding upon ---------------------- and shall inure to the benefit of the parties hereto and their respective estates, successors, legal or personal representatives, heirs, distributees, designees and assigns. 13.14 Legal Action. In the event of any litigation between or among ------------ the parties hereto respecting or arising out of this Agreement, the prevailing party or parties shall be entitled to recover reasonable attorneys' fees and costs, whether or not such litigation proceeds to final judgment or determination. 13.15 Amendment. This Agreement may not be amended except by a --------- writing signed by both parties. 13.16 Counterparts. This Agreement may be executed in counterparts ------------ which, taken together, shall constitute the whole of the Agreement as between the parties. 13.17 Asset Purchase. The purchase of the Shares and, if -------------- appropriate, the Affiliate Shares, may, at the election of PAGI, be structured as a purchase of the assets of such entity or entities, as the case may be, provided that the Shareholders receive the same after tax consideration they would have received had the -15- Share Option and, if appropriate, the Affiliate Share Option, been exercised as a stock purchase or stock purchases, as the case may be. IN WITNESS WHEREOF, the parties have executed this Agreement effective as of the day and year first above written. PAGI: PAN AMERICAN GROUP, INC> By: /s/ WILLIAM BRON ------------------------------ Its: Chairman ---------------------------- Printed Name: William Bron -------------------- BPN: BPN CORPORATION By: /s/ PETER A. WALSKI ------------------------------ Its: President ----------------------------- Printed Name: Peter A. Walski -------------------- Trust: THE WALSKI FAMILY TRUST, August 30, 1989 By: /s/ PETER A. WALSKI ------------------------------ Peter A. Walski, Trustee By: /s/ BARBARA R. WALSKI ------------------------------ Barbara R. Walski, Trustee P. Walski: /s/ PETER A. WALSKI --------------------------------- PETER A. WALSKI B. Walski: /s/ BARBARA R. WALSKI --------------------------------- BARBARA R. WALSKI O'Shea: /s/ CORNELIUS J. O'SHEA --------------------------------- CORNELIUS J. O'SHEA -16- EX-10.7 11 FIRST AMENDMENT TO STOCK OPTION AGREEMENT EXHIBIT 10.7 FIRST AMENDMENT TO STOCK OPTION AGREEMENT This FIRST AMENDMENT to STOCK OPTION AGREEMENT (the "Amendment") is entered into effective as of October 1, 1997 (the "Amendment Effective Date") by and among BPN CORPORATION, a California corporation ("BPN"), PAN AMERICAN GROUP, INC., a Delaware corporation ("PAGI"), and PETER A. WALSKI, an individual ("P. Walski"), BARBARA R. WALSKI, an individual ("B. Walski") (B. Walski and P. Walski collectively, the "Walskis"), CORNELIUS J. O'SHEA, an individual ("O'Shea"), and THE WALSKI FAMILY TRUST, dated August 30, 1989 (the "Trust") (P. Walski, B. Walski and O'Shea, each a "Principal" and collectively, the "Principals") (the Trust and O'Shea each, a "Shareholder" and collectively, the "Shareholders"), and amends the Stock Option Agreement (the "Agreement"), dated as of May 17, 1995 between the parties. R E C I T A L S A. As of the Amendment Effective Date, the Shareholders own beneficially and of record all the issued and outstanding shares (the "Shares") of BPN as follows:
Shareholder No. of Shares ----------- ------------- Trust 750 O'Shea 350
B. Under the terms of the Agreement, the Shareholders granted to PAGI the Share Option and the Affiliate Share Option to acquire the Shares and the Affiliate Shares. C. On or about April 28, 1997, BPN delivered to PAGI the Lending Target Notice described in Section 5.1 of the Agreement, and on July 24, 1997, PAGI delivered to BPN, and each of the Shareholders an Exercise Notice respecting its exercise of the Share Option and Affiliate Share Option as contemplated by Sections 4.2 and 5.1 of the Agreement. D. The parties hereto desire to provide for the withdrawal by BPN of the April 28, 1997 Lending Target Notice and the withdrawal by PAGI of the July 24, 1997 Exercise Notice, and to amend the terms of the Agreement respecting the Share Option and the Affiliate Share Option as provided herein. NOW, THEREFORE, in consideration of mutual promises and covenants contained in this amendment and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: 1. Withdrawal of Notices. BPN hereby withdraws the April 28, 1997 Lending ---------------------- Target Notice and PAGI consents to the withdrawal of the Lending Target Notice by BPN. PAGI hereby withdraws its July 24, 1997 Exercise Notice and BPN, the Principals and Shareholders hereby consent to such withdrawal by PAGI. The parties agree that PAGI shall remain entitled to exercise the Share Option and Affiliate Share Option, and to deliver the Exercise Notice pursuant to the terms of Section 4.1 of the Agreement. 2. Extension of Option. The Option Termination Date as set forth in ------------------- Section 3 of the Agreement is hereby extended to March 31, 2005, and the Option Period shall be extended to such date. 3. Future Exercise of Option. BPN agrees that it shall not deliver the ------------------------- Lending Target Notice contemplated by Section 5.1 of the Agreement prior to October 29, 1999. At the time the Lending Target Notice is delivered, BPN shall have had $30,000,000 or more in premium finance loans outstanding for the six consecutive months preceding delivery of such notice to PAGI. PAGI agrees that it shall not deliver the Exercise Notice to exercise the Share Option or Affiliate Share Option prior to April 29, 1999; provided, however, that PAGI may -------- exercise the Share Option and Affiliate Option prior to such date in the event of the breach by BPN, any Shareholder or any Principal of their obligations under the Agreement, the Insurance Premium Financing Management Agreement between BPN and Pan American Bank, FSB (the "Bank"), or the Guaranties delivered by the Principals for the benefit of the Bank in connection with such Insurance Premium Financing Management Agreement. 4. Exercise Price of the Share Option and the Affiliate Share Option. In ----------------------------------------------------------------- the event the Exercise Notice is delivered on or prior to the date occurring 90 days after delivery of the Lending Target Notice to PAGI, the Share Option Exercise Price shall be $3,250,000. PAGI shall also be required to make the Non-Competition Consideration payments contemplated by Section 10.4 of the Agreement, which Section 10.4 is hereby amended to reduce the aggregate amount of the Non-Competition Consideration from $2,000,000 to $750,000. If the Exercise Notice is given at anytime after the 90th day following delivery to PAGI of the Lending Exercise Notice, the Share 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 the Exercise Notice less the $750,000 in total Non-Competition Consideration provided in Section 10.4 of the Agreement. 5. Capitalized Terms. Capitalized terms not otherwise defined herein ----------------- shall have the meanings set forth for such terms in the Agreement. 2 6. No Other Changes. Except to set forth in this Amendment, the Agreement ---------------- shall remain in full force and effect without modification or amendment. PAGI: PAN AMERICAN GROUP, INC. By: /s/ LAWRENCE J. GRILL ------------------------------ Its: President ----------------------------- Printed Name: LAWRENCE J. GRILL -------------------- BPN: BPN CORPORATION By: /s/ PETER A. WALSKI ------------------------------ Its: President ----------------------------- Printed Name: PETER A. WALSKI -------------------- TRUST: THE WALSKI FAMILY TRUST, August 30, 1989 By: /s/ PETER A. WALSKI ------------------------------ Peter A. Walski, Trustee By: /s/ BARBARA R. WALSKI ------------------------------ Barbara R. Walski, Trustee P. WALSKI: /s/ PETER A. WALSKI --------------------------------- Peter A. Walski B. WALSKI: /s/ BARBARA R. WALSKI --------------------------------- Barbara R. Walski O'SHEA: /s/ CORNELIUS J. O'SHEA --------------------------------- Cornelius J. O'Shea 3 EX-10.8 12 INTERIM CAPITAL ASSISTANCE AGREEMENT Exhibit 10.8 INTERIM CAPITAL ASSISTANCE AGREEMENT ------------------------------------ This Interim Capital Assistance Agreement (the "Agreement"), dated as of this 9th day of September, 1994, is made and entered into by and among the Shareholder[s], as defined in Section 1[s] below and Pan American Bank, FSB, an insured depository institution within the meaning of the Federal Deposit Insurance Act, as amended (the "FDIA"), 12 U.S.C. Section 1811, et seq., -- --- organized and existing as a federal savings bank with its principal place of business at San Mateo, California (the "Assuming Institution") and the Resolution Trust Corporation, in its corporate capacity (in such capacity, the "Corporation"). RECITALS -------- WHEREAS, pursuant to Section 5(d) of the Home Owners' Loan Act, as amended, (the "HOLA") 12 U.S.C. Section 1464(d), the Office of Thrift Supervision ("OTS") has closed Western Federal Savings Bank, (the "Failed Association") and has appointed the Resolution Trust Corporation as receiver of the Failed Association; WHEREAS, the Receiver has determined pursuant to Section 11(d) (2) (G) of the FDIA, as amended (the "FDIA"), 12 U.S.C. Section 1821(d)(2)(G), that it is appropriate and necessary to transfer certain assets and liabilities of the Failed Association to the Assuming Institution; WHEREAS, the parties intend that such transfer be made on the terms and conditions set forth in the Standard Terms as that document is defined in Section 1(t) hereof; WHEREAS, interim capital assistance may be provided by the Corporation pursuant to the Corporation's Minority Capital Assistance Program and Section 21A(u) of the Federal Home Loan Bank Act, as amended (the "FHLBA"), 12 U.S.C. 1441a(u). WHEREAS, application has been made to the Corporation to provide interim capital assistance to the Assuming Institution in connection with the resolution of the Failed Association and, in that connection, the Shareholder[s] and the Assuming Institution have executed and delivered to the Corporation an Application for Interim Capital Assistance dated August 29, 1994 (the "Application") and a Minority Ownership Affidavit dated August 29, 1994 (the "Affidavit"). WHEREAS, the Shareholder[s] have represented that they are "Minorities" and the Assuming Institution has represented that it is a "Minority Institution" in accordance with the definition of those terms under Sections 21A[s] and 21A(u) of the FHLBA, as amended, 12 U.S.C. Sections 1441a[s] and 1441a(u). WHEREAS, the Corporation has agreed to provide interim capital assistance to the Assuming Institution and [each of] the Shareholder[s] for the sole purpose of facilitating the resolution of the Failed Association on the terms and conditions set forth in this Agreement; and WHEREAS the Assuming Institution has executed a Purchase and Assumption Agreement, and Related Agreement[s] in connection with the resolution of the Failed Association. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein, the Parties hereto agree as follows: 1. Defined Terms. ------------- (a) Except as otherwise provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Standard Terms (such meanings to be equally applicable to both the singular and plural forms of the terms defined). (b) "Affiliate" shall have the meaning set forth in (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. Section 1467a(a)(1)(H), whichever is applicable. (c) "Agreement" shall mean this Interim Capital Assistance --------- Agreement, as amended, modified or supplemented from time to time. (d) "Collateral" shall mean the Pledged Collateral as that term ---------- is defined in the Stock Pledge Agreement. (e) "Cost of Funds" shall mean the end of the calendar quarter ------------- Monday Auction yield price for 13 week U.S. Treasury Bills, as quoted in Tuesday's Wall Street Journal, plus 12.5 basis points. (f) "Event of Default" shall have the meaning set forth in ---------------- Section 5 hereof. (g) "Failed Association" shall mean Western Federal Savings ------------------ Bank, formerly a federal savings association under the 2 HOLA, as amended, 12 U.S.C. Section 1461 et seq., and having its principal place ------- of business in Marina Del Ray, California which was closed pursuant to Order No. _________of the OTS. (h) "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 results of its ownership or control of all or any portion of the outstanding capital stock of the Assuming Institution. (i) "Interim Capital Assistance Documents" shall mean this ------------------------------------ Agreement, the Promissory Note, the Stock Pledge Agreement and any other document or agreement now or hereafter delivered in connection herewith or therewith. (j) "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). (k) "Minority" shall have the meaning as statutorily set forth -------- in Section 21A(s) (2) (C) of the FHLBA, as amended, 12 U.S.C. 1441a(s)(2)(C). (1) "Minority Institution" shall have the meaning set forth in -------------------- Section 21A(s) (2) (A) of the FHLBA, as amended, 12 LS.C. 1441a(s) (2) (A) (m) "Party" shall mean the Shareholder[s], the Assuming ----- Institution or the Corporation and "Parties" shall mean the Shareholder[s], the ------- Assuming Institution, and the Corporation. (n) "Pledged Shares" shall mean 100% of the issued and -------------- outstanding shares of capital stock of the Assuming Institution, as more specifically described in Schedule 2 of the Stock Pledge Agreement attached hereto. (o) "Promissory Note" shall mean the promissory note made by --------------- each Shareholder[s] of the Assuming Institution in connection herewith attached as Exhibit A, which is incorporated herein by reference, and referred to in Section 2 hereof. (p) "Purchase and Assumption Agreement" shall mean the Purchase --------------------------------- and Assumption Agreement by and between the Resolution 3 Trust Corporation as receiver of the Failed Association and the Assuming Institution of even date herewith. (q) "Receiver" shall have the meaning as set forth in the -------- Purchase and Assumption Agreement. (r) "Related Agreements" shall have the meaning set forth in the ------------------ Purchase and Assumption Agreement. (s) "Shareholder[s]" shall have the meaning set forth in -------------- Schedule 1 of the Stock Pledge Agreement and shall include, except as otherwise expressly set forth herein, Pan American Financial, Inc. (t) "Standard Terms" shall mean the RTC Standard Purchase and -------------- Assumption Terms and Conditions (Iota version dated December 25, 1993). (u) "Stock Pledge Agreement" shall mean the Stock Pledge ---------------------- Agreement attached hereto as Exhibit B in favor of the Corporation made by each of the Shareholders of the Assuming Institution in connection herewith and is incorporated herein by reference. 2. Interim Capital Assistance. The Corporation hereby agrees to make -------------------------- a term loan (the "Interim Capital Assistance") to the Shareholder[s] in the principal amount of $4,000,000.00. As additional evidence of the indebtedness of the Shareholder[s] to the Corporation resulting from the Interim Capital Assistance, the Shareholder[s] have executed the Promissory Note attached as Exhibit A. The Interim Capital Assistance shall be provided after Association Closing but not later than the initial cash payment date as set forth in Article 6 of the Standard Terms. The Shareholder[s] hereby covenant that they shall, immediately upon receipt of the Interim Capital Assistance, invest the entire amount thereof in the Assuming Institution, and further, that they shall maintain and use such amount solely as capital of the Assuming Institution. 3. Repayment of the Interim Capital Assistance ------------------------------------------- (a) Maturity. The Shareholder[s] shall repay the outstanding -------- principal balance of the Interim Capital Assistance, plus any accrued, previously unpaid interest thereon, in a single lump sum installment on September 8, 1999. (b) Optional Prepayment. The Shareholder[s], at their option and ------------------- from time to time, may prepay the outstanding principal amount of the Interim Capital Assistance, in whole or in part. 4 (c) Mandatory Prepayment. If, prior to the maturity of the -------------------- Interim Capital Assistance, the Shareholder[s] obtain all or any material portion of their permanent financing (through a loan, capital infusion or otherwise), they shall promptly prepay all or a portion of the Interim Capital Assistance in an amount equal to the amount of financing so obtained. (d) Application of Prepayments. Any such mandatory or optional -------------------------- prepayments shall be applied first to accrued interest to the date of such prepayment and then to the outstanding principal amount of the Interim Capital Assistance. 4. Interest. --------- (a) The Shareholder[s] shall pay interest on the outstanding principal balance of the Interim Capital Assistance for the first full calendar quarter after Association Closing and for each calendar quarter thereafter until the maturity (whether at stated maturity, by acceleration or otherwise) of the Interim Capital Assistance. Each interest payment is due and payable on the first Thursday of the month following the end of the preceding calendar quarter. Interest shall accrue at an initial rate per annum of __.__ % which is no greater than the Corporation's Cost of Funds as of the end of the most recently completed calendar quarter prior to Association Closing. The interest rate will be adjusted every calendar quarter thereafter based on the Corporation's Cost of Funds as of the end of the most recently completed calendar quarter prior to the interest payment being due. Interest on Optional and Mandatory Prepayments of Assistance shall be due and payable pursuant to Section 3. (b) In the event that any amount of principal or interest on the Interim Capital Assistance or any other amount payable hereunder or under the Promissory Note is not paid in full when due, the Shareholder[s] agree to pay interest on such unpaid principal and accrued interest or other amount, for each day from the date such amount became due until the date paid, at a rate which is no greater than the sum of the Corporation's Cost of Funds as of the end of the most recently completed calendar quarter plus 300 basis points or, if less, the ---- maximum amount of interest permissible by law to be charged on such unpaid principal or other amount payable hereunder or thereunder. This interest rate will be adjusted every calendar quarter thereafter based on the Corporation's Cost of Funds plus 300 basis points as of the end of the most recently completed calendar quarter prior to the interest payment being due. 5. Events of Default. If any one or more of the following events ----------------- (each, an "Event of Default") shall occur and be continuing, it shall constitute an Event of Default: 5 (a) The Shareholder[s] shall fail to pay any amount of principal or interest on the Interim Capital Assistance or the Promissory Note or any other amount payable hereunder or thereunder when due; or (b) Any representation or warranty by one or more of the Shareholder[s] or the Assuming Institution in this Agreement or any other Interim Capital Assistance Document shall prove to have been incorrect when made; or (c) One or more of the Shareholder[s] or the Assuming Institution shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or any other Interim Capital Assistance Document to which it is a party; or (d) One or more of the Shareholder[s) or the Assuming Institution shall fail to perform or observe any term, covenant or agreement contained in any Interim Capital Assistance Document to which they are a party or shall revoke or repudiate their obligations under any such Interim Capital Assistance Document; or (e) One or more of the Shareholder[s] or the Assuming Institution shall admit in writing their inability to, or shall fail generally or be generally unable to, pay their debts as such debts become due, or shall make a general assignment for the benefit of creditors; or shall have filed a voluntary petition in bankruptcy, a petition for dissolution, or filed a petition or answer seeking reorganization, to effect a plan or other arrangement with creditors or any other relief under any state or federal law relating to bankruptcy or reorganization granting relief to debtors, or shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition filed against it; or any order for relief shall be entered against one or more of the Shareholder[s] or the Assuming Institution in any involuntary proceeding under any such state or federal law, or one or more of the Shareholder[s] or the Assuming Institution shall be adjudicated bankrupt, or shall make an assignment for the benefit of creditors, or shall apply for the appointment of any custodian, conservator, receiver, or trustee for all or any substantial part of their property, or shall take any action to authorize any of the actions set forth in this subsection (e); or any involuntary petition seeking any of the relief specified in this subsection (e) shall be filed against one or more of the Shareholder[s] and shall not be dismissed or stayed within 60 days; or any order shall be issued under state or federal law appointing a conservator or receiver for the Assuming Institution. (g) The Stock Pledge Agreement, shall for any reason cease or fail to create a valid and perfected first priority lien on any of the collateral purported to be covered thereby; or 6 (h) Any event[s] shall occur which give reasonable grounds to conclude, in the judgement of the Corporation, that one or more of the Shareholder[s] or the Assuming Institutions will not, or will be unable to, perform or observe their obligations under the Promissory Note, this Agreement or any other Interim Capital Assistance Document. 6. Acceleration. If any such Event of Default shall occur: (i) the ------------ Corporation, in its sole discretion, may declare the entire unpaid principal amount of the Interim Capital Assistance and the Promissory Note, all interest accrued and unpaid thereon and all other amounts payable under this Agreement and any other Interim Capital Assistance Document to be immediately due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by each of the Shareholder[s] and the Assuming Institution; and (ii) the Corporation may immediately, and whether or not the actions specified in clause (i) have been taken, exercise any or all of the Corporation's rights and remedies under any other Interim Capital Assistance Document, including, without limitation, the rights of a secured party pursuant to the Uniform Commercial Code; provided further, that for any Event of Default ---------------- other than the voluntary or involuntary appointment of a conservator or receiver for the Assuming Institution, the Corporation shall, prior to accelerating the Promissory Note as provided in this Section, give the Shareholders written notice of default which shall specify the circumstances constituting the Event of Default; Shareholders shall have the right to cure the Event of Default within 30 days of the date of mailing of the notice in the case of any Event of Default described in Section 5(a) of this Agreement, or 60 days in the case of any other Event of Default. 7. Consent to Appointment of Conservator or Receiver. The ------------------------------------------------- Shareholder[s] and the Assuming Institution hereby acknowledge and agree that in the event any amount of principal or interest hereunder is not paid when due (whether at stated maturity, by acceleration or otherwise), such default, if not cured by the Shareholders as provided in Section 6 above, shall constitute grounds for the appointment of a conservator or receiver of the Assuming Institution pursuant to Federal law, including without limitation, the FDIA, as amended, 12 U.S.C. Section 1821(c)(5), by the appropriate primary federal regulator, and each of the Shareholder[s] and the Assuming Institution hereby consent to any such appointment of a conservator or receiver by the appropriate primary federal regulator and waive any and all right to contest any such appointment. 8. Negative Covenants of Shareholder[s] and the Assuming Institution. ----------------------------------------------------------------- Until all of the Assuming Institution's obligations under this Agreement and the Shareholders' obligations under this Agreement and the Promissory Note have been discharged, 7 the Assuming Institution will not: (a) Declare or pay any dividends, or issue any of its capital stock or any options or other rights in respect thereto, or repurchase, redeem, retire or otherwise acquire for value any of its outstanding capital stock, or make any distribution of its assets to any of its Shareholders or Holding Company as such, provided however that dividends may be paid if; (i) there is no ---------------- Event of Default in existence under this Agreement or the Promissory Note, (ii) the Assuming Institution would not cause an Event of Default under this Agreement or Promissory Note by the declaration or payment of any such dividends, and (iii) the declaration or payment of such dividends are not prohibited or objected to by the Assuming Institution's primary federal regulator. (b) Make any loan or advance to any Shareholder[s] or Holding Company or to any Affiliate of the Assuming Institution, Shareholder[s] or Holding Company, or enter into any other transaction with any Shareholder[s] or Holding Company or any Affiliate of the Assuming Institution, Shareholder[s] or Holding Company, including, without limitation, any transaction involving the purchase, sale, exchange or lease of property or the provision of services (other than standard deposit transactions entered into in the ordinary course of business on terms no less favorable to the Assuming Institution than it would obtain in an arm's length deposit transaction with a person not such a Shareholder[s] or Holding Company or an Affiliate), provided however, the ---------------- Assuming Institution may enter into transactions with its Affiliated mortgage and consumer finance companies so long as any such transaction does not require the Assuming Institution to repurchase any loans from its Affiliated companies or any other Affiliate or third party purchaser which would result in any loss to the Assuming Institution; (c) Increase the compensation of, or pay any bonuses to, any of its officers, directors or key employees, provided however, that compensation ---------------- for officers, directors or key employees may be increased in the second year of operations of the Assuming Institution and in each year thereafter so long as this Agreement is in effect and all such increases shall be pre-approved in writing by the Corporation. (d) Sell, assign, lease or otherwise dispose of all or substantially all of its assets, or enter into any merger or consolidation, or agree to do any of the foregoing, unless the performance of such agreement is conditioned on the prior or simultaneous repayment, in full, of the Interim Capital Assistance, provided however that the Assuming Institution may ---------------- reorganize its branch structure subject to written approval from its regulators; or 8 (e) Enter into any agreement providing for a change of control of the Assuming Institution prior to the date of repayment, in full, of the Interim Capital Assistance (whether by stated maturity, acceleration or otherwise), plus accrued interest, unless the performance of such agreement is conditioned on the prior or simultaneous repayment, in full, of the Interim Capital Assistance. 9. Affirmative Covenants of Shareholder[s] and the Assuming -------------------------------------------------------- Institution. - ----------- (a) Until all of the Shareholder[s] and Assuming Institution's obligations under this Agreement and the Promissory Note have been discharged, the Assuming Institution will: (i) Maintain its core capital, tangible capital and risk- based capital (calculated in accordance with the regulations prescribed by the OTS in an amount equal to at least 75% of the amount of its core capital, tangible capital and risk based capital on the first Business Day following the date of Association Closing; (ii) Comply with all applicable laws, rules, regulations and orders, including, without limitation, rules and regulations of the OTS; (iii) Provide monthly financial reports to the Corporation or its successor in such form as the Corporation or its successor may reasonably request in order to monitor the financial condition and capital ratios of the Assuming Institution; (iv) Permit representatives of the Corporation or its successor, at any reasonable time and from time to time, to examine the books and records of the Assuming Institution at its place of business; (v) Conduct its operations in a prudent and businesslike manner; and (vi) maintain insurance with responsible and reputable insurers in such amounts and covering such risks as is carried by financial institutions engaged in similar businesses and owning similar properties, including, without limitation, fire, extended coverage, business interruption, public liability, property damage, worker's compensation, banker's blanket bond, directors and officers, and errors and omissions, all as reasonably determined by the Corporation or its successor. (b) Prior to the date of repayment, in full, of the principal amount of the Interim Capital Assistance (whether by stated maturity, acceleration or otherwise), plus accrued interest, 9 and until all of the Shareholder[s] and the Assuming Institution's obligations under this Agreement have been discharged, the Assuming Institution will remain at all times a Minority Institution. 10. Assuming Institution Representations and Warranties. The Assuming --------------------------------------------------- Institution hereby represents and warrants to the Corporation as follows: (a) Capitalization. 100% of the issued and outstanding shares of -------------- capital stock of the Assuming Institution are the Pledged Shares, all of which are validly issued, fully paid and nonassessable. No securities convertible into or exchangeable for any shares of capital stock of the Assuming Institution, or any options, warrants or other commitments entitling any person to purchase or otherwise acquire any shares of capital stock of the Assuming Institution, are issued and outstanding. The Shareholder[s] listed on Schedule 1 to the Stock Pledge Agreement are the record and beneficial owners of the Pledged Shares. None of the Pledged Shares has been transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction to which such transfer may be subject. (b) Authorization. The execution and delivery of this Agreement ------------- and the other Interim Capital Assistance Documents to which it is a party, and performance by the Assuming Institution of its obligations hereunder and thereunder, the execution and delivery of each Interim Capital Assistance Document to which it is a party by each of the Shareholder[s] and performance of their obligations thereunder, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of the Assuming Institution and each of the Shareholder[s]. This Agreement and the other Interim Capital Assistance Documents each have been duly executed and delivered and, upon receipt of the regulatory approvals or waivers contemplated by this Agreement, will constitute a legal, valid and binding obligation of the Assuming Institution and each of the Shareholder[s], as the case may be, enforceable in accordance with their respective terms subject to bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors rights generally and to general principles of equity. (c) No Conflict. Except as previously disclosed to the ----------- Corporation in writing, the execution, delivery and performance of this Agreement and the other Interim Capital Assistance Documents by the Assuming Institution, the execution, delivery and performance of each Interim Capital Assistance Document to which it is a party by each of the Shareholder[s], and the consummation of the transactions contemplated hereby and thereby, will not (i) violate or conflict with any provision of the charter or bylaws of the Assuming Institution or any Holding Company or any law, rule, 10 or regulation affecting the Assuming Institution or any of the Shareholder[s] or by which the Assuming Institution or any of the Shareholder[s] is bound, the violation of which could have a material adverse effect on the financial condition of the Assuming Institution or any of the Shareholder[s], as the case may be, or (ii) violate or conflict with any order, judgement, award, administrative interpretation, injunction, writ, decree or the like affecting the Assuming Institution or any of the Shareholder[s] or by which the Assuming Institution or any of the Shareholder[s] is bound, the violation of which could have a material adverse effect on the operations or financial condition of the Assuming Institution or any of the Shareholder[s], as the case may be, or (iii) result in a breach of or constitute a default under any indenture or other material agreement to which the Assuming Institution or any of the Shareholder[s] is a party or by which the Assuming Institution or any of the Shareholder[s] or any material portion of its respective properties is bound. (d) Regulatory Approvals. No authorization, consent, approval, -------------------- license, exemption or other action by, or notice to or registration or filing with any governmental authority or administrative or regulatory body is required for either the execution, delivery or performance of this Agreement and the other Interim Capital Assistance Documents to which the Assuming Institution is a party, or the execution, delivery and performance of each Interim Capital Assistance Document to which any of the Shareholder[s] is a party, or the consummation of the transactions contemplated hereby and thereby, except such as shall have been made or obtained prior to the date of Association Closing. (e) Absence of Litigation. Except as previously disclosed to the --------------------- Corporation in writing, there are no pending or threatened actions, suits or proceedings before any court, governmental agency, arbitrator or instrumentality affecting the Assuming Institution or any of the Shareholder[s] which (i) if determined adversely to Assuming Institution or any of the Shareholder[s], could reasonably be expected, individually or in the aggregate, to materially affect the financial condition, properties or operation of the Assuming Institution or any of the Shareholder[s] or (ii) purport to affect the legality, validity or enforceability of this Agreement or any other Interim Capital Assistance Document. (f) Accuracy of Application and Affidavit. All statements and ------------------------------------- information provided by the Shareholder[s] and the Assuming Institution in the Application and the Affidavit are true and correct on and as of the date hereof as if made on and as of the date hereof. Such Interim Capital Assistance Documents do not fail to state a material fact necessary to make the statements made therein not misleading. 11 (g) Minimum Capital Requirement. The Interim Capital Assistance --------------------------- does not exceed two-thirds (2/3) of the amount necessary to maintain the Assuming Institution's ratio of tangible capital to total assets (after the reduction of the tangible capital due to the payment of the premium) at the percentage level that existed prior to Association Closing. 11. Conditions. The obligation of the Corporation to make the Interim ---------- Capital Assistance is subject to the satisfaction of the following conditions: (a) Compliance. The Assuming Institution and each of the ---------- Shareholder[s] shall have complied in all material respects with each of the covenants and agreements contained herein which are required to be performed or complied with by them on or prior to the date such Interim Capital Assistance is provided. (b) Accuracy of Representations. Each of the representations and --------------------------- warranties contained in Section 10 shall be true and correct in all material respects on the date such Interim Capital Assistance is made as if made at and as of such date. (c) Officer's Certificate. The Corporation 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 subsections (a) and (b) of this Section 11, which shall constitute a representation of the Assuming Institution with respect thereto. (d) Purchase and Assumption Transaction. The Receiver and the ----------------------------------- Assuming Institution shall have entered into the Purchase and Assumption Agreement and the Corporation shall have received evidence satisfactory to it that the conditions precedent set forth in the Purchase and Assumption Agreement shall have been satisfied or waived and that the Purchase and Assumption Agreement shall have become effective in accordance with its terms. (e) Other Interim Capital Assistance Documents. Each of the ------------------------------------------ Shareholder[s] of the Assuming Institution shall have executed and delivered to the Corporation the Promissory Note and one or more Stock Pledge Agreement[s]. (f) Legal Opinion. Counsel for the Receiver shall have received ------------- an opinion from counsel for the Assuming Institution, in form and substance satisfactory to counsel for the Receiver, dated the date of Association Closing, which confirms that the Assuming Institution is a Minority Institution as defined in Section 21A(s) of the FHLBA, 12 U.S.C. 1441a(s). 12 12. Miscellaneous. ------------- (a) Entire Agreement. This Agreement and the other Interim ---------------- Capital Assistance Documents and any Related Agreements embody the entire agreement of the Parties in relation to the subject matter herein and therein and supersede all prior understandings or agreements, oral or written, between the Parties. (b) Headings. The headings and subheadings of the Articles and -------- Sections contained in this Agreement, except the terms identified for definition in Section 1 of this Agreement, are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provision thereof. (c) Counterparts This 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. (d) GOVERNING LAW. THE AGREEMENT AND THE RIGHTS AND OBLIGATIONS ------------- UNDER THIS 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 PURCHASE AND ASSUMPTION AGREEMENT. (e) Successors. Subject to the limitations of subsection (f) of ---------- this Section 12, subsection (e) of Section 8, and subsection (b) of Section 9, all terms and conditions of the Agreement shall be binding on the successors and assigns of the Corporation, the Assuming Institution and each of the Shareholder[s]. 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 Corporation, the Assuming Institution and the Shareholder[s] any legal or equitable right, remedy or claim under or with respect to this Agreement or any provisions contained herein, it being the intention of the Parties that this Agreement, the obligations and statements of responsibilities thereunder, and all other conditions and provisions thereof are for the sole and exclusive benefit of the Corporation, the Assuming Institution and Shareholder[s] and for the benefit of no other person. (f) Modification; Assignment. No amendment or other ------------------------ modification, rescission, release, annulment or assignment of any part of this Agreement shall be effective except pursuant to a written agreement subscribed by the duly authorized representatives of the Parties. 13 (g) Notice. Any notice, request, demand, consent, approval or ------ other communication to any Party hereto 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 below or at such other address or number as it shall hereafter furnish in writing to the others. All such notices and other communications shall be deemed given on the date received by the addressee.
CORPORATION Shareholder[s] and Assuming - ----------- --------------------------- Institution ----------- RESOLUTION TRUST CORPORATION PAN AMERICAN BANK, FSB 801 17th Street, N.W. 1300 South El Camino Real Washington, DC 20006 San Mateo, CA 94401 Attention: Vice President Attention: President Department of Resolutions With copies to: Senior Counsel for Resolutions Resolution Trust Corporation
(h) Waiver. Each of the Parties may waive their respective ------ rights, powers or privileges under this Agreement; provided, that such waiver -------- ---- shall be in writing; and further provided, that no failure or delay on the part ------- -------- ---- of the Corporation, the Shareholder[s] or the Assuming Institution to exercise any right, power or privilege under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege by the Corporation, the Shareholder[s], or the Assuming Institution under the terms of this Agreement, nor will any such waiver operate or be construed as a future waiver of such right, power or privilege under this Agreement. (i) Costs, Fees and Expenses. Each Party hereto agrees to pay ------------------------ all costs, fees and expenses which it had incurred or will incur, in connection with or incidental to the matters contained in this Agreement, including without limitation any fees and disbursements to its advisers, accountants and counsel. (j) Severability. If any provision of this Agreement is invalid ------------ or unenforceable then, to the extent possible, all of the remaining provisions of this Agreement shall remain in full force and effect and shall be binding upon the Parties hereto. (k) Effectiveness This Agreement shall become effective upon the ------------- satisfaction or waiver of the conditions set 14 forth in Section 11 hereof. IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the day and year first above written.
ASSUMING INSTITUTION: Witness: /s/ [SIGNATURE ILLEGIBLE] By: /s/ LAWRENCE J. GRILL ------------------------- ----------------------------- Its: President ---------------------------- [HOLDING COMPANY] Witness: /s/ [SIGNATURE ILLEGIBLE] By: /s/ LAWRENCE J. GRILL ------------------------- ----------------------------- Its: President ---------------------------- SHAREHOLDER[S] Witness: /s/ [SIGNATURE ILLEGIBLE] By: /s/ LAWRENCE J. GRILL ------------------------- -------------------------- RESOLUTION TRUST CORPORATION Witness: By: /s/ [SIGNATURE ILLEGIBLE] ------------------------ ----------------------------- Its: ----------------------------
15 EX-10.9 13 AMEND NO. 1 TO INTERIM CAPITAL ASSISTANCE AGRMNT Exhibit 10.9 AMENDMENT NO. 1 TO INTERIM CAPITAL ASSISTANCE AGREEMENT ------------------------------------ THIS AMENDMENT NO. 1, dated as of this 1 day of May, 1997, is made and entered into by and among the Shareholder(s), Pan American Financial, Inc., an insured depository institution within the meaning of the Federal Deposit Insurance Act, as amended (the "FDIA"), 12 U.S.C. Section 1811, et seq., -- --- organized and existing as a financial institution with its principal place of business at 1300 El Camino Real, San Mateo, California, Pan American Bank, FSB (the "Assuming Institution"), and the Federal Deposit Insurance Corporation, as Manager of the FSLIC Resolution Fund (the successor to the assets and liabilities of the Resolution Trust Corporation (the "RTC")), a corporation duly organized and existing under the laws of the United states of America and having its principal office in Washington, D.C. (the "FDIC"). RECITALS -------- WHEREAS, the Shareholder(s), Assuming Institution, and the former RTC entered into an Interim Capital Assistance Agreement dated as of April 29, 1994 (the "Agreement"); and WHEREAS, subsection (f) of Section 12 of the Agreement provides, in pertinent part, that no amendment or other modification of the Agreement shall be effective except pursuant to a written agreement subscribed by the duly authorized representatives of the Parties; and WHEREAS, the Shareholder(s), Assuming Institution, and FDIC desire to amend the Agreement as set forth herein. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements contained herein and other good valuable consideration, the receipt and sufficiency of which are herby acknowledged, the Shareholder(s), Assuming Institution, and FDIC hereby agree as follows: 1. Defined Terms. Except as otherwise provided herein, capitalized ------------- terms used in this Amendment shall have the respective meanings assigned to them in the Agreement (such meanings to be equally applicable to both the singular and plural forms of the terms defined). 2. Negative Covenants of Shareholder(s) and Assuming Institution. ------------------------------------------------------------- Subsection (a) of Section 8 of the Agreement is hereby amended by deleting such subsection in its entirety and substituting in lieu thereof the following: "(a) Declare or pay any dividends, or issue any of its capital stock or any options or other rights in respect thereto, or repurchase, redeem, retire or otherwise acquire for value any of its outstanding capital stock, or make any distribution of its assets to any of its Shareholders or Holding Company as such; provided, that dividends may be -------- ---- paid if: (i) used by the Shareholder(s) exclusively for payment of principal or interest on the Promissory Note, or (ii) The Assuming Institution has provided the FDIC with 30 days' prior written notice of its intent to declare or pay any such dividends, which includes a written certification from the Assuming Institution's chief executive officer that it is in compliance with all of the conditions set forth in clauses (A) through (E) below: (A) the Assuming Institution has enclosed in such notice a business plan setting forth in specific detail its plans for repayment of the Promissory Note, (B) the payment of any such dividends would not exceed 50% of the net income of the Assuming Institution earned during the period in which dividends are to be declared and paid, (C) there is no Event of Default in existence under the Agreement or the Promissory Note, (D) the Assuming Institution would not cause an Event of Default under the Agreement or the Promissory Note by the declaration or payment of any such dividends, and (E) the declaration or payment of any such dividends is not prohibited or objected to by the Assuming Institution's primary Federal regulator." 2 3. Miscellaneous. ------------- (a) Ratification: Effective Date. Except as specifically amended ---------------------------- hereby, the Agreement and the Promissory Note shall remain in full force and effect and are hereby ratified and confirmed. (b) Counterparts. This Amendment No. 1 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 Amendment. SIGNATURE PAGE FOLLOWS 3 IN WITNESS WHEREOF, the Parties have duly executed this Amendment as of the day and year first above written. ASSUMING INSTITUTION: PAN AMERICAN BANK FSB Witness: /s/ ANDREE B. MOORE By: /s/ LAWRENCE J. GRILL -------------------------- ----------------------------- Its: President ---------------------------- SHAREHOLDERS: PAN AMERICAN FINANCIAL, INC. Witness: /s/ CHERYL STUDLEY By: /s/ GUILLERMO BRON ------------------------- ----------------------------- Its: Chairman ---------------------------- FEDERAL DEPOSIT INSURANCE CORPORATION Witness:/s/ [SIGNATURE ILLEGIBLE] By: /s/ RICHARD H. FISCHMAN ------------------------- ----------------------------- Its: RICHARD H. FISCHMAN ---------------------------- Assistant Director 4 EX-10.10 14 INTERIM CAPITAL ASSISTANCE AGREEMENT - APRIL 29 Exhibit 10.10 INTERIM CAPITAL ASSISTANCE AGREEMENT ------------------------------------ This Interim Capital Assistance Agreement (the "Agreement"), dated as of this 29th day of April, 1994, is made and entered into by Pan American Financial, Inc. ("Shareholders"), Pan American Bank, FSB, an insured depository institution within the meaning of the Federal Deposit Insurance Act, as amended (the "FDIA"), 12 U.S.C. Section 1811, et seq., organized and existing as a ------ federal savings bank with its principal place of business in San Mateo, California, (the "Assuming Institution"), and the Resolution Trust Corporation, in its corporate capacity (in such capacity, the "Corporation"). RECITALS -------- WHEREAS, pursuant to Section 5(d) of the Home Owners' Loan Act, as amended, (the "HOLA") 12 U.S.C. Section 1464(d), the Office of Thrift Supervision ("OTS") has closed Pan American Federal Savings Bank, (the "Failed Association") and has appointed the Resolution Trust Corporation as receiver of the Failed Association; WHEREAS, the Receiver has determined pursuant to Section 11(d) (2) (G) of the FDIA, as amended (the "FDIA"), 12 U.S.C. Section 1821(d)(2)(G), that it is appropriate and necessary to transfer certain assets and liabilities of the Failed Association to the Assuming Institution; WHEREAS, the parties intend that such transfer be made on the terms and conditions set forth in the "RTC Standard Purchase and Assumption Terms and Conditions" as that document is defined in Section 1(q) hereof; WHEREAS, on April 1, 1992 the Corporation adopted an amended policy statement entitled "RTC Guidelines Regarding Minority - Preference Resolutions" (the "Guidelines") which authorizes the Corporation to provide interim capital assistance to Minority-Owned Depository Institutions in order to preserve the ownership characteristics and increase the number of such institutions whenever practical and the Minority Capital Assistance Program has been established statutorily in Section 21A(u) of the Federal Home Loan Bank Act, as amended (the "FHLBA"), 12 U.S.C. 1441a(u). WHEREAS, the Failed Association was formerly a Minority-Owned Depository Institution. WHEREAS, application has been made to the Corporation to provide interim capital assistance to the Assuming Institution pursuant to the Guidelines in connection with the resolution of the Failed Association and, in that connection, the Shareholders and the Assuming Institution have executed and delivered to the Corporation an Application for Interim Capital Assistance dated September 7, 1993 (the "Application") and a Minority Ownership Affidavit dated September 7, 1993 (the "Affidavit"). WHEREAS, the Shareholders and the Assuming Institution have represented that they are "Minorities" and a "Minority-Owned Depository Institution" within the intent and definition of those terms under Sections 21A(s) and 21A(u) of the FHLBA, as amended, 12 U.S.C. Sections 1441a(s) and 1441a(u), and the Guidelines. WHEREAS, the Corporation has agreed to provide interim capital assistance to the Assuming Institution and each of the Shareholders for the sole purpose of facilitating the resolution of the Failed Association on the terms and conditions set forth in this Agreement; and WHEREAS the Assuming Institution has executed a Purchase and Assumption Agreement, Indemnity Agreement and Related Agreements in connection with the resolution of the Failed Association. NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements hereinafter contained, the Parties hereto agree as follows: 1. Defined Terms. ------------- (a) Except as otherwise provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Standard Terms (such meanings to be equally applicable to both the singular and plural forms of the terms defined). (b) "Affiliate" shall have the meaning set forth in (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. Section 1467a(a)(l)(H), whichever is applicable. (c) "Agreement" shall mean this Interim Capital Assistance --------- Agreement, as amended, modified or supplemented from time to time. 2 (d) "Assistance Documents" shall mean this Agreement, the -------------------- Promissory Note, the Stock Pledge Agreement and any other document or agreement now or hereafter delivered in connection herewith or therewith. (e) "Collateral" shall mean the Pledged Collateral as that term ---------- is defined in the Stock Pledge Agreement. (f) "Cost of Funds" shall mean the end of the calendar quarter ------------- Monday Auction yield price for 13 week U.S. Treasury Bills, as quoted in Tuesday's Wall Street Journal, plus 12.5 basis points. (g) "Event of Default" shall have the meaning set forth in ---------------- Section 5 hereof. (h) "Failed Association" shall mean Pan American Federal Savings ------------------ Bank, formerly a federal savings association under the HOLA, as amended, 12 U.S.C. Section 1461, et seq. and having its principal place of business in San ------ Mateo; California which was closed pursuant to Order No. __________ of the OTS. (i) "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. (j) "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). (k) "Minority" shall have the meaning as statutorily set forth in -------- Section 21A(s) (2) (C) of the FHLBA, as amended, 12 U.S.C. 1441a(s) (2) (C). (1) "Minority-Owned Depository Institution" shall have the meaning ------------------------------------- set forth in Section 21A(s) (2) (A) of the FHLBA, as amended, 12 U.S.C. 1441a(s) (2) (A). (m) "Party" shall mean the Shareholder[s], the Assuming ----- Institution or the Corporation and "Parties" shall mean the Shareholder[s], the Assuming Institution, and the Corporation. 3 (n) "Pledged Shares" shall mean all of the issued and outstanding -------------- shares of capital stock of the Assuming Institution, as more specifically described in Schedule 1 of the Stock Pledge Agreement attached hereto. (0) "Promissory Note" shall mean the promissory note made by each --------------- Shareholder of the Assuming Institution in connection herewith attached as Exhibit A, which is incorporated herein by reference, and referred to in Section 2 hereof. (p) "Receiver" shall have the meaning as set forth in the -------- Standard Terms. (q) "Shareholder" shall have the meaning set forth in the ----------- Preamble to this Agreement. (r) "Standard Terms" shall mean the RTC Standard Purchase and -------------- Assumption Terms and Conditions (Theta version dated July 26, 1993), incorporated by reference in (and expressly made a part of) the Whole Purchase and Assumption Agreement dated as of April 29, 1994 (the "Purchase and Assumption Agreement") and as supplemented, modified or amended by the Purchase and Assumption Agreement. References to Articles, Sections, Exhibits and the like refer to the Articles, Sections, Exhibits and the like of the Standard Terms, as defined herein, unless otherwise indicated. (s) "Stock Pledge Agreement" shall mean the Stock Pledge Agreement ---------------------- attached hereto as Exhibit B in favor of the Corporation made by each Shareholder of the Assuming Institution in connection herewith and is incorporated herein by reference. 2. Interim Capital Assistance. The Corporation hereby agrees to make -------------------------- a term loan (the "Interim Capital Assistance") to the Shareholders in the principal amount of $6,930,000.00. As additional evidence of the indebtedness of the Shareholders to the Corporation resulting from the Interim Capital Assistance, the Shareholders have executed the Promissory Note attached as Exhibit A. The Interim Capital Assistance shall be provided upon the consummation of the transactions contemplated by the Standard Terms and not later than the initial payment date as set forth in Article 6 of the Standard Terms. 3. Repayment of the Interim Capital Assistance. ------------------------------------------- (a) Maturity. The Shareholders shall repay the outstanding -------- principal balance of the Interim Capital Assistance with any accrued previously unpaid interest thereon in a single lump sum installment on April 28, 1999. 4 (b) Optional Prepayment. The Shareholders, at their option and ------------------- from time to time, may prepay the outstanding principal amount of the Interim Capital Assistance, in whole or in part. (c) Mandatory Prepayment. If, prior to the maturity of the -------------------- Interim Capital Assistance, the Shareholders obtain all or any material portion of their permanent financing, they shall promptly prepay all or a portion of the Interim Capital Assistance in an amount equal to the amount of financing so obtained. (d) Application of Prepayments. Any such mandatory or -------------------------- optional prepayments shall be applied first to accrued interest to the date of such prepayment on the amount prepaid and then to the outstanding principal amount of the Interim Capital Assistance. 4. Interest. -------- (a) The Shareholders shall pay interest on the outstanding principal balance of the Assistance for the first calendar quarter after Association Closing and for each calendar quarter thereafter until the maturity (whether at stated maturity, by acceleration or otherwise) of the Assistance, payable the first Thursday of the month following the end of the preceding calendar quarter. Interest shall accrue at a rate per annum of 3.688% for the first two (2) years. Thereafter, interest shall accrue at a variable rate to be adjusted annually, which rate shall equal the Cost of Funds as of the end of the most recently completed calendar quarter prior to the beginning of years three (3), four (4), and five (5). Interest on Optional and Mandatory Prepayments of Assistance shall be due and payable pursuant to Section 3. (b) In the event that any amount of principal or interest on the Interim Capital Assistance or Promissory Note or any other amount payable hereunder or thereunder is not paid in full when due, the Shareholders agree to pay interest on such unpaid principal and accrued interest or other amount, for each day from the date such amount became due until the date paid, at the rate then in effect plus 300 basis points or, if less, the maximum amount of interest ---- permissible by law to be charged on such unpaid principal or other amount payable hereunder or thereunder. 5. Events of Default. If any one or more of the following events ----------------- (each, an "Event of Default") shall occur and be continuing, it shall constitute an Event of Default: (a) The Shareholders shall fail to pay any amount of principal or interest on the Interim Capital Assistance or the 5 Promissory Note or any other amount payable hereunder or thereunder when due; or (b) Any representation or warranty by one or more of the Shareholders or the Assuming Institution in this Agreement or any other Interim Capital Assistance Document shall prove to have been incorrect when made; or (c) One or more of the Shareholders or the Assuming Institution shall fail in any material respect to perform or observe any term, covenant or agreement contained in this Agreement or any other Interim Capital Assistance Document to which it is a party; or (d) One or more of the Shareholders or the Assuming Institution shall fail to perform or observe any term, covenant or agreement contained in any Interim Capital Assistance Document to which they are a party or shall revoke or repudiate their obligations under any such Interim Capital Assistance Document; or (e) The death or incapacity of any individual Shareholder; or (f) One or more of the Shareholders or the Assuming Institution shall admit in writing their inability to, or shall fail generally or be generally unable to, pay their debts as such debts become due, or shall make a general assignment for the benefit of creditors; or shall have filed a voluntary petition in bankruptcy or a petition or answer seeking reorganization; to effect a plan or other arrangement with creditors or any other relief under any state or federal law relating to bankruptcy or reorganization granting relief to debtors, or shall file an answer admitting the jurisdiction of the court and the material allegations of any involuntary petition filed against it; or any order for relief shall be entered against one or more of the Shareholders or the Assuming Institution in any involuntary proceeding under any such state or federal law, or one or more of the Shareholders or the Assuming Institution shall be adjudicated bankrupt, or shall make an assignment for the benefit of creditors, or shall apply for or consent to the appointment of any custodian, receiver or trustee for all or any substantial part of their property, or shall take any action to authorize any of the actions set forth in this subsection (f); or any involuntary petition seeking any of the relief specified in this subsection (f) ; or any involuntary petition seeking any of the relief specified in this subsection (f) shall be filed against one or more of the Shareholders or the Assuming Institution and shall not be dismissed or stayed within 60 days; (g) The Stock Pledge Agreement, shall for any reason cease or fail to create a valid and perfected first priority lien on any of the collateral purported to be covered thereby; or 6 (h) Any event shall occur which gives reasonable grounds to conclude, in the judgement of the Corporation, that one or more of the Shareholders or the Assuming Institutions will not; or will be unable to, perform or observe in the normal course their obligations under the Promissory Note, this Agreement or the other Interim Capital Assistance Documents. 6. Acceleration. If any such Event of Default shall occur: (i) the ------------ Corporation, in its sole discretion, may declare the entire unpaid principal amount of the Interim Capital Assistance and the Promissory Note, all interest accrued and unpaid thereon and all other amounts payable under this Agreement and any other Interim Capital Assistance Documents to be forthwith due and payable, without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived by each of the Shareholders; provided, that -------- if an event of the type described in Section 5(e) hereof shall occur, the result which would otherwise occur only upon giving of notice by the Corporation to the Shareholders as specified above shall occur automatically, without the giving of any such notice; and (ii) the Corporation may immediately, and whether or not the actions specified in clause (i) have been taken, exercise any or all of the Corporation's rights and remedies under any other Interim Capital Assistance Document, including, without limitation, the rights of a secured party pursuant to the Uniform Commercial Code; provided further, that the Corporation shall, ---------------- prior to taking any action as provided in this Section, give the Shareholders written notice of default which shall specify the circumstances constituting the Event of Default; Shareholders shall have the right to cure the Event of Default within 30 days of the date of mailing of the notice in the case of any Event of Default described in Section 5(a) of this Agreement, or 60 days in the case of any other Event of Default. 7. Consent to Appointment of Conservator or Receiver. The ------------------------------------------------- Shareholders and the Assuming Institution hereby acknowledge and agree that in the event any amount of principal or interest hereunder is not paid when due (whether at stated maturity, by acceleration or otherwise), such default, if not cured by the Shareholders as provided in Section 6 above, shall constitute grounds for the appointment of a conservator or receiver of the Assuming Institution pursuant to the FDIA, as amended, 12 U.S.C. Section 1821(c) (5), by the appropriate Federal Banking Regulator and each of the Shareholders and the Assuming Institution hereby consent to any such appointment of a conservator or receiver by the appropriate Federal Banking Regulator and waive any and all right to contest any such appointment. 8. Negative Covenants of Shareholders and the Assuming Institution. --------------------------------------------------------------- Until all of the Assuming Institution's obligations under this Agreement and the Shareholders' obligations under this Agreement and the Promissory Note have been discharged, the Assuming Institution will not: 7 (a) Declare or pay any dividends, or issue any of its capital stock or any options or other rights in respect thereto, or repurchase, redeem, retire or otherwise acquire for value any of its outstanding capital stock, or make any distribution of its assets to any of its Shareholders or Holding Company as such, provided however that dividends may be paid if used by the ---------------- Shareholders exclusively for payment of principal or interest on the Promissory Note; (b) Make any loan or advance to any Shareholder or Holding Company or to any Affiliate of the Assuming Institution, Shareholder or Holding Company, or enter into any other transaction with any Shareholder or Holding Company or any Affiliate of the Assuming Institution, Shareholder or Holding Company, including, without limitation, any transaction involving the purchase, sale, exchange or lease of property or the provisions of services (other than standard deposit transactions entered into in the ordinary course of business on terms no less favorable to the Assuming Institution than it would obtain in an arm's length deposit transaction with a person not such a Shareholder or Holding Company or an Affiliate), provided however, the Assuming Institution may enter -------- ------- into transactions with its Affiliated mortgage company so long as any such transaction does not require the Assuming Institution to repurchase any loans from its Affiliated mortgage company or any other Affiliate or third party purchaser which would result in any loss to the Assuming Institution; (c) Increase the compensation of or pay any bonuses to any of its officers, directors or key employees, provided however, that compensation for ---------------- officers, directors or key employees may be increased in the second year of operations of the Assuming Institution and in each year thereafter so long as this Agreement is in effect and all such increases shall be preapproved in writing by the Corporation and provided further this exception allowing increase -------- ------- in compensation shall not be available to officers, directors or key employees who own 5% or more of the voting stock in the holding company (Pan American Financial, Inc.) or its parent (Pan American Group, Inc.) or any Affiliate of the Assuming Institution or any members of the immediate family of any individual who owns 5% or more of such stock; (d) Sell, assign, lease or otherwise dispose of all or substantially all of its assets, or enter into any merger or consolidation, or agree to do any of the foregoing; provided however that the Assuming Institution ---------------- may reorganize its branch structure subject to written approval from its regulators; or 8 (e) Enter into any agreement which effects a change of control of the Assuming Institution prior to the expiration of one year after repayment of the principal amount of the Interim Capital Assistance (whether by stated maturity, acceleration or otherwise). 9. Affirmative Covenants of Shareholders and the Assuming ------------------------------------------------------ Institution. - ----------- (a) Until all of the Shareholder's and Assuming Institution's obligations under this Agreement and the Promissory Note have been discharged, the Assuming Institution will: (i) Maintain its core capital, tangible capital and risk- based capital (calculated in accordance with the regulations prescribed by the FDIC or OTS in an amount equal to at least 75% of the amount of its core capital, tangible capital and risk-based capital on the first Business Day following the date of Association Closing; (ii) Comply with all applicable laws, rules, regulations and orders, including, without limitation, rules and regulations of the FDIC or OTS; (iii) Provide monthly financial reports to the Corporation or its successor in such form as the Corporation or its successor may reasonably request in order to monitor the financial condition and capital ratios of the Assuming Institution; (iv) Permit representatives of the corporation or its successor, at any reasonable time and from time to time, to examine the books and records of the Assuming Institution at its place of business; (v) Conduct its operations in a prudent and businesslike manner; and (vi) maintain insurance with responsible and reputable insurers in such amounts and covering such risks as is carried by financial institutions engaged in similar businesses and owning similar properties, including, without limitation, fire, extended coverage, business interruption, public liability, property damage, worker's compensation, banker's blanket bond, directors and officers, and errors and omissions, all as reasonably determined by the Corporation or its successor. (b) For a period of one year after repayment of the principal amount of the Interim Capital Assistance (whether by stated maturity, acceleration or otherwise) and all of the Shareholders' and the Assuming Institution's obligations under this Agreement have been discharged, the Assuming Institution will 9 remain at all times a Minority-Owned Depository Institution. 10. Assuming Institution Representations and Warranties. The Assuming --------------------------------------------------- Institution hereby represents and warrants to the Corporation as follows: (a) Capitalization. The only issued and outstanding shares of -------------- capital stock of the Assuming Institution are the Pledged Shares, all of which are validly issued, fully paid and nonassessable. No securities convertible into or exchangeable for any shares of capital stock of the Assuming Institution, or any options, warrants or other commitments entitling any person to purchase or otherwise acquire any shares of capital stock of the Assuming Institution, are issued and outstanding. The Shareholders listed on Schedule 1 of the Stock Pledge, Agreement attached hereto are the record and beneficial owners of the Pledged Shares. None of the Pledged Shares has been transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction to which such transfer may be subject. (b) Authorization. The execution and delivery of this Agreement ------------- and the other Interim Capital Assistance Documents to which it is a party and performance by the Assuming Institution of its obligations hereunder and thereunder, the execution and delivery of each Interim Capital Assistance Document to which it is a party by each of the Shareholders and performance of their obligations thereunder, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by all necessary corporate action on the part of the Assuming Institution and each of the Shareholders. This Agreement and the other Interim Capital Assistance Documents each have been duly executed and delivered and, upon receipt of the regulatory approvals or waivers contemplated by this Agreement, will constitute a legal, valid and binding obligation of the Assuming Institution and each of the Shareholders, as the case may be, enforceable in accordance with their respective terms subject to bankruptcy, insolvency, reorganization or similar laws affecting the enforcement of creditors rights generally and to general principles of equity. (c) No Conflict. Except as previously disclosed to the ----------- Corporation in writing, the execution, delivery and performance of this Agreement and the other Interim Capital Assistance Documents by the Assuming Institution, the execution, delivery and performance of each Interim Capital Assistance Document to which it is a party by each of the Shareholders, and the consummation of the transactions contemplated hereby and thereby, will not (i) violate or conflict with any provision of the charter or bylaws of the Assuming Institution or any Holding Company or any law, rule, regulation affecting the Assuming Institution or any of the Shareholders or by which the Assuming Institution or any of the Shareholders is bound, the violation of which could have a material adverse effect on the financial condition of the Assuming 10 Institution or any of the Shareholders, as the case may be, or (ii) violate or conflict with any order, judgement, award, administrative interpretation, injunction writ, decree or the like affecting the Assuming Institution or any of the Shareholders or by which the Assuming Institution or any of the Shareholders is bound, the violation of which could have a material adverse effect on the operations or financial condition of the Assuming Institution or any of the Shareholders, as the case may be, or (iii) result in a breach of or constitute a default under any indenture or other material agreement to which the Assuming Institution or any of the Shareholders is a party or by which the Assuming Institution or any of the Shareholders or any material portion of its respective properties is bound. (d) Regulatory Approvals. No authorization, consent, approval, -------------------- license, exemption or other action by, or notice to or registration or filing, with any governmental authority or administrative or regulatory body is required for either the execution, delivery or performance of this Agreement and the other Interim Capital Assistance Documents to which the Assuming Institution is a party, or the execution, delivery and performance of each Interim Capital Assistance Document to which any of the Shareholders is a party, or the consummation of the transactions contemplated hereby and thereby, except such as shall have been made or obtained prior to the date of Association Closing. (e) Absence of Litigation. Except as previously disclosed to the --------------------- Corporation in writing, there are no pending or threatened actions, suits or proceedings before any court, governmental agency, arbitrator or instrumentality affecting the Assuming Institution or any of the Shareholders which (i) if determined adversely to the Assuming Institution or any of the Shareholders, could reasonably be expected, individually or in the aggregate, to materially affect the financial condition, properties or operation of the Assuming Institution or any of the Shareholders or (ii) purport to affect the legality, validity or enforceability of this Agreement or any other Interim Capital Assistance Document. (f) Accuracy of Application and Affidavit. All statements and ------------------------------------- information provided by the Shareholders and the Assuming Institution in the Application and the Affidavit are true and correct on and as of the date hereof as if made on and as of the date hereof. Such Interim Capital Assistance Documents do not fail to state a material fact necessary to make the statements made therein not misleading. (g) Minimum Capital Requirement. The Interim Capital Assistance --------------------------- does not exceed two-thirds (2/3) of the required minimum capital of the Assuming Institution. 11 11. Conditions. The obligation of the Corporation to make the Interim ---------- Capital Assistance is subject to the satisfaction of the following conditions: (a) Compliance. The Assuming Institution and each of the ---------- Shareholders shall have complied in all material respects with each of the covenants and agreements contained herein, which are required to be performed or complied with by them on or prior to the date such Interim Capital Assistance is provided. (b) Accuracy of Representations. Each of the representations and --------------------------- warranties contained in Section 10 shall be true and correct in all material respects on the date such Interim Capital Assistance is made as if made at and as of such date. (c) Officer's Certificate. The Corporation shall have received a --------------------- certificate, dated the date of Association Closing, of the chief executive officer of the Assuming Institution and the Shareholders certifying as to the matters specified in subsections (a) and (b) of this Section 11, which shall constitute a representation of the Assuming Institution and its Shareholders with respect thereto. (d) Purchase and Assumption Transaction. The Receiver and the ----------------------------------- Assuming Institution shall have entered into the Standard Terms and the Corporation shall have received evidence satisfactory to it that the conditions precedent set forth in the Standard Terms shall have been satisfied or waived and that the Standard Terms shall have become effective in accordance with its terms. (e) Other Interim Capital Assistance Documents. Each Shareholder ------------------------------------------ of the Assuming Institution shall have executed and delivered to the Corporation one or more than one Stock Pledge Agreement[s]. 12. Miscellaneous. ------------- (a) Entire Agreement. This Agreement and the other Interim ---------------- Capital Assistance Documents embody the entire agreement of the Parties in relation to the subject matter herein and therein and supersede all prior understandings or agreements, oral or written, between the Parties. (b) Headings. The headings and subheadings of the Articles and -------- Sections contained in this Agreement, except the terms identified for definition in Article 1 of the Standard Terms and elsewhere in this Agreement, are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or any provision thereof. 12 (c) Counterparts. This 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. (d) GOVERNING LAW. THE AGREEMENT AND THE RIGHTS AND OBLIGATIONS ------------- UNDER THIS 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 STANDARD TERMS. (e) Successors. Subject to the limitations of subsection (f) of ---------- this Section 12, subsection (e) of Section 8, and subsection (b) of Section 9, all terms and conditions of the Agreement shall be binding on the successors and assigns of the Corporation, the Assuming Institution and each of the Shareholders. 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 Corporation, the Assuming Institution and the Shareholders any legal or equitable right, remedy or claim under or with respect to this Agreement or any provisions contained herein, it being the intention of the Parties that this Agreement, the obligations and statements of responsibilities thereunder, and all other conditions and provisions thereof are for the sole and exclusive benefit of the Corporation, the Assuming Institution and Shareholders and for the benefit of no other person. (f) Modification; Assignment. No amendment or other modification, ------------------------ rescission, release, annulment or assignment of any part of this Agreement shall be effective except pursuant to a written agreement subscribed by the duly authorized representatives of the Parties. (g) Notice. Any notice, request, demand, consent, approval or ------ other communication to any Party hereto 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 below or at such other address or number as it shall hereafter furnish in writing to the others. All such notices and other communications shall be deemed given on the date received by the addressee. 13
CORPORATION SHAREHOLDERS - ----------- ------------ RESOLUTION TRUST CORPORATION Pan American Financial, Inc. 801 17th Street, N.W. c/o Bastion Capital Washington, DC 20006 1999 Avenue of the Stars, #2800 Los Angeles, California 90067 Attention: J. Paul Ramey Vice President Attention: Mr. Guillermo Bron Department of Resolutions cc: Assistant General Counsel ASSUMING INSTITUTION Resolution Trust Corporation -------------------- 4000 MacArthur Boulevard Pan American Bank, FSB Newport Beach, CA 92660 1300 South El Camino Real and P.O. Box 2079 San Mateo, California 94402 Vice President Attention: Lawrence J. Grill Resolution Trust Corporation President 4000 MacArthur Boulevard Newport Beach, CA 92660
(h) Waiver. The Corporation, the Shareholders, and the Assuming ------ Institution may waive their respective rights, powers or privileges under this Agreement; provided, that such waiver shall be in writing; and further provided, -------- ---- ------- -------- that no failure or delay on the part of the Corporation, the Shareholders or the - ---- Assuming Institution to exercise any right, power or privilege under this Agreement shall preclude any other or further exercise thereof or the exercise of any other right, power or privilege by the Corporation, the Shareholders, or the Assuming Institution under the terms of this Agreement, nor will any such waiver operate or be construed as a future waiver of such right, power or privilege under this Agreement. (i) Costs, Fees and Expenses. Each Party hereto agrees to pay all ------------------------ costs, fees and expenses which it had incurred or will incur, in connection with or incidental to the matters contained in this Agreement, including without limitation any fees and disbursements to its advisers, accountants and counsel. (j) Severability. If any provision of this Agreement is invalid ------------ or unenforceable then, to the extent possible, all of the remaining provisions of this Agreement shall remain in full force and effect and shall be binding upon the Parties hereto. (k) Effectiveness. This Agreement shall become effective upon the ------------- satisfaction or waiver of the conditions set 14 forth in Section 11 hereof. IN WITNESS WHEREOF, the Parties have duly executed this Agreement as of the day and year first above written. SHAREHOLDERS: Pan American Financial, Inc. By: /s/ WILLIAM (GUILLERMO) BRON ------------------------------------ Printed Name: William (Guillermo) Bron Title: Chairman of the Board ASSUMING INSTITUTION: Pan American Bank, FSB By: /s/ WILLIAM (GUILLERMO) BRON ------------------------------------ Printed Name: William (Guillermo) Bron Title: Chairman of the Board RESOLUTION TRUST CORPORATION By: /s/ LEWIS W. FRALIN ------------------------------------ Printed Name: Lewis W. Fralin Title: Director of Resolutions 15 EX-10.11 15 LETTER AGREEMENT - MARCH 2, 1995 EXHIBIT 10.11 [Letterhead of the Resolution Trust Corporation] March 2, 1995 Lawrence J. Grill Chief Executive Officer Pan American Bank, FSB 1300 South El Camino Real P.O. Box 2079 San Mateo, CA 94401-0986 Re: Waiver of Certain Provisions of Interim Capital Assistance Agreement dated April 29, 1994 and September 9, 1994. Dear Mr. Grill: This is in response to letters from you and your counsel dated August 24, September 6, and December 2, 1994, requesting waivers or modifications of certain provisions of the Interim Capital Assistance Agreements dated April 29, 1994 ("April ICA") and September 9, 1994 ("September ICA") by and between Pan American Financial Inc. ("PAFI"), Pan American Bank, FSB, San Mateo, California ("Pan American") and the Resolution Trust Corporation ("RTC"), (collectively, the "ICA Agreements") and the associated April 29, 1994 ("April Stock Pledge Agreement") and September 9, 1994 ("September Stock Pledge Agreement") Stock Pledge Agreements (collectively, the "Stock Pledge Agreements"). Those requests were made in connection with the September 9, 1994 resolution of Western Federal Savings Bank ("Western FSB"), in which Pan American assumed the deposits of the Panorama City Branch and executed an additional Interim Capital Assistance Agreement, and related documents, which provided an additional ICA loan. As you know, our definitive response to those requests was delayed until your recent delivery of the shares of stock required to be pledged with the RTC pursuant to the September ICA and September Stock Pledge Agreement. Your requests were primarily for modifications to: (a) allow Pan American to issue additional stock to PAFI to facilitate a capital infusion required by the Office of Thrift Supervision, (b) delete the April ICA provisions prohibiting a change of control, and requiring maintenance of minority status, during the twelve months after repayment of the April ICA loan, and (c) permit Pan American to sell loans to, and repurchase 1 loans from, its consumer finance affiliate, subject to the same restrictions that apply to such transactions with your affiliated mortgage company. According to your letters, OTS conditioned its approval of Pan American's acquisition of the Panorama City Branch of Western FSB from the RTC on Pan American increasing its capital by approximately $750,000. To comply with this regulatory requirement, Pan American issued an additional 75,000 shares of common stock, at $10 a share, to PAFI on or about September 9, 1994. Your letters also indicate that Pan American issued an additional 400,000 shares of common stock to PAFI an or about September 9, 1994 in consideration of PAFI downstreaming the $4 Million in ICA provided by the RTC in connection with the resolution of Western. On January 18, 1995 you tendered Pan American Bank, F.S.B. Stock Certificate No. 2, representing the 475,000 shares of common stock. You have represented that the RTC now holds all of the issued and outstanding common stock -- 1,610,000 shares -- of Pan American Bank, F.S.B., San Mateo, California. You have also agreed that all such shares shall serve as collateral for the ICA, Stock Pledge and other ICA Agreements previously executed by and between PAFI, Pan American and the RTC. Based on your representations, we have determined to grant your requests as noted below. 1. Capital Infusion Modifications Your requests for a partial waiver of subsections 3(c) and 8(a) of the ICA Agreements and sections 7 and 8 of the Stock Pledge Agreements are granted to the extent necessary to permit Pan American's previous issuance of an additional 475,000 shares of capital stock to PAFI, provided that the $4,750,000 infusion of capital into Pan American has been completed and that such funds remain in Pan American as capital and, provided further, that such additional 475,000 shares of stock which have been transferred to the custody of the RTC shall be considered "Pledged Shares" under the ICA Agreements and the Stock Pledge Agreements. 2. Affiliated Transactions Your request for a revision of Section 8(b) of the April ICA to conform it to Section 8(b) of the September ICA which expands the mortgage company affiliate exception to include Pan American's consumer finance company affiliate is granted to the extent necessary to permit Pan American to sell loans to, and 2 repurchase loans (not resulting in a loss to Pan American) from, its consumer finance affiliate. 3. Change of Control/Minority Status Your request for a revision of the Provisions of Sections 8(e) and 9(b) of the April ICA to conform them to Sections 8(e) and 9(b) of the September ICA to the extent necessary to remove the prohibition against entering into a change of control agreement, and the requirement that Pan American maintain its status as a minority institution, during the twelve months after the ICA loan has been repaid and satisfied in full is granted. However the change in control prohibition and minority status requirement remain in full force and effect until the repayment in full of that loan and until full satisfaction of all other provisions of the April ICA agreement. This modification is intended to make the terms of the April and September ICA agreements consistent on this issue. 4. Corporate Reorganizations Your request for a revision of Section 8(d) of the April ICA Agreement to conform it to Section 8(d) of the September ICA Agreement, which permits specified corporate transactions if the ICA's repayment is a condition of the transaction, is granted. 5. Events of Default In addition, it is hereby agreed that compliance with the provisions of the ICA Agreements and Stock Pledge Agreements, as amended by this letter agreement, shall not constitute an Event of Default under those Agreements. 6. Stock Pledge Schedules Schedules 2, 3 and 4 of the Stock Pledge Agreements are also hereby amended to reflect the additional 475,000 shares of common stock pledged as a result of the September ICA and associated stock sale. 7. Effective Date of Changes The revisions and modifications to the April ICA and April Stock Pledge Agreements become effective as of the effective dates of the September ICA and September Stock Pledge Agreements when this letter is signed by you, in the space provided below, and returned to me. 3 Except to the extent expressly waived or modified herein, all of the terms, provisions, covenants and conditions contained in the ICA Agreements, the Stock Pledge Agreements and in any of the other documents, instruments, and agreements executed in connection with those documents remain unchanged and in full force and effect. If you have any questions regarding this letter please contact Gregory B. Smith, Senior Counsel, at (202) 736-3013 or Edward Thomas, Financial Analyst, at (202) 416-7179. Sincerely yours, /s/ J. PAUL RAMEY ----------------- J. Paul Ramey, Vice President, Division of Resolutions Agreed to on April 25, 1995. By: /s/ LAWRENCE J. GRILL --------------------- Lawrence J. Grill Chief Executive Officer Pan American Bank, FSB Witness: /s/ ROBERT B. WILSON -------------------- Name: Robert B. Wilson Title: Executive Vice President cc: Herbert J. Held H. Ronald Hoch Edward Thomas Jay Earle Gregory B. Smith, Esq. Patrick J. McCarty, Esq. 4 EX-10.12 16 PROMISSORY NOTE - MARCH 2, 1995 EXHIBIT 10.12 PROMISSORY NOTE --------------- $4,000,000.00 September 9, 1994 FOR VALUED RECEIVED, Pan American Financial, Inc. (the "Shareholders"), jointly and severally, to the extent of the Pledged Shares, hereby unconditionally promise to pay to the order of the RESOLUTION TRUST CORPORATION in its corporate capacity (the "Corporation") on September 8, 1999 the principal sum of Four Million Dollars ($4,000,000.00). The Shareholders further promise to pay interest on the aggregate principal balance outstanding hereunder from time to time until the maturity thereof (whether at stated maturity, by acceleration or otherwise) at the interest rate and in the manner set forth in the Interim Capital Assistance Agreement of even date herewith (the "Interim Capital Assistance Agreement") by and among __________________________, the Shareholders and the Corporation. Interest shall be payable in arrears. All payments hereon shall be applied first to the payment of accrued interest and the balance shall be applied to principal. Both principal and interest are payable in lawful money of the United States of America in immediately available funds to the Resolution Trust Corporation, at its main office at 801 17th Street, N.W., Washington, D.C. 20434, or such other place as the Corporation may designate in writing. This promissory note is referred to and is made pursuant to the terms and conditions set forth in the Interim Capital Assistance Agreement as supplemented, modified or amended. The Interim Capital Assistance Agreement provides, among other things, for required and optional prepayments, interest rates and acceleration (which in certain cases shall be automatic) of the maturity hereof upon the occurrence of certain stated events, in each case without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings assigned to them in the Interim Capital Assistance Agreement. This promissory note is secured by a Stock Pledge Agreement in favor of the Corporation covering certain collateral more specifically described in the Stock Pledge Agreement and provided for in the Interim Capital Assistance Agreement, and is entitled to the benefits thereof. The Shareholders agree to pay all costs, including reasonable attorneys' fees, incurred by the Corporation in enforcing payment hereof. THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE FEDERAL LAW OF THE UNITED STATES OF AMERICA AND, TO THE EXTENT NOT INCONSISTENT THEREWITH, THE LAWS OF THE STATE OF CALIFORNIA. [SHAREHOLDERS]: ----------------------------- Attest: Pan American Financial Inc. /s/ [SIGNATURE ILLEGIBLE] /s/ LAWRENCE J. GRILL - ----------------------------- ----------------------------- ----------------------------- EX-10.13 17 STOCK PLEDGE AGREEMENT - SEPTEMBER 9, 1994 EXHIBIT 10.13 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT dated as of September 9, 1994 (this "Agreement") is made by and between each of the persons named in Schedule 1 hereto (such persons are hereinafter referred to individually as a "Pledgor" and collectively as "Pledgors") and the Resolution Trust Corporation, organized and existing under the laws of the United States, in its corporate capacity (in such capacity, the "Secured Party" or the "Corporation"). RECITALS -------- WHEREAS, pursuant to Section 5(d) of the Home Owners' Loan Act, as amended (the "HOLA"), 12 U.S.C. Section 1464(d), the Office of Thrift Supervision ("OTS") has closed Western Federal Savings Bank, (the "Failed Association") and has appointed the Resolution Trust Corporation as receiver of the Failed Association (the "Receiver"); WHEREAS, the Receiver has determined pursuant to Section 11(d) (2) (G) of the Federal Deposit Insurance Act, as amended (the "FDIA"), 12 U.S.C. Section 1821{d)(2)(G), that it is appropriate and necessary to transfer certain assets and liabilities of the Failed Association to the Assuming Institution; WHEREAS, the Parties intend that such transfer be made on the terms and conditions set forth in the "RTC Standard Purchase and Assumption Terms and Conditions (IOTA version dated December 25, 1993) (the "Standard Terms"); WHEREAS, the Corporation has adopted the Minority Capital Assistance Program which has been established statutorily in the Federal Home Loan Bank Act, as amended (the "FHLBA"), 12 U.S.C. 1441a(u) and has implemented policies, procedures and rules regarding minority preference resolutions which permits the Corporation to provide interim capital assistance to Minority Institutions in order to preserve the ownership characteristics and increase the number of such institutions whenever practical; WHEREAS, application has been made to the Corporation to provide interim capital assistance to the Pledgors in connection with the resolution of the Failed Association and, in that connection, the Pledgors have executed and delivered to the Corporation an Application for Interim Capital Assistance dated August 29, 1994 (the "Application"); WHEREAS, the Pledgors have represented that they are "Minorities" and that the Assuming Institution is a "Minority Institution" as those terms are defined in Sections 21A(s) and 21A(u) of the Federal Home Loan Bank Act, 12 U.S.C. 1441a(s) and (u), of the FHLBA, as amended, 12 U.S.C. Sections 1441a(s) and (u); WHEREAS, the Corporation has agreed to provide interim capital assistance to the Pledgors for the sole purpose of facilitating the resolution of the Failed Association on the terms and conditions set forth in this Agreement; and WHEREAS, as a condition to receipt of Interim Capital Assistance, the Pledgors have agreed to pledge to the Corporation 100% of issued and outstanding shares of capital stock of the Assuming Institution and any Additional Collateral as may be hereinafter acquired. NOW, THEREFORE, in consideration of the premises and to induce the Corporation to provide such interim capital assistance, it is hereby agreed as follows: 1. Defined Terms. ------------- Except as otherwise provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned 2 to them in the Interim Capital Assistance Agreement of even date herewith, by and among the Assuming Institution, the Corporation and the Shareholder[s] (the "Interim Capital Assistance Agreement") (such meanings to be equally applicable to both the singular and plural forms of the terms defined). (a) "Additional Collateral" means, for each Pledgor, all additional shares --------------------- of capital stock of the Assuming Institution hereinafter acquired in any manner by such Pledgor, all options or other rights to acquire the same, and all dividends and distributions (whether of cash, securities or other property) received or receivable with respect to the Pledged Shares or Qualifying Shares of such Pledgor or such additional shares of such Pledgor or in exchange therefor, and any and all proceeds of the Pledged Shares of such Pledgor and of the foregoing, provided that, nothing in this Agreement is intended to, or shall be construed to, prohibit or restrict the payment of dividends used by the Shareholder[s] exclusively for the payment of principal or interest on the Promissory Note. (b) "Assistance Documents" shall mean the Interim Capital Agreement, -------------------- the Promissory Note, this Agreement and any other document or agreement now or hereafter delivered in connection herewith or therewith. (c) "Assuming Institution" shall mean Pan American Bank, FSB, an -------------------- insured depository institution within the meaning of the FDIA, organized and existing as a federal savings bank with its principal place of business at San Mateo, California. (d) "Event of Default" shall have the meaning set forth in Section 5 ---------------- of the Interim Capital Assistance Agreement. (e) "Failed Association" shall mean Western Federal Savings Bank, ------------------ formerly a federal savings association under the HOLA, as amended, 12 U.S.C. Section 1461, et seq., and having its principal place of business in Marina Del ------ Ray, California, which was closed pursuant to Order No. ____________ of the OTS. 3 (f) "Minority" shall have the meaning as statutorily set forth in -------- Section 21A(s)(2)(C) of the FHLBA, 12 U.S.C. 1441a(s) (2)(C). INSERT ALTERNATIVE A OR B AS APPLICABLE (g) "Pledged Shares" shall mean 100% of the issued and outstanding -------------- shares of capital stock of the Assuming Institution, as more specifically described in Schedule 2 hereto. (h) "Promissory Note" shall mean the promissory note (attached as --------------- Exhibit A to the Interim Capital Assistance Agreement of even date herewith and incorporated herein by reference) made by each Shareholder of the Assuming Institution. (i) "Purchase and Assumption Agreement" shall mean the Purchase and --------------------------------- Assumption Agreement, of even date herewith, by and between the Resolution Trust Corporation as receiver of the Failed Association and the Assuming Institution. (j) "Receiver" shall have the meaning as set forth in the Purchase and -------- Assumption Agreement. (k) "Qualifying Shares" means, for each Pledgor who is also a director ----------------- of the Assuming Institution, the number of shares of capital stock of the Assuming Institution owned by such Pledgor which are the minimum number of shares required to be owned by such Pledgor (pursuant to any applicable federal and/or state statutes and regulations, including 12 U.S.C. Section 72) which are more fully described in Schedule 3 hereto. (l) "Secured Obligations" shall have the meaning set forth in Section ------------------- 3 hereof. 2. Pledge of Pledged Collateral. ---------------------------- (a) As security for the payment and performance of the Secured Obligations, and for other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, each Pledgor hereby grants to the Corporation a security interest in all of the following (collectively, the "Pledged Collateral"): (i) the Pledged Shares of such Pledgor and the stock certificates representing such Pledged Shares; and 4 (ii) the Additional Collateral of such Pledgor and the stock certificates representing such Additional Collateral. (b) Each Pledgor hereby agrees to deliver, at the time of execution of this Agreement, all stock certificates representing the Pledged Shares of such Pledgor to the Corporation, together with such Pledgor's endorsement or appropriate stock powers duly executed in blank, in each case with signatures guaranteed. (c) Subject to the provisions of Section 8(a) hereof, if any Pledgor shall become entitled to receive or shall receive any items of Additional Collateral, such Pledgor shall accept any such items, and shall hold them in trust for the Corporation, and shall promptly (and in any event within three (3) Business Days) deliver all items of Additional Collateral forthwith to the Corporation in the exact form received, together with such Pledgor's endorsement or with appropriate stock powers duly executed in blank, in each case with signatures guaranteed, to be held by the Corporation subject to the terms hereof as part of the Pledged Collateral. Each such Pledgor shall also, upon obtaining any additional shares of capital stock of the Assuming Institution which are not Pledged Shares, promptly (and in any event within three (3) Business Days) deliver to the Corporation a Pledge Amendment, duly executed by such Pledgor, in substantially the form of Schedule 4 hereto and incorporated herein by reference (a "Pledge Amendment"), with respect to such shares. Each Pledgor hereby authorizes the RTC to attach any such Pledge Amendment to this Agreement and agrees that all shares listed on any Pledge Amendment delivered to the RTC shall for all purposes hereunder be considered Pledged Collateral. 3. Security for Obligations. This Agreement secures, and the Pledged ------------------------ Collateral is security for, the payment and performance of (a) all indebtedness and other obligations of the Pledgors now or hereafter existing under the Interim Capital Assistance Agreement, the Promissory Note, all other Assistance Documents to which any Pledgors is a party, and all other documents now or hereafter delivered in connection therewith, whether due or not 5 due, absolute or contingent, liquidated or unliquidated, and (b) all indebtedness and other obligations now or hereafter existing of the Pledgors under this Agreement and all other documents now or hereafter delivered in connection herewith (collectively, the "Secured Obligations"). 4. Pledgor's Waivers. ----------------- (a) Each Pledgor waives and agrees not to assert (i) each of the following rights to require the Corporation (A) to proceed against any other Pledgor or guarantor or any other Person, (B) to proceed against or exhaust any of the Pledged Collateral or any other security held for the Secured Obligations, (C) to give notice of the terms, time and place of any public or private sale of the Pledged Collateral or any other security held for the Secured Obligations, and (D) to comply with any other provisions of Section 9- 504 of the Uniform Commercial Code (or any equivalent provision of any other applicable law); provided however, that the Corporation shall endeavor to give -------- ------- notice to each Pledgor of the terms, time and place of any sale of any Collateral Pledged or any other security held for the Secured Obligations, (ii) the defense of the statute of limitations in any action hereunder or for the collection or performance of the Secured Obligations, (iii) any defense arising by reason of any lack of authority or any other defense of such Pledgor or any other Person, and (iv) any defense based upon an election of remedies (including, if available, an election to proceed by nonjudicial foreclosure) which destroys or impairs the subrogation rights of such Pledgor or the right of such Pledgor to proceed against any other Pledgor or other obligor of the Secured Obligations for reimbursement. Each Pledgor assumes responsibility for keeping informed of the financial condition of the Assuming Institution and agrees that the Corporation has no obligation to keep such Pledgor so informed. (b) Each Pledgor waives any and all notice of the acceptance of this Stock Pledge Agreement, and any and all notice of (i) the creation, renewal, modification, extension or accrual of 6 the Secured Obligations, (ii) the reliance by the Corporation upon this Stock Pledge Agreement, or (iii) the exercise of any right, power or privilege hereunder. The Secured Obligations shall conclusively be deemed to have been created, contracted, incurred and permitted to exist in reliance upon this Stock Pledge Agreement. Each Pledgor waives presentment, protest, demand for payment, and notice of default, dishonor, protest, or nonpayment and all other notices to, or upon such Pledgor or any other Person with respect to the Secured Obligations. (c) The obligations of each Pledgor hereunder are independent of the obligations of any other Pledgor and upon the occurrence, and during the continuance of any Event of Default, a separate action or actions may be brought against any one or more of such Pledgors, whether or not any other Pledgor is joined therein or a separate action or actions are brought against any other Pledgor. (d) Until satisfaction of the Secured Obligations in full, no Pledgor shall have any right of subrogation with respect to the Secured Obligations. (e) The obligations of each Pledgor hereunder shall be irrevocable, absolute and unconditional, irrespective of the genuineness, legality, validity, regularity or enforceability of any Assistance Documents or of any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or guarantor, and shall not be subject to any counterclaim, set-off, deduction or defense which any such Pledgor may have against the Receiver or the Corporation. (f) Each Pledgor hereby consents and agrees that, without notice to, or further assent from, such Pledgor: (i) the principal amount of the Secured Obligations may be increased or decreased and additional indebtedness or obligations of any Pledgor under the Assistance Documents may be 7 incurred, in accordance with any Assistance Document, or by an amendment, modification or renewal of any Assistance Document or otherwise; (ii) the time, manner, place or terms of any payment under any Assistance Document may be extended or changed, including by an increase or decrease in the interest rate on any Secured Obligation or any other amount payable under any Assistance Document, in accordance with any Assistance Document, or by an amendment, modification or renewal of such Assistance Document or otherwise; (iii) any action may be taken under or with respect to any Assistance Document in the exercise of any right, remedy, power or privilege therein contained (including, without limitation, the acceleration of the maturity of the Promissory Note) or otherwise, or such right, remedy, power or privilege may be waived, omitted or not enforced; (iv) the time for any Pledgor's performance of or compliance with any term, covenant or agreement on its part to be performed or observed under any Assistance Document may be extended, or such performance or compliance waived, or failure in or departure from such performance or compliance consented to, all in such manner and upon such terms as the Corporation may deem proper; (v) the Corporation may discharge or release, in whole or in part, any other Pledgor or other guarantor or any other person liable for the payment and performance of all or any part of the Secured Obligations, and may permit or consent to any such action or any result of such action, and shall not be obligated to demand or enforce payment upon any of the Pledged Collateral, nor shall the Corporation be liable to such Pledgor for any failure to collect or enforce payment of the Secured Obligations or to realize on the other Pledged Collateral therefor; (vi) in addition to the Pledged Collateral, the Corporation may take and hold other security (legal or equitable) 8 of any kind, at any time, as collateral for the Secured Obligations, and may, from time to time, in whole or in part, exchange, sell, surrender, release, subordinate, modify, waive or extend such security and may permit or consent to any such action or the result of any such action, and may apply such security and direct the order or manner of sale thereof; and (vii) the Corporation may exercise or refrain from exercising any right, remedy or power (including, without limitation, any power of sale) granted by any Assistance Document or other security document or agreement, in law or in equity or otherwise, with respect to the Secured Obligations or any of the Pledged Collateral or other security or lien (legal or equitable) held, given or intended to be given therefor; all as the Corporation may deem advisable, and all without impairing, abridging, releasing or affecting this Stock Pledge Agreement. 5. Continuing Obligation. --------------------- This Stock Pledge Agreement shall continue in effect and be binding upon each Pledgor until satisfaction of the Secured Obligations in full. This Stock Pledge Agreement shall be automatically reinstated if, for any reason, any payment by or on behalf of the Pledgors shall be rescinded or must otherwise be restored, whether as a result of proceedings in bankruptcy or reorganization or otherwise. 6. Representations and Warranties. ------------------------------ In addition to the representations and warranties of each Pledgor set forth in the other Assistance Documents, which are incorporated herein by this reference, each Pledgor hereby represents and warrants to the Corporation that: (a) The Pledged Shares and the Qualifying Shares of such Pledgor constitute 100% issued and outstanding shares of capital stock owned or controlled by such Pledgor, and all of such 9 Pledged Shares and Qualifying Shares are validly issued, fully paid and nonassessable; (b) No securities convertible into or exchangeable for any shares of capital stock of the Assuming Institution, or any options, warrants or other commitments entitling any Person to purchase or otherwise acquire any shares of capital stock of the Assuming Institution, are issued and outstanding; (c) Such Pledgor is the record and beneficial owner of the Pledged Shares of such Pledgor, and will be the record and beneficial owner of any Additional Collateral of such Pledgor upon acquisition thereof by such Pledgor, free and clear of all Liens, except those created in favor of the Corporation hereunder; (d) Such Pledgor has the right and requisite authority to pledge, assign, transfer, deliver, deposit and set over the Pledged Collateral pledged by such Pledgor to the Corporation as provided herein; (e) None of the Pledged Shares of such Pledgor has been transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction to which such transfer may be subject; (f) No consent, approval, authorization or other order of any Person and no consent, authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required to be made or obtained by such Pledgor either (i) for the pledge by such Pledgor of the Pledged Collateral pursuant to this Stock Pledge Agreement or for the execution, delivery or performance of this Stock Pledge Agreement by such Pledgor, or (ii) for the exercise by the Corporation of the voting or other rights provided for in this Stock Pledge Agreement or the remedies with respect to the Pledged Collateral pursuant to this Stock Pledge Agreement, except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally; 10 (g) The pledge, assignment and delivery of the Pledged Collateral pursuant to this Stock Pledge Agreement will create a valid perfected first priority Lien on the Pledged Collateral pledged by such Pledgor and the proceeds thereof, securing the Secured Obligations; and (h) This Stock Pledge Agreement has been duly executed and delivered by such Pledgor and constitutes a legal, valid and binding obligation of such Pledgor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or other similar laws affecting the rights of creditors generally or by the application of general equity principles. The representations and warranties set forth in this Section 6 shall survive the execution and delivery of this Stock Pledge Agreement. 7. Covenants. --------- In addition to the covenants of each Pledgor set forth in the other Assistance Documents to which it is a party, which covenants are incorporated herein by this reference, each Pledgor hereby covenants and agrees: (a) At its own expense, to appear in and defend any action or proceeding which purports to affect title to the Pledged Collateral pledged by such Pledgor or the Lien in favor of the Corporation therein. (b) (i) Not to sell, convey, transfer, assign or otherwise dispose of the Pledged Collateral pledged by such Pledgor or any right, title or interest therein other than pursuant hereto, (ii) not to create, incur or permit to exist any Lien on the Pledged Collateral pledged by such Pledgor, other than the Lien in favor of the Corporation created by this Agreement, and (iii) not to consent to or approve the issuance to any person of any additional shares of any class of capital stock of the Assuming Institution, any securities convertible into or exchangeable for 11 any such shares or any warrants, options or other rights to purchase or otherwise acquire any such shares. (c) Upon the written request of the Corporation, from time to time to execute, acknowledge and deliver, and file and record, all such instruments, including without limitation Uniform Commercial Code financing statements, and take all such other action, as is reasonably necessary to carry out the purposes of this Agreement. (d) To maintain at all times ownership of all of the Pledged Shares owned by such Pledgor as of the date hereof. (e) (i) To execute, acknowledge, deliver, file, notarize and register at its own expense all such further agreements, instruments, certificates, documents and assurances and perform such acts as the Corporation shall deem necessary or appropriate to effectuate the purposes of the Assistance Documents to which such Pledgor is a party, (ii) promptly obtain from time to time and maintain in full force and effect at its own expense all such governmental licenses, authorizations, consents, permits and approvals as may be required to enable the Pledgor to comply with its obligations under the Assistance Documents to which it is a party and all other documents made and delivered, or to be made and delivered, pursuant thereto, and (iii) promptly provide the Corporation with evidence of the foregoing satisfactory in form and substance to the Corporation. 8. Administration of the Pledged Collateral. ---------------------------------------- (a) As long as no Event of Default shall have occurred and be continuing, each Pledgor shall have the right, from time to time, to vote and give consents with respect to the Pledged Collateral pledged by it or any part thereof for all purposes not inconsistent with the provisions of this Agreement, the Interim Capital Assistance Agreement and any other Assistance Documents; provided, however, that in any event no vote shall be cast, and no -------- ------- consent shall be given or action taken, which would have the effect of impairing the position or interest of the Corporation with 12 respect to the Pledged Collateral pledged by such Pledgor which would authorize or effect (i) any action prohibited under the terms of any Assistance Document, (ii) any change in the authorized number of shares, the stated capital or the authorized capital of the Assuming Institution or the issuance of any additional shares of stock of the Assuming Institution, or (iii) the alteration of the voting rights with respect to the stock of the Assuming Institution. (b) Upon the occurrence, and during the continuance, of any Event of Default: (i) the Corporation shall have the right following prior written notice to any Pledgor to vote the Pledged Collateral pledged by such Pledgor or to give shareholder consent in respect of the Pledged Collateral pledged by such Pledgor (including without limitation, the right to vote such Pledged Collateral to elect a new board of directors of the Assuming Institution) and to exercise all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to the Pledged Collateral pledged by such Pledgor as if the Corporation were the absolute owner thereof (and each such Pledgor hereby irrevocably appoints the Corporation its proxy and attorney-in-fact with full power of substitution to do so and agrees, if so requested, to execute or cause to be executed appropriate proxies therefor); and (ii) any or all of the Pledged Collateral held by the Corporation hereunder may, at the option of the Corporation, be registered in the name of the Corporation or its nominee. (c) Notwithstanding any provision contained herein, the Corporation shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible to any Pledgor or any other person for any failure to do so or delay in doing so. 13 9. Corporation's Remedies. ---------------------- Should the Pledgors not cure an Event of Default, the Corporation shall have, in addition to all rights and remedies specified elsewhere in this Agreement and all rights and remedies of a secured party under the Uniform Commercial Code or other applicable statutes or rules, the following rights and remedies: (a) Any item of the Pledged Collateral of any Pledgor may be sold for cash or other value in any number of lots at brokers' board, public auction or private sale without demand, advertisement or notice (excepting only that the Corporation shall give such Pledgor five (5) days' prior written notice of the time and place of any public sale or the time after which a private sale may take place, which notice each Pledgor and the Corporation hereby agree to be reasonable) and such other demands, advertisements, or notices as may be required by applicable law. At any sale or sales of the Pledged Collateral (except a private sale) the Corporation or any Person acting on its behalf or its assigns may bid for and purchase the whole or any part of the Pledged Collateral so sold and upon compliance with the terms of such sale may hold and dispose of such Pledged Collateral without further accountability to the Pledgor, except for the proceeds of such sale or sales. (b) The proceeds of all sales and collections, and any other amounts (including any cash contained in the Pledged Collateral) the application of which is not otherwise provided for herein, shall be applied (i) first, to the payment of the costs, expenses and disbursements incurred in connection with such sale or sales and collections, including reasonable attorneys' fees and any other amounts then due to the Corporation; (ii) second, to the payment of accrued and unpaid interest on the Promissory Note comprising the Secured Obligations; (iii) third, to the payment of the principal amount of the Promissory Note comprising the Secured Obligations; and (iv) fourth, to the payment of any other amount of the Secured Obligations. Any excess of proceeds which exists after 14 such disposition shall, subject to the rights of any junior lienholders, be paid over to the Pledgors. 10. Notice. ------ Any notice, request, demand, consent, approval or other communication to any party hereto 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 at its address set forth below or at such other address as it shall hereafter furnish in writing to the others. All such notices and other communications shall be deemed given on the date received by the addressee. Secured Party Pledgors - ------------- -------- Resolution Trust Corporation See Schedule 1 801 17th Street, N.W. Washington, D.C. 20549 Attention: Vice President Department of Resolutions with a copy to: General Counsel 11. No Waiver; Cumulative Remedies. ------------------------------ No failure to exercise, and no delay in exercising, on the part of the Corporation, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Each Pledgor waives any right to require the Corporation to proceed against any Person or to exhaust any other collateral or security for the Secured Obligations or to pursue any remedy in the Corporation's power. 12. Indemnity, Expenses and Liability. --------------------------------- (a) The Pledgors jointly and severally agree to indemnify the Corporation from and against any and all claims, losses, costs, expenses and liabilities growing out of or resulting 15 from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities resulting from the Corporation's gross negligence or willful misconduct. (b) The Pledgors jointly and severally agree upon demand to pay to the Corporation the amount of any and all losses, costs, liabilities and expenses (including, without limitation, the reasonable fees and disbursements of its counsel and of any experts and agents) which the Corporation may incur in connection with (i) the perfection and protection of the security interest granted or purported to be granted hereby, (ii) the exercise or enforcement of any of the rights or remedies of the Corporation hereunder, including in any out-of-court workout or in any bankruptcy case, and (iii) the preservation of or realization upon the Pledged Collateral, including without limitation losses, costs, liabilities and expenses sustained by the Corporation as a result of any failure by any Pledgor to perform or observe its obligations contained in this Agreement. 13. Assignment. ---------- All rights, powers and remedies of the Corporation under this Agreement shall inure to the benefit of its respective successors and assigns, and all obligations of each Pledgor hereunder shall bind such Pledgor's heirs, personal representatives, successors and assigns. 14. Severability. ------------ Any provision of this Agreement which shall be held invalid or unenforceable shall be ineffective without invalidating the remaining provisions hereof. 15. Governing Law. ------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS UNDER THIS 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 PURCHASE AND ASSUMPTION AGREEMENT. 16 16. Termination. ----------- Upon payment in full of all amounts of principal, interest, expenses and all other liquidated amounts payable with respect to the Secured Obligations, and satisfaction of all other then known Secured Obligations, this Agreement shall terminate (except to the extent explicitly provided for otherwise herein) and the Corporation shall redeliver to each Pledgor any of the Pledged Collateral of such Pledgor in the Corporation's possession and shall execute and deliver to such Pledgor such documents as shall be necessary to evidence termination of the security interests granted to the Corporation hereunder; provided, however, that if at such time there shall exist, in the reasonable - -------- ------- opinion of the Corporation, an unsatisfied Secured Obligation which is contingent or unliquidated as to amount, this Agreement shall not terminate, and the Corporation shall not be obligated to redeliver to any Pledgor any of the Pledged Collateral of such Pledgor in the Corporation's possession and shall not be obligated to execute and deliver any release documents, until such contingent or unliquidated Secured Obligation is liquidated by agreement between the Corporation and each such Pledgor and is paid in full, or is adequately secured by cash collateral. 17. Entire Agreement; Amendments. ---------------------------- This Agreement and the other Assistance Documents constitute the entire agreement between the parties with respect to the matters set forth herein and therein. This Agreement may not be amended or supplemented except by a writing signed by the Corporation and each Pledgor. 18. Counterparts. ------------ This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 17 19. Headings. -------- The headings which are used in this Agreement are for the convenience of the parties only and shall not affect the meaning of any provision of this Agreement. IN WITNESS WHEREOF, the parties hereto have caused this Stock Pledge Agreement to be duly executed as of the date first above written. RESOLUTION TRUST CORPORATION By: /s/ [SIGNATURE ILLEGIBLE] ------------------------------------- Its: Director Office Major Resolutions ------------------------------------- PLEDGORS: ------------------------------------ /s/ LAWRENCE J. GRILL ------------------------------------ PAN AMERICAN FINANCIAL, INC. ------------------------------------ ------------------------------------ ------------------------------------ 18 EX-10.19 18 PROMISSORY NOTE - APRIL 29, 1994 EXHIBIT 10.19 PROMISSORY NOTE --------------- $6,930,000.00 April 29, 1994 FOR VALUE RECEIVED, the undersigned, Pan American Financial, Inc. (the "Shareholders"), hereby unconditionally promise to pay to the order of the RESOLUTION TRUST CORPORATION in its corporate capacity (the "Corporation") on April 28, 1999 the principal sum of six million nine hundred thirty thousand Dollars ($6,930,000.00). The Shareholders further promise to pay interest on the aggregate principal amount balance outstanding hereunder (whether at stated maturity, by acceleration or otherwise) at the end of each calendar quarter and interest rate set forth in the Interim Capital Assistance Agreement of even date herewith (the "Interim Capital Assistance Agreement") between the Shareholders and the Corporation. Interest shall be payable in arrears upon any prepayment of principal hereof (to the extent accrued on the amount prepaid) and at maturity. Both principal and interest are payable in lawful money of the United States of America in immediately available funds to the Resolution Trust Corporation, at its main office at 801 17th Street, N.W., Washington, D.C. 20434, or such other place as the Corporation may designate in writing. This promissory note is referred to and is made pursuant to the terms and conditions set forth in the Interim Capital Assistance Agreement as supplemented, modified or amended. The Interim Capital Assistance Agreement provides, among other things, for required and optional prepayments, interest rates and acceleration (which in certain cases shall be automatic) of the maturity hereof upon the occurrence of certain stated events, in each case without presentment, demand, protest or further notice of any kind, all of which are hereby expressly waived. Capitalized terms used herein but not otherwise defined herein shall have the respective meanings assigned to them in the Interim Capital Assistance Agreement. This promissory note is secured by a Stock Pledge Agreement in favor of the Corporation covering certain collateral more specifically described in the Interim Capital Assistance Agreement and is provided for in the Stock Pledge Agreement, and is entitled to the benefits thereof. 1 The Shareholders agree to pay all costs, including reasonable attorneys' fees, incurred by the Corporation in enforcing payment hereof. THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE FEDERAL LAW OF THE UNITED STATES OF AMERICA AND, TO THE EXTENT NOT INCONSISTENT THEREWITH, THE LAWS OF THE STATE OF CALIFORNIA. Attest: SHAREHOLDERS: Pan American Financial, Inc. By: /s/ LAWRENCE J. GRILL By: /s/ WILLIAM BRON --------------------------- --------------------------- Printed Name: Lawrence J. Grill Printed Name: William (Guillermo) Bron Title: President and Corporate Title: Chairman of the Board Secretary 2 EX-10.20 19 STOCK PLEDGE AGREEMENT - APRIL 29, 1994 EXHIBIT 10.20 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT dated as of April 29, 1994 (this "Agreement") is made between each of the persons named in Schedule 1 hereto (such persons are hereinafter referred to individually as a "Pledgor" and collectively as "Pledgors") and the Resolution Trust Corporation, organized and existing under the laws of the United States, in its corporate capacity (in such capacity, the "Secured Party" or the "Corporation"). RECITALS -------- WHEREAS, pursuant to Section 5(d) of the Home Owners' Loan Act, as amended (the "HOLA"), 12 U.S.C. Section 1464(d), the Office of Thrift Supervision ("OTS") has closed Pan American Federal Savings Bank, (the "Failed Association") and has appointed the Resolution Trust Corporation as receiver of the Failed Association; WHEREAS, the Receiver has determined pursuant to Section 1l(d)(2)(G) of the Federal Deposit Insurance Act, as amended (the "FDIA"), 12 U.S.C. Section 1821(d)(2)(G), that it is appropriate and necessary to transfer certain assets and liabilities of the Failed Association to the Assuming Institution; WHEREAS, the Parties intend that such transfer be made on the terms and conditions set forth in the "RTC Standard Purchase and Assumption Terms and Conditions (Theta version dated July 26, 1993) (the "Standard Terms"), incorporated by reference in (and expressly made a part of) the Whole Purchase and Assumption Agreement dated as of April 29, 1994 (the "Purchase and Assumption Agreement") and as supplemented, modified or amended by the Purchase and Assumption Agreement; WHEREAS, on April 1, 1992 the Corporation adopted an amended 1 policy statement entitled "RTC Guidelines Regarding Minority-Preference Resolutions" (the "Guidelines") which authorizes the Corporation to provide interim capital assistance to Minority-owned Depository Institutions in order to preserve the ownership characteristics and increase the number of such institutions whenever practical, and the Minority Capital Assistance Program has been established statutorily in the Federal Home Loan Bank Act, as amended (the "FHLBA"), 12 U.S.C. 1441a(u); WHEREAS, the Failed Association was formerly a Minority-Owned Depository Institution; WHEREAS, application has been made to the Corporation to provide interim capital assistance to the Pledgors pursuant to the Guidelines in connection with the resolution of the Failed Association and, in that connection, the Pledgors have executed and delivered to the Corporation an Application for Interim Capital Assistance dated Septeluber 7, 1993 (the "Application"); WHEREAS, the Pledgors have represented that they are "Minorities" and a "Minority-Owned Depository Institution" within the intent and definition of those terms under Sections 21A(s) and 21A(u) of the Federal Home Loan Bank Act, 12 U.S.C. 1441a(s) and (u), of the FHLBA, as amended, 12 U.S.C. Sections 1441a(s) and (u), and the Guidelines; WHEREAS, the Corporation has agreed to provide interim capital assistance to the Pledgors for the sole purpose of facilitating the resolution of the Failed Association on the terms and conditions set forth in this Agreement; and WHEREAS, as a condition to receipt of Interim Capital Assistance, the Pledgors have agreed to pledge to the Corporation all of issued and outstanding shares of capital stock of the Assuming Institution and any Additional Collateral as may be hereinafter acquired. NOW, THEREFORE, in consideration of the premises and to induce the Corporation to provide such interim capital assistance, it is hereby agreed as follows: 2 1. Defined Terms. ------------- Except as otherwise provided herein, capitalized terms used in this Agreement shall have the respective meanings assigned to them in the Interim Capital Assistance Agreement (such meanings to be equally applicable to both the singular and plural forms of the terms defined). (a) "Additional Collateral" means, for each Pledgor, all additional shares of --------------------- capital stock of the Assuming Institution hereinafter acquired in any manner by such Pledgor, all options or other rights to acquire the same, and all dividends and distributions (whether of cash, securities or other property) received or receivable with respect to the Pledged Shares or Qualifying Shares of such Pledgor or such additional shares of such Pledgor or in exchange therefor, and any and all proceeds of the Pledged Shares of such Pledgor and of the foregoing. (b) "Assistance Documents" shall mean the Interim Capital Assistance --------------------- Agreement, the Promissory Note, this Agreement and any other document or agreement now or hereafter delivered in connection herewith or therewith. (c) "Assuming Institution" shall mean Pan American Bank, FSB, an insured -------------------- depository institution within the meaning of the FDIA, organized and existing as a federal savings bank with its principal place of business in San Mateo, California. (d) "Event of Default" shall have the meaning set forth in Section 5 of the ---------------- Interim Capital Assistance Agreement. (e) "Failed Association" shall mean Pan American Federal Savings Bank, ------------------ formerly a federal savings association under the HOLA, as amended, 12 U.S.C. Section 1461, et seq., and having its principal place of business in San Mateo, ------- California, which was closed pursuant to Order No. ___________ of the OTS. (f) "Minority" shall have the meaning as statutorily set forth in Section 21A(s)(2)(C) of the FHLBA, 12 U.S.C. 1441a(s) (2) (C). 3 (g) "Pledged Shares" shall mean all of the issued and outstanding shares of -------------- capital stock of the Assuming Institution, as more specifically described in Schedule 2 hereto. (h) "Receiver" shall have the meaning as set forth in the Standard Terms and -------- the Purchase and Assumption Agreement. (i) "Qualifying Shares" means, for each Pledgor who is also a director of the ----------------- Assuming Institution, the number of shares of capital stock of the Assuming Institution owned by such Pledgor which are the minimum number of shares required to be owned by such Pledgor pursuant to state or federal banking laws or regulations, if applicable, and which are more fully described in Schedule 3 hereto. (j) "Secured Obligations" shall have the meaning set forth in Section 3 ------------------- hereof. 2. Pledge of Pledged Collateral. ---------------------------- (a) For valuable consideration, the sufficiency and receipt of which are hereby acknowledged, as security for the payment and performance of the Secured Obligations, each Pledgor hereby grants to the Corporation a security interest in all of the following (collectively, the "Pledged Collateral"): (i) the Pledged Shares of such Pledgor and the stock certificates representing such Pledged Shares; and (ii) the Additional Collateral of such Pledgor and the stock certificates representing such Additional Collateral. (b) Each Pledgor hereby agrees to deliver all stock certificates representing the Pledged Shares of such Pledgor to the Corporation, together with such Pledgor's endorsement or appropriate stock powers duly executed in blank, in each case with signatures guaranteed. (c) Subject to the provisions of Section 8(a) hereof, if any Pledgor shall become entitled to receive or shall receive any items of Additional Collateral, such Pledgor shall accept any such items, and shall hold them in trust for the Corporation, and shall promptly (and in any event within three (3) Business Days) deliver 4 all items of Additional Collateral forthwith to the Corporation in the exact form received, together with such Pledgor's endorsement or with appropriate stock powers duly executed in blank, in each case with signatures guaranteed, to be held by the Corporation subject to the terms hereof as part of the Pledged Collateral. Each such Pledgor shall also, upon obtaining any additional shares of capital stock of the Assuming Institution which are not Pledged Shares, promptly (and in any event within three (3) Business Days) deliver to the Corporation a Pledge Amendment, duly executed by such Pledgor, in substantially the form of Schedule 4 hereto and incorporated herein by reference (a "Pledge Amendment"), with respect to such shares. Each Pledgor hereby authorizes the RTC to attach any such Pledge Amendment to this Agreement and agrees that all shares listed on any Pledge Amendment delivered to the RTC shall for all purposes hereunder be considered Pledged Collateral. 3. Security for Obligations. This Agreement secures, and the Pledged ------------------------ Collateral is security for, the payment and performance of (a) all indebtedness and other obligations of the Shareholders now or hereafter existing under the Interim Capital Assistance Agreement, the Note, all other Assistance Documents to which any Shareholder is a party, and all other documents now or hereafter delivered in connection therewith, whether due or not due absolute or contingent; liquidated or unliquidated, and (b) all indebtedness and other obligations now or hereafter existing of the Pledgors under this Agreement and all other documents now or hereafter delivered in connection herewith (collectively, the "Secured Obligations"). 4. Pledgor's Waivers. ----------------- (a) Each Pledgor waives and agrees not to assert (i) any right to require the Corporation to proceed against any other Pledgor or guarantor or any other Person, to proceed against or exhaust any of the Pledged Collateral or any other security held for the Secured Obligations or to give notice of the terms, time and place of any public or private sale of the Pledged Collateral 5 or any other security held for the Secu(Pounds)ed Obligations or comply with any other provisions of Section 9-504 of the Uniform Commercial Code (or any equivalent provision of any other applicable law); provided however, that -------- ------- the Corporation shall endeavor to give notice to each Pledgor of the terms, time and place of any sale of any Collateral Pledged or any other security held for the Secured Obligations, (ii) the defense of the statute of limitations in any action hereunder or for the collection or performance of the Secured Obligations, (iii) any defense arising by reason of any lack of authority or any other defense of such Pledgor or any other Person, and (iv) any defense based upon an election of remedies (including, if available, an election to proceed by nonjudicial foreclosure) which destroys or impairs the subrogation rights of such Pledgor or the right of such Pledgor to proceed against any other Pledgor or other obligor of the Secured Obligations for reimbursement. Each Pledgor assumes responsibility for keeping informed of the financial condition of the Assuming Institution and agrees that the Corporation has no obligation to keep such Pledgor so informed. (b) Each Pledgor waives any and all notice of the acceptance of this Stock Pledge Agreement, and any and all notice of the creation, renewal, modification, extension or accrual of the Secured Obligations, or the reliance by the Corporation upon this Stock Pledge Agreement, or the exercise of any right, power or privilege hereunder. The Secured Obligations shall conclusively be deemed to have been created, contracted, incurred and permitted to exist in reliance upon this Stock Pledge Agreement. Each Pledgor waives presentment, protest, demand for payment, notice of default, dishonor or nonpayment and all other notices to or upon such Pledgor or any other Person with respect to the Secured Obligations. (c) The obligations of each Pledgor hereunder are independent of the obligations of any other Pledgor and upon the occurrence and during the continuance of any Event of Default, a 6 separate action or actions may be brought against any such Pledgor, whether or not any other Pledgor is joined therein or a separate action or actions are brought against any other Pledgor. (d) Until satisfaction of the Secured Obligations in full, no Pledgor shall have any right of subrogation with respect to the Secured Obligations. (e) The obligations of each Pledgor hereunder shall be irrevocable, absolute and unconditional, irrespective of the genuineness, legality, validity, regularity or enforceability of any Assistance Documents or of any other circumstance which might otherwise constitute a legal or equitable discharge of a surety or guarantor, and shall not be subject to any counterclaim, set-off, deduction or defense which any such Pledgor may have against the Receiver or the Corporation. (f) Each Pledgor hereby consents and agrees that, without notice to or further assent from such Pledgor: (i) the principal amount of the Secured Obligations may be increased or decreased and additional indebtedness or obligations of any Shareholder under the Assistance Documents may be incurred, by an amendment, modification or renewal of any Assistance Document or otherwise; (ii) the time manner, place or terms of any payment under any Assistance Document may be extended or changed, including by an increase or decrease in the interest rate on any Secured Obligation or any other amount payable under any Assistance Document, by an amendment, modification or renewal of such Assistance Document or otherwise; (iii) any action may be taken under or with respect to any Assistance Document in the exercise of any remedy, power or privilege therein contained (including, without limitation, the acceleration of the maturity of the Note) or otherwise, or such remedy, power or privilege may be waived, omitted or not enforced; (iv) the time for any Shareholder's performance of or compliance with any term, covenant or agreement on its part to be 7 performed or observed under any Assistance Document may be extended, or such performance or compliance waived, or failure in or departure from such performance or compliance consented to, all in such manner and upon such terms as the Corporation may deem proper; (v) the Corporation may discharge or release, in whole or in part, any other Pledgor or other guarantor or any other Person liable for the payment and performance of all or any part of the Secured Obligations, and may permit or consent to any such action or any result of such action, and shall not be obligated to demand or enforce payment upon any of the Pledged Collateral, nor shall the Corporation be liable to such Pledgor for any failure to collect or enforce payment of the Secured Obligations or to realize on the other Pledged Collateral therefor; (vi) in addition to the Pledged Collateral, the Corporation may take and hold other security (legal or equitable) of any kind, at any time, as collateral for the Secured Obligations, and may, from time to time, in whole or in part, exchange, sell, surrender, release, subordinate, modify, waive or extend such security and may permit or consent to any such action or the result of any such action, and may apply such security and direct the order of manner of sale thereof; and (vii) the RTC may exercise or refrain from exercising any right, remedy or power (including, without limitation, any power of sale) granted by any Assistance Document or other security document or agreement, in law or in equity or otherwise, with respect to the Secured Obligations or any of the Pledged Collateral or other security or lien (legal or equitable) held, given or intended to be given therefor; all as the Corporation may deem advisable, and all without impairing, abridging, releasing or affecting this Stock Pledge Agreement. 5. Continuing Obligation. --------------------- This Stock Pledge Agreement shall continue in effect and be binding upon each Pledgor until satisfaction of the Secured 8 Obligations in full. This Stock Pledge Agreement shall be automatically reinstated if, for any reason, any payment by or on behalf of the Pledgors shall be rescinded or must otherwise be restored, whether as a result of proceedings in bankruptcy or reorganization or otherwise. 6. Representations and Warranties ------------------------------ In addition to the representations and warranties of each Pledgor set forth in the other Assistance Documents, which are incorporated herein by this reference, each Pledgor hereby represents and warrants to the Corporation that: (a) The Pledged Shares and the Qualifying Shares of such Pledgor constitute the only issued and outstanding shares of capital stock owned or controlled by such Pledgor, and all of such Pledged Shares and Qualifying Shares are validly issued, fully paid and nonassessable; (b) No securities convertible into or exchangeable for any shares of capital stock of the Assuming Institution, or any options, warrants or other commitments entitling any Person to purchase or otherwise acquire any shares of capital stock of the Assuming Institution, are issued and outstanding; (c) Such Pledgor is the record and beneficial owner of the Pledged Shares of such Pledgor, and will be the record and beneficial owner of any Additional Collateral of such Pledgor upon acquisition thereof by such Pledgor, free and clear of all Liens, except those created in favor of the Corporation hereunder; (d) Such Pledgor has the right and requisite authority to pledge, assign, transfer, deliver; deposit and set over the Pledged Collateral pledged by such Pledgor to the Corporation as provided herein; (e) None of the Pledged Shares of such Pledgor has been transferred in violation of the securities registration, securities disclosure or similar laws of any jurisdiction to which such-transfer may be subject; (f) No consent, approval, authorization or other 9 order of any Person and no consent, authorization, approval, or other action by, and no notice to or filing with, any governmental authority or regulatory body is required to be made or obtained by such Pledgor either (i) for the pledge by such Pledgor of the Pledge Collateral pursuant to this Stock Pledge Agreement or for the execution, delivery or performance of this Stock Pledge Agreement by such Pledgor, or (ii) for the exercise by the Corporation of the voting or other rights provided for in this Stock Pledge Agreement or the remedies in respect of the Pledged Collateral pursuant to this Stock Pledge Agreement or the remedies with respect to the Pledged Collateral pursuant to this Stock Pledge Agreement, except as may be required in connection with such disposition by laws affecting the offering and sale of securities generally; (g) The pledge, assignment and delivery of the Pledged Collateral pursuant to this Stock Pledge Agreement will create a valid perfected first priority Lien on the Pledged Collateral pledged by such Pledgor and the proceeds thereof, securing the Secured Obligations; and (h) This Stock Pledge Agreement has been duly executed and delivered by such Pledgor and constitutes a legal, valid and binding obligation of such Pledgor enforceable in accordance with its terms, except as enforceability may be limited by bankruptcy, insolvency, or other similar laws affecting the rights of creditors generally or by the application of general equity principles. The representations and warranties set forth in this Section 6 shall survive the execution and delivery of this Stock Pledge Agreement. 7. Covenants. --------- In addition to the covenants of each Pledgor set forth in the other Assistance Documents to which it is a party, which covenants are incorporated herein by this reference, each Pledgor hereby agrees: 10 (a) At its own expense, to appear in and defend any action or proceeding which purports to affect title to the Pledged Collateral pledged by such Pledgor or the Lien in favor of the Corporation therein. (b) (i) Not to sell, convey, transfer, assign or otherwise dispose of the Pledge Collateral pledged by such Pledgor or any right, title or interest therein other than pursuant hereto, (ii) not to create, incur or permit to exist any Lien on the Pledged Collateral pledged by such Pledgor, other than the Lien in favor of the Corporation created by this Agreement, and (iii) not to consent to or approve the issuance to any Person of any additional shares of any class of capital stock of the Assuming Institution, any securities convertible into or exchangeable for any such shares or any warrants, options or other rights to purchase or otherwise acquire any such shares. (c) Upon the written request of the Corporation, from time to time to execute, acknowledge and deliver, and file and record, all such instruments, including without limitation Uniform Commercial Code financing statements, and take all such other action, as is reasonably necessary to carry out the purposes of this Agreement. (d) To maintain at all times ownership of all of the shares of capital stock of the Assuming Institution owned by such Pledgor as of the date hereof. (e) (i) To execute, acknowledge, deliver, file, notarize and register at its own expense all such further agreements, instruments, certificates, documents and assurances and perform such acts as the Corporation shall deem necessary or appropriate to effectuate the purposes of the Assistance Documents to which such Pledgor is a party, (ii) promptly obtain from time to time and maintain in full force and effect at its own expense all such governmental licenses, authorizations, consents, permits and approvals as may be required to enable the Pledgor to comply with its obligations under the Assistance Documents to which it is a 11 party and all other documents made and delivered, or to be made and delivered, pursuant thereto, and (iii) promptly provide the Corporation with evidence of the foregoing satisfactory in form and substance to the Corporation. 8. Administration of the Pledged Collateral. ---------------------------------------- (a) As long as no Event of Default shall have occurred and be continuing, each Pledgor shall have the right, from time to time, to vote and give consents with respect to the Pledged Collateral pledged by it or any part thereof for all purposes not inconsistent with the provisions of this Agreement, the Interim Capital Assistance Agreement and any other Assistance Documents; provided, --------- however, that in any event no vote shall be cast, and no consent shall be given - ------- or action taken, which would have the effect of impairing the position or interest of the Corporation with respect to the Pledged Collateral pledged by such Pledgor which would authorize or effect (i) any action prohibited under the terms of any Assistance Document, (ii) any change in the authorized number of shares, the stated capital or the authorized capital of the Assuming Institution or the issuance of any additional shares of stock of the Assuming Institution, or (iii) the alteration of the voting rights with respect to the stock of the Assuming Institution. (b) Upon the occurrence and during the continuance of any Event of Default: (i) the Corporation shall have the right following prior written notice to any Pledgor to vote the Pledged Collateral pledged by such Pledgor or to give shareholder consent in respect of the Pledged Collateral pledged by such Pledgor (including without limitation, the right to vote such Pledged Collateral to elect a new board of directors of the Assuming Institution) and to exercise all rights of conversion, exchange, subscription or any other rights, privileges or options pertaining to the Pledged Collateral pledged by such Pledgor as if the Corporation were the absolute owner thereof (and each such Pledgor 12 hereby irrevocably appoints the Corporation its proxy and attorney-in-fact with full power of substitution to do so and agrees, if so requested, to execute or cause to be executed appropriate proxies therefor); and (ii) any or all of the Pledged Collateral held by the Corporation hereunder may, at the option of the Corporation, be registered in the name of the Corporation or its nominee. c) Notwithstanding any provision contained herein, the Corporation shall have no duty to exercise any of the aforesaid rights, privileges or options and shall not be responsible to any Pledgor or any other Person for any failure to do so or delay in doing so. 9. Corporation's Remedies. ---------------------- Should the Pledgors not cure any Event of Default, the Corporation shall have, in addition to all rights and remedies specified elsewhere in this Agreement and all rights and remedies of a secured party under the Uniform Commercial Code or other applicable statutes or rules, the following rights and remedies: (a) Any item of the Pledged Collateral of any Pledgor may be sold for cash or other value in any number of lots at brokers' board, public auction or private sale without demand, advertisement or notice (excepting only that the Corporation shall give such Pledgor five (5) days' prior written notice of the time and place of any public sale or the time after which a private sale may take place, which notice each Pledgor and the Corporation hereby agree to be reasonable) and such other demands, advertisements, or notices as may be required by applicable law. At any sale or sales of the Pledged Collateral (except a private sale) the Corporation or any Person acting on its behalf or its assigns may bid for and purchase the whole or any part of the Pledged Collateral so sold and upon compliance with the terms of 13 such sale may hold and dispose of such Pledged Collateral without further accountability to the Pledgor, except for the proceeds of such sale or sales. (b) The proceeds of all sales and collections, and any other amounts (including any cash contained in the Pledged Collateral) the application of which is not otherwise provided for herein, shall be applied (i) first, to the payment of the costs, expenses and disbursements incurred in connection with such sale or sales and collections, including reasonable attorneys' fees and any other amounts then due to the Corporation; (ii) second, to the payment of accrued and unpaid interest on the Note comprising the Secured Obligations; (iii) third, to the payment of the principal amount of the Note comprising the Secured Obligations; and (iv) fourth, to the payment of any other amount of the Secured Obligations. Any excess of proceeds which exists after such disposition shall, subject to the rights of any junior lienholders, be paid over to the Pledgors. 10. Notice. ------ Any notice, request, demand, consent, approval or other communication to any party hereto 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 at its address set forth below or at such other address as it shall hereafter furnish in writing to the others. All such notices and other communications shall be deemed given on the date received by the addressee. Secured Party Pledgors - ------------- -------- Resolution Trust Corporation See Schedule 1 801 17th Street, N.W. Washington, D.C. 20549 Attention: J. Paul Ramey Vice President Department or Resolutions copies to: Assistant General Counsel Resolution Trust Corporation 14 4000 MacArthur Boulevard Newport Beach, CA 92660 and Vice President Resolution Trust Corporation 4000 MacArthur Boulevard Newport Beach, CA 92660 11. No Waiver; Cumulative Remedies. ------------------------------ No failure to exercise, and no delay in exercising, on the part of the Corporation, any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or privilege hereunder preclude any further exercise thereof or the exercise of any other right, power or privilege. The remedies herein provided are cumulative and not exclusive of any remedies provided by law. Each Pledgor waives any right to require the Corporation to proceed against any Person or to exhaust any other collateral or security for the Secured Obligations or to pursue any remedy in the Corporation's power. 12. Indemnity, Expenses and Liability. --------------------------------- (a) The Pledgors jointly and severally agree to indemnify the Corporation from and against any and all claims, losses and liabilities growing out Of or resulting from this Agreement (including, without limitation, enforcement of this Agreement), except claims, losses or liabilities resulting from the Corporations's gross negligence or willful misconduct. (b) The Pledgors jointly and severally agree upon demand to pay to the Corporation the amount of any and all losses, costs and expenses (including, without limitation, the reasonable fees and disbursements of its counsel and of any experts and agents) which the Corporation may incur in connection with (i) the perfection and protection of the security interest granted or purported to be granted hereby, (ii) the exercise or enforcement of any of the rights or remedies of the Corporation hereunder, including in any out-of-court workout or in any bankruptcy case, 15 and (iii) the preservation of or realization upon the Pledged Collateral, including without limitation losses, costs and expenses sustained by the Corporation as a result of any failure by any Pledgor to perform or observe its obligations contained in this Agreement. 13. Assignment. ---------- All rights, powers and remedies of the Corporation under this Agreement shall inure to the benefit of its respective successors and assigns, and all obligations of each Pledgor hereunder shall bind such Pledgor's successors and assigns. 14. Severability. ------------ Any provision of this Agreement which shall be held invalid or unenforceable shall be ineffective without invalidating the remaining provisions hereof. 15. Governing Law. ------------- THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS UNDER THIS 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 OF CALIFORNIA. 16. Termination ----------- Upon payment in full of all amounts of principal, interest, expenses and all other liquidated amounts payable with respect to the Secured Obligations, and satisfaction of all other then known Secured Obligations, this Agreement shall terminate (except to the extent explicitly provided for otherwise herein) and the Corporation shall redeliver to each Pledgor any of the Pledged Collateral of such Pledgor in the Corporation's possession and shall execute and deliver to such Pledgor such documents as shall be necessary to evidence termination of the security interests granted to the Corporation hereunder; provided, however, that if at such time there shall exist, in the reasonable - --------- ------- opinion of the Corporation, an unsatisfied Secured Obligation which is contingent or unliquidated as to amount, this Agreement shall not terminate, 16 and the Corporation shall not be obligated to redeliver to any Pledgor any of the Pledged Collateral of such Pledgor in the Corporation's possession and shall not be obligated to execute and deliver any release documents, until such contingent or unliquidated Secured Obligation is liquidated by agreement between the Corporation and each such Pledgor and is paid in full, or is adequately secured by cash collateral. 17. Entire Agreement; Amendments. ---------------------------- This Agreement and the other Assistance Documents constitute the entire agreement between the parties with respect to the matters set forth herein and therein. This Agreement may not be amended or supplemented except by a writing signed by the Corporation and each Pledgor. 18. Counterparts. ------------ This Agreement may be executed in any number of counterparts, and by different parties hereto in separate counterparts, each of which when so executed shall be deemed an original and all of which taken together shall constitute but one and the same agreement. 19. Headings. -------- The headings which are used in this Agreement are for the convenience of the parties only and shall not affect the meaning of any provision of this Agreement. 17 IN WITNESS WHEREOF, the parties hereto have caused this Stock Pledge Agreement to be duly executed as of the date first above written. RESOLUTION TRUST CORPORATION By: /s/ LEWIS W. FRALIN --------------------------------- Printed Name: Lewis W. Fralin Title: Director of Resolutions PLEDGOR: Pan American Financial, Inc. By: /s/ WILLIAM BRON ---------------------------------- Printed Name: William (Guillermo) Bron Title: Chairman of the Board 18 Schedule l to Stock Pledge Agreement dated as of April 29, 1994 Pan American Financial, Inc. 1999 Avenue of the Stars, #2800 Los Angeles, California 90067 19 Schedule 2 to Stock Pledge Agreement dated as of April 29, 1994 PLEDGED SHARES Common stock, $8.00 per share, of Pan American Bank, F.S.B. being represented by stock certificates as follows:
Name of Certificate Certificate No. of Pledgor No. Date Shares - ------- ----------- ----------- ------ Pan American l April 29, 1994 1,135,000 Financial, Inc.
20 EX-10.34 20 INTERIM OPERATING AGREEMENT - JULY 1, 1997 EXHIBIT 10.34 INTERIM OPERATING AGREEMENT This Agreement is made effective as of July 1, 1997, by and between UNITED PAN AM MORTGAGE CORP., a California corporation ("Mortgage Company") and PAN AMERICAN BANK, FSB, a federal savings bank ("Bank") with reference to the following: R E C I T A L S A. Effective July 1, 1997, Bank has distributed, by way of dividend to its parent, all of the issued and outstanding shares of capital stock of the Mortgage Company, as contemplated by that certain letter of January 28, 1997 submitted to the Office of Thrift Supervision ("OTS"), in connection with the Bank's letter application, dated January 27, 1997, to establish the Mortgage Company as an operating subsidiary on an interim basis (the "OTS Application"). The organization of the Mortgage Company and the transfer of its shares by dividend were the subject of no objection or approval letters issued by the OTS on February 20, 1997 and April 2, 1997. The Mortgage Company had been incorporated by the Bank on January 10, 1997, to acquire certain lending business currently conducted by the Bank at the offices listed on Schedule "A" ("Mortgage Company Offices") and to conduct such operations on an interim basis pending the transfer of the Mortgage Company to its parent. To date it has not commenced activities. B. The foregoing transactions were undertaken as part of the transfer from the Bank of its entire existing subprime single-family mortgage loan origination and mortgage banking business (the "Subprime Business") to the Mortgage Company. In addition to the Mortgage Company assets described above, following the expiration of the Term of this Agreement (as defined below), such transfer will include the assumption by the Mortgage Company of all obligations of the Bank under office leases for the Mortgage Company Offices and the assignment of such leases to the Mortgage Company, the transfer of all employees conducting the Subprime Business and the assumption of certain maintenance and other service contracts in so far as such service contracts relate to the Subprime Business. C. Following completion of the transfer of the entire Subprime Business, it is anticipated that the Bank will continue to underwrite loans originated by the Mortgage Company for a fee and to purchase loans from the Mortgage Company in the manner generally described in the OTS Application, on such terms and procedures as are provided therein or as such terms and procedures may be modified from time-to-time. D. In order to complete the transfer of the Subprime Business by the Bank to the Mortgage Company, the Mortgage Company and certain of its employees and agents involved in the origination, production and/or servicing of mortgage loans are required to be licensed or to obtain or confirm exemptions from licensing under various laws in effect in the states in which the Mortgage Company maintains Mortgage Company Offices or otherwise originates or acquires mortgage loans ("State Licensing Requirements"). The Bank, as a federally- chartered savings bank, and its employees, are generally exempt from State Licensing Requirements and can originate, produce and service mortgage loans without the necessity of obtaining licenses or permits in the states in which Subprime Business is currently conducted. E. The Mortgage Company and the Bank wish to provide for the continued origination and production of mortgage loans in connection with the Subprime Business by the Bank and its employees and agents on an interim basis, pending receipt by the Mortgage Company of all licenses, permits, authorizations and exemptions required to satisfy State Licensing Requirements, in order to assure the effective transition of the Subprime Business from the Bank to the Mortgage Company. NOW, THEREFORE, the Mortgage Company and the Bank agree as follows: 1. TERM. This Agreement shall remain in effect from July 1, 1997 until ---- the earlier of December 31, 1997 and the end of the month in which the Mortgage Company satisfies all State Licensing Requirements (the "Term"). 2. PRODUCTION EMPLOYEES. During the Term the Bank shall retain all loan -------------------- origination and production employees and agents engaged in the Subprime Business ("Production Employees") under its direct employ. Production Employees shall be transferred to the Mortgage Company upon the expiration of the Term. During the Term, the Bank shall remain responsible for the payment of all wages and other benefits due such employees. 3. ELIGIBLE LOANS. During the Term, the Bank shall continue to originate -------------- and fund through the Production Employees subprime mortgage loans meeting its underwriting guidelines and other requirements ("Eligible Loans"), which loan programs and underwriting guidelines shall be specified jointly by the Mortgage Company and the Bank. Such requirements shall include, among other things, requirements relating to owner occupancy; loan-to-value ratios; lien priority; title, hazard, flood and mortgage insurance; appraisal; borrower financial and credit history; loan documentation, and compliance with state and federal laws and regulations. 4. MORTGAGE COMPANY OFFICES. The parties recognize that certain State ------------------------ Licensing Requirements apply to the Mortgage Company Offices. To that end, during the Term, the Bank shall continue to lease and remain obligated to landlords under the office leases relating to the Mortgage Company Offices, and shall pay all rent, utilities, insurance and other costs related to the operation and maintenance of such offices, as well as to the loan production and origination functions conducted at the Mortgage Company Offices, including all personnel costs, telephones, and other Operating Expenses ("Office Expenses"). Such Office Expenses shall be paid during the Term by the Bank, and following expiration of the Term by the Mortgage Company. To the extent the Bank retains any liability to landlords for periods following the expiration of the Term respecting the leases of the Mortgage Company Offices, the Mortgage Company shall indemnify and hold the Bank -2- harmless from any such liabilities. The Mortgage Company shall not charge the Bank for use of the Mortgage Company Office assets, which have been sold to the Mortgage Company and the Bank may after July 1 acquire the assets necessary to originate and fund subprime mortgage loans. Such assets acquired by the Bank after July 1 shall be sold to the Mortgage Company at net book value upon satisfaction of State Licensing Requirements but not later than December 31, 1997. 5. ADMINISTRATIVE SERVICES. During the Term, Mortgage Company shall ----------------------- administer and supervise all Subprime Business conducted at the Mortgage Company Offices to the extent consistent with applicable law and regulations. Such services shall be provided without separate charge to the Bank. 6. SECONDARY MARKETING. During the Term, the Mortgage Company shall be ------------------- responsible for all activities and related overhead and other expenses related to the marketing and sale of Eligible Loans originated and funded by the Bank during the Term, including the securitization or other sale of loans, solicitation of bids for loans, advising the Bank regarding sales pricing and related matters ("Secondary Marketing Services"). This Agreement shall constitute the written authorization of the Bank to the Mortgage Company to act as the Bank's agent for such purposes, subject to applicable OTS regulations. For such Secondary Marketing Services during the Term, the Mortgage Company shall be entitled to receive a Marketing Fee as described in Section 7 below. 7. COMPENSATION OF THE PARTIES. As contemplated by the OTS Application, --------------------------- upon satisfaction of all State Licensing Requirements and the complete transition of the origination and production of Eligible Loans from the Bank to the Mortgage Company, the Bank will purchase Eligible Loans which the Bank has underwritten prior to their funding by the Mortgage Company, subject to an option on the part of the Mortgage Company to repurchase such loans. The loans will ultimately be resold by the Mortgage Company into the secondary market. In that connection, the Bank will receive interest income on the Eligible Loans during the period it retains ownership of the loans, an underwriting fee of $100 per loan for its underwriting each Eligible Loan, and a transaction fee equal to 0.50% of each Eligible Loan actually repurchased from the Bank by the Mortgage Company ("Transaction Fee") upon the ultimate sale of such loans in the secondary market. The parties hereto desire to preserve the foregoing allocation of the relative economic benefits of the origination, production and sale of Eligible Loans during the Term. The parties have reviewed the historical operating expenses involved in connection with the origination and production of Eligible Loans and the operation of the Mortgage Company Offices and have concluded that such expenses, including all costs of Production Employees and all other Office Expenses, do not exceed $____________ for each Eligible Loan originated and sold. In order to cover such expenses, the parties have agreed that the Bank shall be entitled to receive a payment of $___________ for each Eligible Loan originated and sold during the Term (the "Production Operations Payment"). Accordingly, during the Term, and in addition to interest received while such loans were owned by the Bank, from the net sales proceeds of each Eligible Loan sold by the Mortgage Company on behalf of the Bank, the Bank shall be entitled to retain: (a) the principal amount and all accrued interest on the loan, (b) the Transaction Fee, and (c) the Production Operations Payment. The Mortgage Company shall be entitled to receive from the Bank a Marketing Fee equal to the net proceeds of each Eligible Loan sale less the amounts paid to the Bank as described in the preceding sentence. Within 90 days following expiration of the Term, the parties shall -3- review the actual expenses incurred by the Bank in connection with the production and origination of Eligible Loans sold, and the Mortgage Company shall promptly pay to the Bank any excess of such expenses over the total Production Operation Payments made to the Bank, and the Bank shall pay to the Mortgage Company any amount by which the Production Operations Payments exceed actual expenses. 8. AMENDMENTS TO AGREEMENT. The parties agree to negotiate in good faith ----------------------- respecting the reallocation of expenses and income should it appear that the allocation of expenses and income in Section 7 did not fairly reflect the terms of the economic relationship contemplated by the parties. 9. INDEMNITY. The Mortgage Company shall indemnify and hold harmless the --------- Bank from and against any obligations or liabilities that the Bank may have arising out of (a) any claim by any investor who purchased Eligible Loans sold by the Bank during the Term, respecting indemnification for losses or the repurchase of loans from such investor; (b) the leases, sums due Production Employees or other expenses connected with the operation of the Mortgage Company Offices or the conduct of the Subprime Business following the term; and (c) any assets transferred to or liabilities assumed by the Mortgage Company in connection with the Subprime Business. Executed this 1st day of July, 1997. "Mortgage Company" UNITED PAN AM MORTGAGE CORP. By /s/ JOHN T. FRENCH ------------------------------- Title: Chairman "Bank" PAN AMERICAN BANK, FSB By /s/ LAWRENCE J. GRILL ------------------------------- Title: President and CEO -4- EX-10.37 21 EMPLOYMENT AGREEMENT - MAY 7, 1996 EXHIBIT 10.37 [LETTERHEAD OF PAN AMERICAN BANK, FSB] May 7, 1996 Mr. Ray C. Thousand 30 Bridge Port Road Newport Beach, CA 92657 Re: Employment Agreement Dear Mr. Thousand: This letter agreement and attachments hereto, (collectively the "Agreement") set forth the terms and conditions of your employment with Pan American Bank, FSB (the "Bank"). By signing this Agreement, you will be agreeing to these terms. It is important that you understand clearly both what your benefits are and what is expected of you by the Bank. The effective date of this Agreement (the "Effective Date") shall be as of December 7, 1995. 1. Term. This Agreement shall have a term of three (3) years, commencing as of the Effective Date (the "Term"). Where used herein, "Term" shall refer to the entire period of your employment by the Bank from and after the Effective Date, whether for the period provided above or as extended or terminated earlier as hereinafter provided. 2. Duties. You initially shall hold the office of President of the Bank's Automobile Finance Division. During the Term thereof and subject to obtaining necessary corporate and regulatory approvals, the Bank may determine to spin off the business conducted by the Automobile Finance Division into a newly organized subsidiary corporation, in which case you would hold the office of President of the new subsidiary. In either capacity, you shall perform the duties customarily performed by individuals holding a similar title with other financial institutions or as otherwise may be agreed upon by the Bank and you from time to time. During the Term hereof, you shall perform the services herein contemplated faithfully, diligently and to the best of your ability in compliance with instructions and policies of the Bank's senior management, the Board of Directors, the Bank's Federal Charter and Bylaws and with all applicable laws and regulations. 3. Compensation. a) Base Salary. For your service rendered to the Bank or any subsidiary corporation hereunder, during the Term hereof, the Bank shall pay or cause to be paid a base salary to you at the rate of One Hundred Thirty Five Thousand Dollars ($135,000) per annum, payable in conformity with the Bank's normal payroll periods and procedures. Ray C. Thousand May 7, 1996 Page 2 b) Bonus. In addition to the base salary provided for under Section 3(a) above, you shall be entitled to annual bonus compensation in accordance with the incentive compensation formula set forth in Exhibit A to this Agreement. Among other things, the incentive compensation formula establishes certain performance criteria and sales objectives by which the amount of your bonus compensation, if any, is to be determined. c) Automobile Allowance. The Bank shall provide you during the Term of this Agreement with an automobile allowance of Two Hundred Dollars ($200) per month. d) Options. See Exhibit B. 4. OTHER BENEFITS. During the Term hereof and unless otherwise agreed to by the Bank and you: a) Vacation. You shall be entitled to a total of three (3) weeks paid vacation, the amount and term of which shall be determined in accordance with the policies of the Bank as in effect from time to time. b) Group Medical, Life Insurance and Other Benefits. You will be eligible for the medical, dental, vision, life insurance and long-term disability plans that are generally applicable to your employment classification. You will be issued summary plan descriptions regarding the Bank's benefit plans when you become a participant in those plans. 5. BUSINESS EXPENSES. You shall be entitled to reimbursement by the Bank for any and all ordinary and necessary business expenses reasonably incurred by you in the performance of your duties and in acting for the Bank during the Term of this Agreement, provided that you furnish to the Bank adequate records and other documentation as may be required for the substantiation of such expenditures as a business expense of the Bank. 6. PRIOR EMPLOYMENT. You and the Bank acknowledge and agree that you were previously employed by one or more other financial institutions in capacities similar to the capacities proposed herein. In connection with any such prior employment, you hereby represent and warrant to the Bank as follows: a) No Breach of Prior Agreement. Your execution and delivery of this Agreement and your performance of the obligations contemplated hereunder will not result in a breach of any prior employment agreement, whether written or oral, that you may have entered into with any former employer or other third party. b) No Use of Confidential or Proprietary Information. While in the employ of the Bank, whether pursuant to this Agreement or otherwise, you will not make use of any information, manuals, documents, files, reports, studies or other materials that may have been used and/or developed while you were in the employ of any prior employer(s), which information and/or materials are or may be deemed of a confidential or proprietary nature by such other prior employer(s). Ray C. Thousand May 7, 1996 Page 3 You further acknowledge and agree that any violation by you of this Section 6 shall constitute grounds for termination of your employment hereunder and that you may be held liable by the Bank for any losses or damages suffered by the Bank as a result of any such violation. 7. Termination. a) Termination for Cause. The Board may for cause terminate your employment at any time during the Term of this Agreement. In such event, all of your rights under this Agreement shall terminate and you shall have no right to receive compensation, and other benefits shall cease for any period after the effective date of such termination for cause. Bonus compensation unpaid shall be forfeited. Termination for cause shall be defined as your personal dishonesty, willful misconduct, breach of fiduciary or duty of loyalty, continuing intentional or habitual failure to perform stated duties, violation of any law (other than minor traffic violations or similar misdemeanor offenses), rule or regulation adopted by the Office of Thrift Supervision, Federal Deposit Insurance Corporation or other regulatory agency with jurisdiction over the Bank, any judgment, ruling or decree by any court of competent jurisdiction or administrative body that precludes or impairs your ability to perform the services contemplated by this Agreement or any material breach by you of any provision of this Agreement. b) Termination Without Cause. The Bank may terminate your employment without cause at any time during the Term of this Agreement. In the event that the Bank terminates your employment without cause, you shall be entitled to receive as severance compensation an amount as provided in Exhibit C. The severance payment under this Section 7(b) shall be provided in a lump sum or, at your election, in equal monthly installments for a period not to exceed six (6) months from the date of termination. This payment shall be in lieu of any and all other compensation due under the agreement unless previously vested or earned, except the amount of any bonus compensation payable to you under Section 3(b) hereof, shall be prorated through the date of termination. c) Failure to Meet Performance Objectives. In the event that you fail to achieve at least the performance objectives set forth in Exhibit D to this Agreement within any applicable measuring period, the Bank may terminate your employment under this Agreement. In such event (and provided that your employment is not otherwise terminated for cause as provided under Section 7(a)), you shall be entitled to receive as severance compensation an amount equal to fifteen percent (15%) of the remaining base salary to be provided to you under Section 3(a) hereunder from the date of termination until the end of the Term. The severance payment under this Section 7(c) shall be provided in a lump sum or, at your election, in equal monthly installments for a period not to exceed six (6) months from the date of termination. This payment shall be in lieu of any and all other payments due under the contract including bonus compensation. Ray C. Thousand May 7, 1996 Page 4 d) Compliance with Law and Regulation. You and the Bank expressly acknowledge and agree that any payments made to you pursuant to this Agreement or otherwise are subject to and conditioned upon compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated thereunder. e) Suspension and Removal Orders. If you are suspended and/or temporarily prohibited from participating in the conduct of the Bank's affairs by notice served under Section 8(e)(3) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818 (e)(3) and (g)(1)), the Bank's obligations under this Agreement shall be suspended as of the date of service, unless stayed by appropriate proceeding. If the charges in the notice are dismissed, the Bank may in its discretion: (I) pay you all or part of the compensation withheld while its obligations under this Agreement were suspended; and (ii) reinstate (in whole or in part) any of its obligations which were suspended. If you are removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818(e)(4) or (g)(1)), all obligations of the Bank under this Agreement shall terminate as of the effective date of the order, but vested rights of the parties shall not be affected. f) Termination by Default. If the Bank is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Action (12 U.S.C. Section 1813(x)(1)), all obligations under this Agreement shall terminate as of the date of default, but vested rights of the parties shall not be affected. g) Supervisory Assistance or Merger. All obligations under this Agreement shall be terminated, except to the extent that it is determined that continuation of the Agreement is necessary for the continued operation of the Bank: (I) by the Director of the Office of Thrift Supervision (the "Director") or his or her designee, at the time that the Federal Deposit Insurance Corporation enters into an agreement to provide assistance to or on behalf of the Bank under the authority contained in Section 13(c) of the Federal Deposit Insurance Act (12 U.S.C. Section 1823(c)); or (ii) by the Director or his or her designee, at the time that the Director or his or her designee approves a supervisory merger to resolve problems related to the operation of the Bank or when the Bank is in an unsafe or unsound condition. All rights of the parties that have already vested, however, shall not be affected by such action. h) Disability. In the event that you shall fail, because of illness, incapacity or injury, to render the services contemplated by this Agreement for three (3) consecutive calendar months, or for shorter periods aggregating four (4) months in any twelve (12) month period, your employment hereunder may be terminated by written notice from the Bank to you. In the event that your employment is terminated under this Section 7(h), you shall receive the difference between any disability payments provided through insurance plans offered by the Bank, if any, provided you have enrolled in such plans and paid the cost thereof, and your base salary as set forth in Section 3(a) hereof, for six months after notice from the Bank, plus the amount of any bonus compensation payable to you under Section 3(b) hereof, prorated through the date of termination. Such termination shall not affect any rights which you may have pursuant to any insurance or other death benefit, or any stock option plans or options thereunder, which rights shall continue to be governed by the provisions of such plans and arrangements. i) Death. If your employment is terminated by reason of your death, this Agreement shall terminate without further obligations of the Bank to you (or your heirs or legal representatives) under this Agreement, other than for payment of (i) your base salary (as set forth in Section 3(a) hereof) through the date of termination; (ii) the amount of any bonus compensation payable to you under Section 3(b) above, prorated through the date of termination; (iii) any compensation previously deferred by you; (iv) any accrued vacation and/or sick leave pay; and (v) any amounts due pursuant to the terms of any applicable welfare benefit plan. All of the foregoing amounts shall be paid to your estate or beneficiary, as applicable, in a lump sum in cash within thirty (30) days after the date of termination or earlier as required by applicable law. 8. Disclosure or Use of the Bank's Trade Secrets. During the Term hereof, you will have access to and become acquainted with what you and the Bank acknowledge are trade secrets of the Bank. You shall not use or disclose any trade secrets or, directly or indirectly, cause them to be used or disclosed in any manner, except as may be required or requested by the Bank, by court order or under applicable law or regulation. This paragraph shall survive the termination of this agreement. 9. Return of Documents. You expressly agree that all manuals, documents, files, reports, studies or other materials used and/or developed by you for the Bank during the Term of this Agreement or prior thereto while you were employed by the Bank are solely the property of the Bank, and that you have no right, title or interest therein. Upon termination of this Agreement, you or your representative shall promptly deliver possession of all such materials (including any copies thereof) to the Bank. 10. Notices. All notices, demands or other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered in person, or sent by United States mail, certified or registered, with return receipt requested, if to you, addressed to you at your last residence address as shown in the records of the Bank, and if to the Bank, addressed to the President of the Bank at the Bank's principal office. 11. Governing Law and Jurisdiction. This Agreement shall be goverened by and interpreted in accordance with the laws of the State of California. Each of the parties hereto consents to the jurisdiction of the California state or federal courts, as the case may be, for the enforcement of this Agreement and matters pertaining to the transactions and activities contemplated hereby. 12. Attorney's Fees. In the event that a dispute arises with respect to this Agreement, or your employment or severance of your employment from the Bank, the prevailing party in such dispute shall be entitled to recover all expenses, including, without limitation, reasonable attorney's fees, incurred in connection with such dispute. Ray C. Thousand May 7, 1996 Page 6 13. BENEFIT OF AGREEMENT. This Agreement shall be binding upon and shall ensure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that you may not assign any interest in this Agreement without the prior written consent of the Bank. 14. CAPTIONS. Captions and paragraph heading used in this Agreement are for convenience only and shall not be used in interpreting this Agreement. 15. ENTIRE AGREEMENT. This Agreement contains the entire agreement of the parties with respect to your employment by the Bank, and it expressly supersedes any and all other agreements, either oral or written, relating thereto. 16. SEVERABILITY. Should any provision of this Agreement for any reason be declared invalid, void or unenforceable by a court of competent jurisdiction, the validity and binding effect of any remaining portions of this Agreement shall remain in full force and effect as if this Agreement had been executed with such invalid, void or unenforceable provisions eliminated; provided, however, that the remaining provisions still reflect the intent of the parties to this Agreement. 17. AMENDMENTS. This Agreement may not be amended or modified except by a written agreement signed by you and the President of the Bank. This Agreement and any amendment thereof may be executed in counterparts. We look forward to your continued association with the Bank. In order to confirm your agreement with and acceptance of the terms and conditions set forth above, please sign and date one copy of this Agreement where indicated below and return it to the Bank's Human Resources Department. The other copy is for your records. If there is any matter in this Agreement that you wish to discuss further, please do not hesitate to contact me. Very truly yours, /s/ Lawrence J. Grill Lawrence J. Grill President and Chief Executive Officer I agree to the terms of employment set forth in this Agreement subject to approval of the Pan American Bank Board of Directors. /s/ RAY C. THOUSAND 5/14/96 - -------------------------- ----------------- Employee Date EXHIBIT A BONUS CALCULATIONS GOALS - -----
December 31 ---------------------------------------- 1996 1997 1998 ---------------------------------------- Volume for a month $1,500,000 $4,000,000 $7,000,000 Pre-Tax Profit $ (529,000) $1,235,000 $5,283,000 Delinquency (30+ Contractual) 4.0% 4.0% 4.0% Net Charge-off 3.5% 3.5% 3.5%
These goals assume a cost of funds not to exceed prime +2 based on Wall Street Journal prime, $1,000,000 in equity capital, and no corporate overhead allocation. BONUS - ----- Bonus will be calculated as follows: YEAR 1 - ------ 25% of base salary if all goals are met. YEAR 2 - ------ 25% of base salary if pre-tax profit of $750,000 is achieved and all other goals essentially met. 50% of base salary if pre-tax profit of $1,000,000 is achieved and all other goals essentially met. 75% of base salary if pre-tax profit of $1,235,000 is achieved and all other goals essentially met. 100% of base salary if pre-tax profit of $1,500,000 is achieved and all other goals essentially met. YEAR 3 - ------ 25% of base salary if pre-tax profit of $3,000,000 is achieved and all other goals essentially met. 50% of base salary if pre-tax profit of $3,750,000 is achieved and all other goals essentially met. 75% of base salary if pre-tax profit of $4,500,000 is achieved and all other goals essentially met. 100% of base salary if pre-tax profit of $5,283,000 is achieved and all other goals essentially met. "Pre-tax profit" shall be based upon the amount reflected in the Bank's internal financial statements without any allocation for Bank Corporate overhead, but including Cost of Funds charged by the Bank at prime +2. Attainment of goals/bonus assumes that there are no material changes in policy by the Bank that might materially affect or limit the Auto Finance Division Business Plan. If any material changes in policy by the Bank, then goals and bonus calculation will be adjusted accordingly upon mutual agreement of the parties. Employee must be on the payroll at the end of the calendar year to be eligible for payment of a bonus regardless of length of service or reason for termination or resignation unless provided for specifically in the Employment Agreement. If the Employee is discharged by the Company for "Willful Misconduct" or any other reasons set forth in paragraph 7(a) of the Employment Agreement, any right of the Employee to a bonus shall be forfeited even if the employee is on the payroll at the end of the calendar year. Bonus payments will be made within 60 days after the end of the calendar year allowing for the review of the results of operations. EXHIBIT B Options Options are to be granted totaling 7.5% of the Bank's Auto Finance Subsidiary (during the term of this agreement the Auto Finance Division will be spun off into a newly organized subsidiary corporation the current name of which is anticipated to be United Auto Credit Corporation). By mutual agreement with agreement not unreasonably withheld, "phantom stock plan" can be substituted for an Option Plan provided it provides equivalent financial compensation and rights as on Option Plan. The exercise price of the options will be calculated at the end of each fiscal year as follows: Contributed Capital for each month will be defined as the additional capital (over and above the Cumulative Capital Account at the end of the previous month) needed in order to maintain a 5 to 1 debt to equity ratio at the end of such month. Adjusted Shareholder's Equity is defined as the sum of (i) Initial Capital plus (ii) Contributed Capital plus (iii) Retained Earnings. Liquidity event is either an Initial Public Offering or a sale of the auto subsidiary. Threshold Capital is defined as the sum of all Contributed Capital compounded at a 30% per annum less the loan rate charged to the time it is computed. 1. The shares vested on each year will have an exercise price equal to the Adjusted Shareholders' Equity at such time. (B) 2. The options will vest 20% per year based on attainment of 85% of net pre-tax profit goal (except for year 1) for the Division or Subsidiary. 3. The shares could be exercised at a liquidity event only if the Bank or its holding company receives consideration equal to or greater than the Threshold Capital for the cumulative Contributed Capital at such time.
Calendar Percentage of Total Option 85% of Pre-tax Profit Goal, except for year one - -------- -------------------------- --------------------------------------------------- YEAR 1 20% Start 3 Branches, generate $1.5 million in monthly 1996 volume by calendar year-end YEAR 2 20% $ 1,050,000 1997 YEAR 3 20% $ 4,500,000 1998 YEAR 4 20% $ 8,000,000 (A) 1999 YEAR 5 20% $12,000,000 (A) 2000
(A) If pre-tax profit growth not attained then the goal will be adjusted to achieving a 5% ROA. (B) If growth is faster than Plan, the Plan Adjusted Shareholder Equity as set forth in Schedule 1 to this Exhibit B will be the maximum exercise price. Page 1 The "pre-tax profit goal" assumes a cost of funds equivalent prime rate plus 200 basis points (as provided in the business plan 8.5%+2%=10.5%), an initial equivalent capitalization of $1,000,000 and no corporate overhead allocation from the Bank. Should any year's goal not be met, the option amount for that year will carry over to the next year. If the goal is met in the succeeding year (including the cumulative profit goal for the previous year(s)), then the previously unearned option(s) amount will vest. Unearned option(s) amounts will carry over for five years and to the extent not vested will terminate and therefore be null and void. Should the Bank sell the Auto Finance Subsidiary to any other unaffiliated entity, all options will immediately vest or in the case of a "phantom stock plan" the equivalent will be provided for. If the Auto Finance Subsidiary is transferred within the affiliated structure, the obligation and benefits of the option or "phantom stock plan" shall continue in full force or effect. Attainment of goals/bonus assumes that there are no material changes in policy by the Bank that might materially affect or limit the Auto Finance Division Business Plan. If any material changes in policy by the Bank then goals and bonus calculation will be adjusted accordingly, upon mutual agreement of the parties. The terms and conditions for Options or "phantom stock plan" will be more fully set forth in a Plan Document or the equivalent thereof to be finalized September 30, 1996. The sale of shares acquired through exercise of options shall be subject to a shareholders' agreement giving the Bank first right refusal. Schedule 1 Summary Financials ------------------
1996 1997 1998 1999 2000 ------ ------ ------ ------- ------- Net Income (317) 741 3,170 6,160 9,286 Net Loans 10,266 38,555 75,637 119,248 166,918 Total Assets 10,177 37,675 73,727 116,237 162,703 Beginning Shareholders Equity 1,000 683 1,424 4,594 10,754 Retained Earnings (317) 741 3,170 6,160 9,286 Shareholders Equity/(1)/ 683 1,424 4,594 10,754 20,040 Prev. Contributed Capital - 1,370 6,287 10,533 13,096 Capital Contributed in period/(2)/ 1,370 4,917 4,246 2,562 248 Adj. Shareholders Equity 2,053 7,711 15,127 23,850 33,384 Loans/Adj. Shareholders Equity 5.0x 5.0x 5.0x 5.0x 5.0x Cumulative Capital Contributed 2,370 7,287 11,533 14,096 14,344 1 2 3 4 5 ------------------------------------------ Hurdle Rate 30.0% 2,370 2,832 3,385 4,045 4,833 Loan Rate 10.5% 4,917 5,876 7,021 8,390 Extra Yield 19.5% 4,246 5,074 6,064 2,562 3,062 248 Threshold Capital/(3)/ 2,370 7,749 13,507 18,703 22,598
/(1)/ Per management projections /(2)/ For illustrations purposes the Contributed Capital is computed at year end versus monthly as agreed /(3)/ Threshold Capital at the end of period if liquidity event occurs Page 3 EXHIBIT C Severance Compensation Upon Termination Without Cause Pursuant to 7(b) If termination occurs during the first two years of the term of this contract the payment shall be equal to twelve (12) months salary at the then current base salary. If termination occurs in the third year, the amount paid shall be the actual amount of total months base salary remaining to be paid to the end of the term of the contract. EXHIBIT D TERMINATION - FAILURE TO MEET PERFORMANCE OBJECTIVES PURSUANT TO 7(c) If Monthly Delinquencies in any year (30+ days past due) and Net Charge-Offs = 15+% - no termination payment. Failure to meet any 2 of 4 objectives in any year will constitute Failure to Meet Performance Objective: 1st Year Monthly Volume less than $1 million gross in December 1996 Profit less than ($700,000 Loss) pretax Delinquency (30 days+) greater than 6% Net % of Charge-Offs greater than 4% 2nd Year Monthly Volume less than $2 million gross in December 1997 Profit less than $600,000 Delinquency (30 days+) greater than 7% Net % of Charge-Offs greater than 5% 3rd Year Monthly Volume less than $3.5 million gross in December 1998 Profit less than $2.5 million Delinquency (30 days+) greater than 7% Net % of Charge-Offs greater than 6%
EX-10.39 22 EMPLOYMENT AGREEMENT - LAWRENCE J. GRILL EXHIBIT 10.39 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is entered into as of October 1, 1997 by and between Pan American Group, Inc. ("PAGI"), Pan American Bank, FSB, a federally chartered savings bank (the "Bank"; the Bank and PAGI are individually and collectively referred to as "Employer") and Lawrence J. Grill ("Employee"). WITNESSETH: WHEREAS, Employer desires to obtain the services of Employee and Employee desires to render services to Employer; WHEREAS, the Boards of Directors of Employer (individually and collectively referred to as the "Board") has determined that it is in Employer's best interests and that of its stockholders to secure the services of Employee, to secure certain additional commitments from Employee and to provide Employee certain additional benefits; and WHEREAS, Employer and Employee desire to set forth in this Agreement all the terms and conditions of Employee's employment with Employer. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: 1. Term. Employer agrees to employ Employee and Employee agrees to serve ---- Employer in accordance with the terms of this Agreement, for (a) a term of approximately three (3) years and two (2) months commencing on the date of this Agreement and ending December 31, 2000 (the "Initial Term"), and (b) at the option of Employer, which Employer may exercise by giving written notice to Employee on or before December 31, 1999, an additional one year period ending December 31, 2001 (the "Extended Term") The Initial Term and the Extended Term are hereinafter referred to as the "Term." Notwithstanding the foregoing, the Term may be terminated before the expiration of the Initial Term or the Extended Term in accordance with the provisions which follow. 2. Services and Exclusivity of Services. ------------------------------------ (a) Employee Time. So long as this Agreement shall continue in ------------- effect, Employee shall devote his full business time, energy and ability exclusively to the business, affairs and interests of Employer and its subsidiaries and matters related thereto , shall use Employee's best efforts and abilities to promote Employer's interests, and shall perform the services contemplated by this Agreement in accordance with policies established by and under the direction of the Board. (b) Service to Affiliates; Promoting Business. Employee agrees to ----------------------------------------- serve without additional remuneration in such executive capacities or as a Board member for one or more direct or indirect subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitations under applicable law. Employee agrees to faithfully and diligently promote the business affairs and interests of Employer and its subsidiaries. (c) Exclusivity of Services. Employee may make and manage personal ----------------------- business investments of his choice and serve in any capacity with any civic, educational or charitable organization without seeking or obtaining approval by the Board, provided that such activities and services do not substantially interfere or conflict with the performance of duties hereunder or create any conflict of interest with such duties. An investment that exceeds 5% of the equity securities or capitalization of a competitor, supplier or customer of Employer shall be deemed to constitute such a conflict. Employee shall not serve in any capacities for any business enterprise unless such service is expressly authorized by the Board in advance. (d) No Conflicts. Employee represents to Employer that Employee has ------------ no other outstanding commitments inconsistent with any of the terms of this Agreement or the services to be rendered hereunder. 3. Specific Position: Duties and Responsibilities. ----------------------------------------------- (a) Positions, Duties and Authority. Employer and Employee agree ------------------------------- that, subject to the provisions of this Agreement, the Bank will employ Employee and Employee will serve the Bank as its President, Chief Executive Officer and Secretary. Employee shall, without any additional remuneration, serve as President, Chief Executive Officer and Secretary of PAGI. Employee agrees to observe and comply with the rules and regulations of the Bank as adopted by the Board of Directors of the Bank (the "Bank Board") respecting the performance of Employee's duties to the Bank, and with the rules and regulations of PAGI as adopted by the Board of Directors of PAGI (the "PAGI Board"). -2- Employee also agrees to carry out and perform orders, directions and policies of the Bank Board and the PAGI Board as they may from time to time direct. Employee shall have such corporate power and authority as shall reasonably be required to enable the discharge of duties commensurate with the offices he holds. It is anticipated that approximately 75% of Employee's time will be occupied with his services to the Bank, and that approximately 25% of his time will be occupied with his services to PAGI. (b) Supervision of Employee. For the term of this Agreement, Employee ----------------------- shall report (i) with respect to his duties to the Bank, to (A) the Chairman of the Bank Board (the "Chairman"), and (B) the Bank Board, and (ii) with respect to his duties to PAGI, to (I) the Chairman of the Board of PAGI, and (II) the PAGI Board. 4. Compensation. ------------ (a) Base Compensation. During the term of this Agreement, Employer ----------------- agrees to pay Employee a base salary at the rate of One Hundred Ninety Thousand Dollars ($190,000) per year, payable in equal installments consistent with Employer's normal payroll practices applicable to salaried employees (the "Base Salary"). (b) Bonuses. At least annually, the Board shall meet with Employee to ------- review with him his performance and the performance and prospects of the business of Employer. Based on such review, and on such other factors as the Board may deem to be relevant pursuant to the annual Executive Incentive Plan similar to the plan in effect for the year ending June 30, 1997, Employer shall pay Employee a bonus of up to 50% of Employee's Base Salary upon attainment of goals approved by the Board relating to pre-tax net income, return on shareholders' equity an other similar factors. (c) Additional Benefits. During the Term hereof, Employee shall ------------------- participate in any bonus, pension, profit, incentive compensation, medical, life insurance, disability or similar plan, and shall receive all perquisites, available to executives of Employer at or below Employee's level of responsibility (the "Compensation Plans"), except to the extent Employee does not meet the eligibility requirements generally applicable to participants in such Compensation Plan. -3- Employee shall also be entitled to receive the benefits specified on Schedule 4(c) to this Agreement (the "Additional Benefits"). Employee shall not receive duplicative benefits if a Compensation Plan is listed on Schedule 4(c) as an Additional Benefit. Notwithstanding anything else contained in this Agreement to the contrary, (i) all rights of Employer, PAGI and Employee with respect to stock options granted to Employee pursuant to any Employer or PAGI stock option plan shall be governed solely by such plan, including all rights as to the vesting of options thereunder, and (ii) this Agreement shall not be deemed to amend or otherwise affect the provisions of any Compensation Plan. (d) Vacation. Employee shall be entitled to twenty (20) days of paid -------- vacation each twelve-month period, which shall accrue on a pro rata basis from the date of this employment agreement; provided, however, that vacation days shall cease to accrue whenever thirty (30) vacation days have accrued, and the accrual of vacation days shall resume only when Employee has used enough vacations days so that additional vacation days can accrue without exceeding the limit of thirty (30) accrued vacation days. (e) Modification of Benefits. Except with respect to the Additional ------------------------ Benefits, Employer reserves the right at all times to modify, suspend or discontinue any and all Compensation Plans and any other benefits, plans, practices, policies and programs (whether before or after termination of employment) without notice to or recourse by Employee so long as such action is taken with respect to Employer' employees generally and does not single out Employee. 5. Termination. ----------- (a) For Cause. --------- i) Employer may terminate this Agreement and Employee's employment hereunder at any time for cause without further obligation or liability to Employee, including without limitation, any obligation to pay Base Salary and Additional Benefits following such termination, effective upon delivery of notice of such termination to Employee or at such other future time as may be specified in such notice. Employer and Employee agree that the term "for cause" shall mean the following: -4- Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or material breach of any provision of this Agreement or any other grounds specified in Section 563.39(b)(1) of the Office of Thrift Supervision (the "OTS") Rules and Regulations (and any subsequent regulations of OTS and the Federal Deposit Insurance Corporation (the "FDIC") governing employment agreements). ii) If Employee is suspended and/or temporarily prohibited from participating in the conduct of the Employer's affairs by reason of a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818 (e)(3) and (g)(1)), all obligations of Employer under this Agreement shall be suspended as of the date of service of the notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, Employer may in its discretion (i) pay Employee all or part of the compensation withheld while this Agreement was suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. iii) If Employee is removed and/or permanently prohibited from participating in the conduct of Employer's affairs by reason of an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818 (e)(4) or (g)(1)), all obligations of Employer under this Agreement shall terminate as of the effective date of that order, and Employee shall receive the amount set forth in Section 5(e)(ii) of this Agreement. iv) If Employer is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this Agreement shall terminate as of the date of default, and Employee shall receive the amount set forth in Section 5(e)(ii) of this Agreement. v) All obligations of Employer under this -5- Agreement shall be terminated (except to the extend determined that continuation of this Agreement is necessary for the continued operation of Employer) by the OTS (i) at the time the FDIC or the Corporation enters into an agreement to provide assistance to or on behalf of Employer under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, or (ii) at the time the OTS approved a supervisory merger to resolve problems related to the operation of Employer, or when Employer are determined by the OTS to be in an unsafe or unsound condition; provided, however, that Employee shall receive the amount set forth in Section 5(e)(ii) of this Agreement . (b) Without Cause. Notwithstanding any other provision of this ------------- Section 5, Employee hereby agrees that Employer may terminate Employee's employment hereunder at will for any reason without any liability or obligation to Employee whatsoever, except for termination payment expressly provided for in this Agreement, at any time upon written notice of termination to Employee, such termination to become effective upon such future date as may be specified in such notice of termination. Such termination may be only by a vote of a majority of the Board and the PAGI Board. As consideration for Employee's agreement to this subparagraph (b), Employer agrees that in the event Employer elects to terminate the employment of Employee pursuant to the provisions of this subparagraph (b) prior to the completion of the Term, Employer shall provide a formal written notice of such termination and Employee shall be entitled to a termination payment equal to (i) a lump sum payment of the Base Salary equal to (A) if the termination of employment occurs before December 31, 1999, the Base Salary Employee would have received from the date of such termination through December 31, 1999, (B) if the termination of employment occurs on or after January 1, 2000 but before December 31, 2000, the Base Salary Employee would have received from the date of such termination through December 31, 2000, or (C) if the termination occurs during the Extended Term, the Base Salary Employee would have received during the balance of the Extended Term; provided, however, that in no event shall Employee receive a lump sum payment of Base Salary for a period of less than six (6) -6- months; (ii) a lump sum payment of any accrued vacation pay; (iii) any and all Additional Benefits accrued through the date of termination, including any compensation previously deferred by Employee (together with any accrued interest and earnings thereon); (iv) a lump sum payment of the "Prorated Incentive Compensation" (as defined below); (v) continuation of group medical disability and life insurance coverage under such Compensation Plans in which Employee participated as of his termination of employment, or the equivalent, until the earliest to occur of (A) the expiration of the Initial Term, or the Extended Term, in which Employee's termination of employment occurred, (B) Employee's commencement of full-time employment with a new employer, (C) Employee's sixty-fifth (65th) birthday, or (D) Employee's failure to pay any portion of any premium or cost required under the terms of such Compensation Plan to be paid by participants generally. For purposes of this Agreement, the term "Prorated Incentive Compensation" means, for Employer's fiscal year in which Employee's termination of employment occurs (the "Termination Year"), the incentive compensation received by Employee in Employer's fiscal year immediately before the Termination Year (the "Prior Year"), (I) multiplied by a fraction, the numerator of which is the number of days from the beginning of the Termination Year to the date of Employee's termination of employment, and the denominator of which is three hundred sixty five (365), and (II) except for purposes of Section 5(d), decreased in an amount which, as determined by the Board, based on Employer's customary and consistent calculation of earnings, is proportional to any decrease in earnings of Employer from the Prior Year to the Termination Year. (c) Disability. In the event Employee shall fail, because of ---------- illness, incapacity or injury which is determined, within the applicable definitions under the Employer's group disability insurance, to be total and permanent by a physician selected b y Employer or its insurers and acceptable to Employee or Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably) to render for three consecutive months or for shorter periods aggregating 75 or more business days in any twelve month period, the services contemplated by this Agreement, Employee's employment hereunder may be -7- terminated by written notice of termination from Employer to Employee. Thereafter, Employer shall continue to pay Base Salary to Employee at a rate and time and in a manner equal to 100% of the Base Salary payable immediately prior to the termination, until the earliest to occur of the following: (i) Employee dies, (ii) Employee recovers from such disability and returns to full-time service, (iii) six (6) months after the date of such notice, or (iv) the waiting period, if any, under Employer's long term disability insurance or other disability plan purchased for Employee is satisfied and payments by the insurance company to Employee commence. Thereafter, no further salary or benefits shall be paid. (d) Death. If Employee's employment is terminated by reason of ----- Employee's death, this Agreement shall terminate without further obligations to Employee (or Employee's heirs or legal representatives) under this Agreement, other than for (i) payment of the sum of (A) Employee's Base Salary through the end of the month during which death occurs and for 30 days thereafter to the extent not theretofore paid, (B) any compensation previously deferred by Employee (together with any accrued interest or earnings thereon) plus the Prorated Incentive Compensation in an amount determined under Section 5(b), (C) any accrued vacation pay, in each case to the extend not theretofore paid (the sum of the amounts described in clauses (A), (B) and (C) shall be hereinafter referred to as the "Accrued Obligations"), which shall be paid to Employee or Employee's estate or beneficiary, as applicable in a lump sum in cash within thirty (30) days after the date of termination or any earlier time required by applicable law; and (ii) payment to Employee or Employee's estate or beneficiary, as applicable, any amount due pursuant to the terms of any applicable Compensation Plan. (e) Termination by Employee. ----------------------- i) Employee may terminate his employment for a "Reduction in Authority" (as defined below) at any time two (2) months after a notice of intent to terminate pursuant to this Section 5(e) has been delivered to the Board and Chairman, provided such condition continues for the duration of a one month period after written notice to the Board and Chairman. Upon such -8- termination, Employee shall receive the payments and benefits set forth in subparagraph (b) above. The term "Reduction in Authority" shall mean the occurrence of one of the following events, other than as a result of grounds for termination of employment for cause under Section 5(a) or for disability under Section 5(c): (A) the continuing assignments to Employee by the Chairman and Board of duties materially and adversely inconsistent with Employee's position as President and Chief Executive Officer of the Bank or PAGI; (B) a material, adverse and continuing change in the nature of Employee's responsibilities; (C) the requirement that Employee must regularly report to persons other than the Chairman and the Board; (D) the removal of Employee from, or failure to re-elect Employee as, the President and Chief Executive Officer of the Bank or PAGI or as a member of the Bank or PAGI Board, or (E) a change in the Employer's corporate headquarters outside of the San Francisco Bay Area. Provided, however failure to reelect Employee to, or the ceasing of Employee to occupy the position of, President or Chief Executive Officer of PAGI after October 15, 1998 will not constitute a "Reduction in Authority." ii) Employee may terminate his employment hereunder at any time upon not less than thirty (30) days written notice to Employer. In such event, Employee shall be entitled to all Accrued Obligations under this Agreement, except payment of the Prorated Incentive Bonus, through the effective date of such termination. (f) No Limitation. Employer's exercise of its right to terminate ------------- shall be without prejudice to any other right or remedy to which it or any of its affiliates may be entitled at law or in equity to enforce its rights under this Agreement. (g) Exclusive Remedy. Employee agrees that the payments ---------------- expressly provided and contemplated by this Agreement shall constitute the sole and exclusive obligation of Employer in respect to Employee's employment with and relationship to Employer and that the payment thereof shall be the sole and exclusive remedy for any termination of Employee's employment. Employee -9- covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of employment. (h) Expiration of Term. No payment shall be due to Employee under ------------------ this Agreement by reason of the expiration of the Initial Term and the failure by Employer to exercise its option for the Extended Term. (i) No Mitigation. In the event this Agreement is terminated for any ------------- reason, Employee shall not be obligated to mitigate any damages Employee might otherwise suffer. Employer's obligation to make payments to Employee pursuant to this Agreement shall not be affected by any other employers or sources or any setoff, counterclaim, recoupment, defense or other right which Employer or its subsidiaries may have against Employee. 6 Change in Control. Employee shall be entitled to receive the amounts ----------------- set forth in Section 5(b) of this Agreement if Employer terminates his employment without cause, or he terminates his employment with Employer for a Reduction in Authority, within the "Applicable Period" (as defined below) after a "Change in Control" (as defined below). A "Change in Control" means a merger, consolidation, transfer of all or substantially all in the assets of the Bank and PAGI, or any other corporate reorganization or transaction or series of transactions, which results in any person, group of related persons, or any other organization or entity acquiring 50% or more of the outstanding voting securities or partnership interests of PAGI and the Bank. The "Applicable Period" begins on the date of a Change in Control and ends on the later of the expiration of the Initial Term or Extended Term (as the case may be) in which the Change in Control occurs, or twelve (12) months after the Change in Control occurs. 7 Business Expenses. During the term of this Agreement, to the extent ----------------- that such expenditures satisfy the criteria under the Internal Revenue Code for deductibility by Employer (whether or not fully deductible by Employer) for federal income tax purposes as ordinary and necessary business expenses, Employer shall reimburse Employee promptly for reasonable business expenditures, including travel, entertainment, parking, business meetings, and professional dues but not the costs of (or dues associated with) maintaining club memberships, made and substantiated in accordance with policies, practices and procedures established from time to -10- time by Employer generally and incurred in pursuit and furtherance of Employer's business and good will. 8. Indemnification. --------------- (a) Indemnification by Employer. Pursuant to the terms of Section --------------------------- 545.121 of the OTS Rules and Regulations ("Section 545.121"). Employer agrees to indemnify, defend and hold harmless, Employee, from and against (a) the amount of any judgment for which Employee becomes liable as a result of any Action (as defined in Section 545.121) brought against Employee in his capacity as an officer or director of Employer, and (b) if he attains a favorable judgment in such Action, reasonable costs and expenses, including reasonable attorneys' fees, actually paid or incurred by Employee in defending or settling such Action, or in enforcing his rights under Section 545.121; provided however, that Employer shall have no obligation to indemnify Employee hereunder unless (a) Final Judgment (as defined in Section 545.121) on the merits is in Employee's favor; or (b) in the case of Settlement (as defined in Section 545.121), Final Judgment against him, or Final Judgment in his favor other than on the merits, the disinterested directors of Employer determine that Employee was acting in good faith within the scope of his employment or authority as he could reasonably have perceived it under the circumstances and for a purpose he could reasonably have believed under the circumstances was in the best interests of Employer. If the disinterested directors of Employer reasonably conclude that, in connection with an Action, Employee may be entitled to indemnification, the directors shall authorize Employer to advance to Employee reasonable costs and expenses, including reasonable attorneys' fees, arising from the defense or settlement of such Action, subject to an undertaking by Employee to repay such amounts in the event of a final nonappealable determination that Employee is not entitled to indemnification, and the provisions of this Section 8. (b) Notification of Claims. After receipt of notice of commencement ---------------------- of any Action giving rise to a right of indemnification hereunder, Employee shall promptly notify Employer in writing of such Action and, when known, the facts constituting the basis for such Action -11- (in reasonable detail). Failure by Employee to so notify Employer shall not relieve Employer of any liability hereunder unless such failure materially prejudices Employer. (c) Indemnification Procedure. Employer shall be entitled, if it so ------------------------- elects, to take control of the defense and investigation with respect to an Action and to employ and engage attorneys of its own choice to handle and defend the same, upon written notice to Employee of such election which notice acknowledges Employer's obligation to provide indemnification hereunder. Employer shall not settle any Action that is the subject of indemnification without the written consent of Employee, which consent shall not be unreasonably withheld; provided, however, that Employer may -------- ------- settle an Action without Employee's consent if such Settlement (i) makes no admission or acknowledgment of liability or culpability with respect to Employee, (ii) includes a complete release of Employee, and (iii) does not require Employee to make any payment or forego, relinquish or take any action or right. Employee shall cooperate in all reasonable respects with Employer and its attorneys in the investigation, trial and defense of any Action (including the filing in Employee's name of appropriate cross claims and counterclaims). Employee may, at his own cost, participate in any investigation, trial and defense of such Action controlled by Employer. If, after receipt of a claim notice pursuant to Section 8(b), Employer does not undertake to defend any such Action, Employee may, but shall have no obligation to, contest such Action and Employer shall be bound by the result obtained with respect thereto by Employee (including, but not limited to, any Settlement thereof); provided, however, that Employee shall not settle such Action without the written consent of Employer, which Employer shall not unreasonably withhold. Employer may, at its own cost, participate in any investigation, trial and defense of any Action controlled by Employee. If Employee reasonably believes that there may be a conflict of interest between himself and Employer in the conduct of the defense of any Action, Employee shall have the right, at the expense of Employer, to select his own counsel and assume the defense of the Action; provided, however, that Employee may not -------- ------- settle such Action without the consent of Employer which consent shall not be unreasonably withheld; provided, further, that -------- ------- Employee may settle an -12- Action without Employer's consent if such Settlement (i) makes no admission or acknowledgment of liability or culpability, (ii) includes a complete release of Employer and (iii) does not require Employer to make any payment or forego, relinquish or take any action or right. At any time after the commencement of defense of any Action, Employer may request Employee to agree in writing to the abandonment of such contest or to the payment or compromise by Employer of such claim, whereupon such action shall be taken unless Employee determines that the contest should be continued and so notifies Employer in writing within 15 days of such request from Employer. If Employee determines that the contest should be continued, Employer shall be liable hereunder only to the extent of the lesser of (i) the amount which the other party(ies) to the contested claim have agreed to accept in payment or compromise as of the time Employer made its request therefor to Employee less any additional expenses incurred by Employer subsequent to such event or (ii) such amount for which Employer would otherwise be liable with respect to such Action by reason of the provisions hereof. 9. Miscellaneous. ------------- (a) Succession; Survival. This Agreement shall inure to the benefit -------------------- of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Employee, this Agreement may not be assigned other than in connection with a merger or sale of substantially of all the assets of Employer or a similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all the obligations of Employer hereunder. The obligations and duties of Employee hereunder are personal and otherwise not assignable. (b) Notices. Any notice or other communication provided for in this ------- Agreement shall be in writing and sent if to Employer to its office at: Pan American Bank, FSB c/o Bastion Capital Corporation 1999 Avenue of the Stars, Suite 2960 Los Angeles, California 90067 Facsimile: (310) 277-7582 Attention: Mr. William Bron, Chairman of the Board -13- or at such other address as Employer may from time to time in writing designate, and if to Employee to such address as Employee may from time to time in writing designate (or Employee's business address of record in the absence of such designation). Each such notice or other communication shall be effective (i) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means, when actually delivered at such address. (e) Entire Agreement; Amendments. This Agreement contains the entire ---------------------------- agreement of the parties relating to the subject matter hereof and it supersedes any prior agreements, undertakings, commitments and practices relating to Employee's employment by Employer or its affiliates. No amendment or modification of the terms of this Agreement shall be valid unless made in writing and signed by Employee and, on behalf of Employer, by the Chairman. (d) Waiver. No failure on the part of any party to exercise or delay ------ in exercising any right hereunder shall be deemed a waiver thereof or of any other right, nor shall any single or partial exercise preclude any further or other exercise of such right or any other right. (e) Choice of Law. This Agreement, the legal relations between the ------------- parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, the relationship of the parties or the subject matter hereof shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State and without regard to conflicts of law doctrines, to the extent permitted by law and applicable regulations. (f) Arbitration. Any dispute, controversy or claim arising out of or ----------- in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall at the request of either party be submitted to and settled by arbitration conducted at a mutually convenient office of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"). Employer and Employee may agree on a retired judge from -14- the JAMS panel. If they are unable to agree upon a retired judge, JAMS will provide a list of three available judges and each party may strike one. If two of the three judges are stricken, the remaining judge will serve as arbitrator. If two arbitrators remain, the first judge listed shall serve as arbitrator. Employer and Employee agree that arbitration must be initiated within two years after the claimed breach occurred and that the failure to initiate arbitration within the two-year period constitutes an absolute bar to the institution of any new proceedings related to such alleged breach. The aggrieved party can initiate arbitration by sending written notice of any intention to arbitrate by registered or certified mail to all parties and to JAMS. The notice must contain a description of the dispute, the amount involved and the remedy sought. Exhibit A sets forth the rights of Employer and Employee if the dispute is arbitrated and the rules and procedures to be followed at the arbitration hearing; provided, however, that the party or parties prevailing in such proceeding will be entitled to the reasonable attorneys' fees and expenses of counsel and costs incurred by reason of such arbitration. (g) Confidentiality; Proprietary Information. Employee agrees to not ---------------------------------------- make use of, divulge or otherwise disclose, directly or indirectly confidential or proprietary information concerning the business (including but not limited to its products, employees, services, practices or policies) of Employer or any of its affiliates of which Employee may learn or be aware as a result of Employee's employment during the Term or prior thereto as stockholder, employee, officer or director of or consultant to Employer or any of its affiliates, except to the extent such use or disclosure is (i) required by applicable law, (ii) lawfully obtainable from other sources, (iii) generally available to the public, or (iv) authorized in writing by Employer. The provision of this subsection (g) shall survive the expiration, suspension or termination, for any reason, of this Agreement. (h) Severability. If any provision of this Agreement is held invalid ------------ or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall -15- nevertheless remain in full force and effect in all other circumstances, to the fullest extent permitted by law. (i) Withholding: Deductions. All compensation payable hereunder ----------------------- including salary and other benefits, shall be subject to applicable taxes, withholding and other required, normal or elected employee deductions. (j) Section Headings. Section and other headings contained in this ---------------- Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. (k) Non-Solicitation. Employee agrees that for a period of one (1) ---------------- year after the termination of employment, Employee will not, on behalf of Employee or on behalf of any other individual, association or entity, call on any of the customers of Employer for the purpose of soliciting or inducing any of such customers to acquire (or providing to any of such customers) any product or service provided by Employer nor will Employee in any way, directly or indirectly , as agent or otherwise, in any other manner solicit, influence or encourage such customers to take away or to divert or direct their business to Employee or any other person or entity by or with which Employee is employed, associated, affiliated or otherwise related ("Employee Related ---------------- Entity"); provided, however, that during the one (1) year period ------ referred to above, Employee will be permitted to be involved in advertising and marketing deposit products and loans in communities served by Employer in its residential loan and deposit business. (l) Employees. Employee agrees that for a period of two (2) years --------- after the termination of Employee's employment, Employee will not, directly or indirectly, disrupt, damage, impair, or interfere with Employer's business by soliciting, influencing, encouraging or recruiting any employee of Employer to work for Employee or any Employee Related Entity. (m) Counterparts. This Agreement and any amendment hereto may be ------------ executed in one or more counterparts. All of such counterparts shall constitute one and the same agreement and shall become effective when a copy signed by each party has been delivered to the other party. -16- (n) Representation By Counsel; Interpretation. Employer and Employee ----------------------------------------- each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the matters contemplated by this Agreement. Accordingly, any rule of law, including but not limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner of effect the intent of the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "Employer" PAN AMERICAN BANK, FSB By: /s/ WILLIAM BRON ----------------------------- William Bron Its: Chairman PAN AMERICAN GROUP, INC. By: /s/ WILLIAM BRON ----------------------------- William Bron Its: "EMPLOYEE" /s/ LAWRENCE J. GRILL -------------------------------- Lawrence J. Grill Pan American Bank, FSB 1300 S. El Camino Real Suite 320 San Mateo, California 94402 Facsimile: (650) 349-8504 -17- SCHEDULE TO PARAGRAPH 4(C) ADDITIONAL BENEFITS STOCK OPTION PLAN Concurrently upon execution of the Agreement, PAGI and Employee shall enter into a Stock Option Agreement pursuant to PAGI's most current Stock Option Plan. PAGI shall grant Employee additional stock options to purchase 30 shares upon the terms and conditions described in such Plan and Agreement, and at a price to be determined by the PAGI Board or its compensation committee. PERQUISITES See the schedule of additional benefits attached to this schedule. -18- EXHIBIT TO SCHEDULE TO PARAGRAPH 4(C) PERQUISITES PAID BY EMPLOYER - -------------------------------------------------------------------------------- a. $500,000 of term life insurance in excess of the amount provided by Employer under the Employer's group term life insurance plan in which its employees generally participate. b. Monthly car allowance of $500 c. Long-term Disability Insurance providing 60% of annual Base Salary up to $10,000 per month coverage as provided under the Employer's long-term disability plan in which its employees generally participate, or through individual coverage if such plan does not provide such coverage. d. Accidental Death and Dismemberment Insurance up to the maximum amount that can be purchased under the Employer's accidental death and dismemberment plan in which its employees generally participate. e. Monthly premium cost under the Employer's plan for family Medical, Dental and Vision Insurance, except that Employee shall pay family deductibles and co-payments. -19- EX-10.40 23 EMPLOYMENT AGREEMENT - GUILLERMO BRON. EXHIBIT 10.40 EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT ("Agreement") is entered into as of October 1, 1997 by and between Pan American Group, Inc. ("PAGI"), Pan American Bank, FSB, a federally chartered savings bank (the "Bank"; the Bank and PAGI are individually and collectively referred to as "Employer") and Guillermo Bron ("Employee"). WITNESSETH: WHEREAS, Employer desires to obtain the services of Employee and Employee desires to render services to Employer; WHEREAS, the Boards of Directors of Employer (individually and collectively referred to as the "Board") has determined that it is in Employer's best interests and that of its stockholders to secure the services of Employee, to secure certain additional commitments from Employee and to provide Employee certain additional benefits; and WHEREAS, Employer and Employee desire to set forth in this Agreement all the terms and conditions of Employee's employment with Employer. NOW, THEREFORE, in consideration of the mutual promises and covenants herein contained, the parties agree as follows: 1. Term. Employer agrees to employ Employee and Employee agrees to serve ---- Employer in accordance with the terms of this Agreement, for (a) a term of approximately three (3) years and two (2) months commencing on the date of this Agreement and ending December 31, 2000 (the "Initial Term"), and (b) at the option of Employer, which Employer may exercise by giving written notice to Employee on or before December 31, 1999, an additional one year period ending December 31, 2001 (the "Extended Term") The Initial Term and the Extended Term are hereinafter referred to as the "Term." Notwithstanding the foregoing, the Term may be terminated before the expiration of the Initial Term or the Extended Term in accordance with the provisions which follow. 2. Services and Exclusivity of Services. ------------------------------------ (a) Employee Time. So long as this Agreement shall continue in ------------- effect, Employee shall devote his energy and ability to the business, affairs and interests of Employer and its subsidiaries and matters related thereto, as reasonably necessary to perform his services hereunder, and shall use Employee's best efforts and abilities to promote Employer's interests, and shall perform the services contemplated by this Agreement in accordance with policies established by and under the direction of the Board. (b) Service to Affiliates; Promoting Business. Employee agrees to ----------------------------------------- serve without additional remuneration in such executive capacities or as a Board member for one or more direct or indirect subsidiaries of Employer as the Board may from time to time request, subject to appropriate authorization by the subsidiary or subsidiaries involved and any limitations under applicable law. Employee agrees to faithfully and diligently promote the business affairs and interests of Employer and its subsidiaries. (c) Exclusivity of Services. Employee may make and manage personal ----------------------- business investments of his choice and serve in any capacity with Bastion Capital Corporation or any of its affiliates, or any similar or analogous investment banking or merchant banking firms, or any civic, educational or charitable organization without seeking or obtaining approval by the Board, provided that Employee shall not engage in any such activities and services which substantially interfere or conflict with the performance of duties hereunder, or which constitute a line of business related to that of the Bank without the prior approval of the Board, which the Board shall not unreasonably withhold. An investment that exceeds 5% of the equity securities or capitalization of a competitor, supplier or customer of Employer shall be deemed to constitute such a conflict. (d) No Conflicts. Employee represents to Employer that Employee has ------------ no other outstanding commitments inconsistent with any of the terms of this Agreement or the services to be rendered hereunder. 3. Specific Position: Duties and Responsibilities. ----------------------------------------------- (a) Positions, Duties and Authority. Employer and Employee agree ------------------------------- that, subject to the provisions of this Agreement, the Bank will employ Employee and Employee will serve the Bank and/or PAGI as its Chairman of the Board. Employee agrees to observe and comply with the rules and regulations of the Bank as adopted by the Board of Directors of the Bank (the "Bank Board") respecting the performance of Employee's duties to the Bank, and with the rules and regulations of PAGI as adopted by the Board of Directors of PAGI (the "PAGI Board"). -2- Employee also agrees to carry out and perform orders, directions and policies of the Bank Board and the PAGI Board as they may from time to time direct. Employee shall have such corporate power and authority as shall reasonably be required to enable the discharge of duties commensurate with the offices he holds. It is anticipated that Employee's services to Employer shall be particularly focused on strategic planning and implementation of the expansion of Employer's existing businesses, the exploration of, and entry into, new lines of business, and the obtaining of favorable financing for new and existing businesses of the Employer. It is anticipated that approximately 66-2/3% of Employee's time will be occupied with his services to the Bank, and that approximately 33-1/3% of his time will be occupied with his services to PAGI. Any bonus paid pursuant to Section 4(b) will be fairly allocated between the Bank and PAGI based on the respective services Employee performs for them. (b) Supervision of Employee. For the term of this Agreement, ----------------------- Employee shall report (i) with respect to his duties to the Bank, to the Bank Board, and (ii) with respect to his duties to PAGI, to the PAGI Board. 4. Compensation. ------------ (a) Base Compensation. During the term of this Agreement, Employer ----------------- agrees to pay Employee a base salary at the rate of One Hundred Fifty Thousand Dollars ($150,000) per year, payable in equal installments consistent with Employer's normal payroll practices applicable to salaried employees (the "Base Salary"). (b) Bonuses. At least annually, the Board shall meet with Employee ------- to review with him his performance of services hereunder and the performance and prospects of the business of Employer. Based on such review, and on such other factors as the Board may deem to be relevant, which may include pre-tax net income, return on shareholders' equity and other similar factors, Employer shall pay Employee a bonus of up to 100% of Employee's Base Salary. (c) Additional Benefits. During the Term hereof, Employee shall ------------------- participate in any bonus, pension, profit, incentive compensation, medical, life insurance, disability or similar plan, and shall receive all perquisites, -3- available to executives of Employer at or below Employee's level of responsibility (the "Compensation Plans"), except to the extent Employee does not meet the eligibility requirements generally applicable to participants in such Compensation Plan. Employee shall also be entitled to receive the benefits specified on Schedule 4(c) to this Agreement (the "Additional Benefits"). Employee shall not receive duplicative benefits if a Compensation Plan is listed on Schedule 4(c) as an Additional Benefit. Notwithstanding anything else contained in this Agreement to the contrary, (i) all rights of Employer, PAGI and Employee with respect to stock options granted to Employee pursuant to any Employer or PAGI stock option plan shall be governed solely by such plan, including all rights as to the vesting of options thereunder, and (ii) this Agreement shall not be deemed to amend or otherwise affect the provisions of any Compensation Plan. (d) Vacation. Employee shall be entitled to twenty (20) days of paid -------- vacation each twelve-month period, which shall accrue on a pro --- rata basis from the date of this employment agreement; provided, ---- however, that vacation days shall cease to accrue whenever thirty (30) vacation days have accrued, and the accrual of vacation days shall resume only when Employee has used enough vacations days so that additional vacation days can accrue without exceeding the limit of thirty (30) accrued vacation days. (e) Modification of Benefits. Except with respect to the Additional ------------------------ Benefits, Employer reserves the right at all times to modify, suspend or discontinue any and all Compensation Plans and any other benefits, plans, practices, policies and programs (whether before or after termination of employment) without notice to or recourse by Employee so long as such action is taken with respect to Employer' employees generally and does not single out Employee. 5. Termination. ----------- (a) For Cause. --------- i) Employer may terminate this Agreement and Employee's employment hereunder at any time for cause without further obligation or liability to Employee, including without limitation, any obligation to pay Base Salary and Additional Benefits -4- following such termination, effective upon delivery of notice of such termination to Employee or at such other future time as may be specified in such notice. Employer and Employee agree that the term "for cause" shall mean the following: Employee's personal dishonesty, incompetence, willful misconduct, breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule or regulation (other than traffic violations or similar offenses) or final cease and desist order, or material breach of any provision of this Agreement or any other grounds specified in Section 563.39(b)(1) of the Office of Thrift Supervision (the "OTS") Rules and Regulations (and any subsequent regulations of OTS and the Federal Deposit Insurance Corporation (the "FDIC") governing employment agreements). ii) If Employee is suspended and/or temporarily prohibited from participating in the conduct of the Employer's affairs by reason of a notice served under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818 (e)(3) and (g)(1)), all obligations of Employer under this Agreement shall be suspended as of the date of service of the notice, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, Employer may in its discretion (i) pay Employee all or part of the compensation withheld while this Agreement was suspended, and (ii) reinstate (in whole or in part) any of its obligations which were suspended. iii) If Employee is removed and/or permanently prohibited from participating in the conduct of Employer's affairs by reason of an order issued under Section 8(e)(4) or (g)(1) of the Federal Deposit Insurance Act (12 U.S.C. Section 1818 (e)(4) or (g)(1)), all obligations of Employer under this Agreement shall terminate as of the effective date of that order, and Employee shall receive the amount set forth in Section 5(e)(ii) of this Agreement. iv) If Employer is in default (as defined in Section 3(x)(1) of the Federal Deposit Insurance Act), all obligations under this -5- Agreement shall terminate as of the date of default, and Employee shall receive the amount set forth in Section 5(e)(ii) of this Agreement. v) All obligations of Employer under this Agreement shall be terminated (except to the extend determined that continuation of this Agreement is necessary for the continued operation of Employer) by the OTS (i) at the time the FDIC or the Corporation enters into an agreement to provide assistance to or on behalf of Employer under the authority contained in Section 13(c) of the Federal Deposit Insurance Act, or (ii) at the time the OTS approved a supervisory merger to resolve problems related to the operation of Employer, or when Employer are determined by the OTS to be in an unsafe or unsound condition; provided, however, that Employee shall receive the amount set forth in Section 5(e)(ii) of this Agreement. (b) Without Cause. Notwithstanding any other provision of this ------------- Section 5, Employee hereby agrees that Employer may terminate Employee's employment hereunder at will for any reason without any liability or obligation to Employee whatsoever, except for termination payment expressly provided for in this Agreement, at any time upon written notice of termination to Employee, such termination to become effective upon such future date as may be specified in such notice of termination. Such termination may be only by a vote of a majority of the Board and the PAGI Board. As consideration for Employee's agreement to this subparagraph (b), Employer agrees that in the event Employer elects to terminate the employment of Employee pursuant to the provisions of this subparagraph (b) prior to the completion of the Term, Employer shall provide a formal written notice of such termination and Employee shall be entitled to a termination payment equal to (i) a lump sum payment of the Base Salary equal to (A) if the termination of employment occurs before December 31, 1999, the Base Salary Employee would have received from the date of such termination through December 31, 1999, (B) if the termination of employment occurs on or after January 1, 2000 but before December 31, 2000, the Base Salary Employee would have received from the date of such termination through December 31, 2000, or (C) if the -6- termination occurs during the Extended Term, the Base Salary Employee would have received during the balance of the Extended Term; provided, however, that in no event shall Employee receive a lump sum payment of Base Salary for a period of less than six (6) months; (ii) a lump sum payment of any accrued vacation pay; (iii) any and all Additional Benefits accrued through the date of termination, including any compensation previously deferred by Employee (together with any accrued interest and earnings thereon); and (iv) a lump sum payment of the "Prorated Incentive Compensation" (as defined below). For purposes of this Agreement, the term "Prorated Incentive Compensation" means, for Employer's fiscal year in which Employee's termination of employment occurs (the "Termination Year"), the incentive compensation received by Employee in Employer's fiscal year immediately before the Termination Year (the "Prior Year"), (I) multiplied by a fraction, the numerator of which is the number of days from the beginning of the Termination Year to the date of Employee's termination of employment, and the denominator of which is three hundred sixty five (365), and (II) except for purposes of Section 5(d), decreased in an amount which, as determined by the Board, based on Employer's customary and consistent calculation of earnings, is proportional to any decrease in earnings of Employer from the Prior Year to the Termination Year. (c) Disability. In the event Employee shall fail, because of ---------- illness, incapacity or injury which is determined, within the applicable definitions under the Employer's group disability insurance, to be total and permanent by a physician selected by Employer or its insurers and acceptable to Employee or Employee's legal representative (such agreement as to acceptability not to be withheld unreasonably) to render for three consecutive months or for shorter periods aggregating 75 or more business days in any twelve month period, the services contemplated by this Agreement, Employee's employment hereunder may be terminated by written notice of termination from Employer to Employee. Thereafter, Employer shall continue to pay Base Salary to Employee at a rate and time and in a manner equal to 100% of the Base Salary payable immediately prior to the termination, until the earliest to occur of the following: (i) Employee dies, (ii) Employee recovers from -7- such disability and returns to full-time service, (iii) six (6) months after the date of such notice, or (iv) the waiting period, if any, under Employer's long term disability insurance or other disability plan purchased for Employee is satisfied and payments by the insurance company to Employee commence. Thereafter, no further salary or benefits shall be paid. (d) Death. If Employee's employment is terminated by reason of ----- Employee's death, this Agreement shall terminate without further obligations to Employee (or Employee's heirs or legal representatives) under this Agreement, other than for (i) payment of the sum of (A) Employee's Base Salary through the end of the month during which death occurs and for 30 days thereafter to the extent not theretofore paid, (B) any compensation previously deferred by Employee (together with any accrued interest or earnings thereon) plus the Prorated Incentive Compensation in an amount determined under Section 5(b), (C) any accrued vacation pay, in each case to the extend not theretofore paid (the sum of the amounts described in clauses (A), (B) and (C) shall be hereinafter referred to as the "Accrued Obligations"), which shall be paid to Employee or Employee's estate or beneficiary, as applicable in a lump sum in cash within thirty (30) days after the date of termination or any earlier time required by applicable law; and (ii) payment to Employee or Employee's estate or beneficiary, as applicable, any amount due pursuant to the terms of any applicable Compensation Plan. (e) Termination by Employee. ----------------------- i) Employee may terminate his employment for a "Reduction in Authority" (as defined below) at any time two (2) months after a notice of intent to terminate pursuant to this Section 5(e) has been delivered to the Board, provided such condition continues for the duration of a one month period after written notice to the Board. Upon such termination, Employee shall receive the payments and benefits set forth in subparagraph (b) above. The term "Reduction in Authority" shall mean the occurrence of one of the following events, other than as a result of grounds for termination of employment for cause under Section 5(a) or for -8- disability under Section 5(c): (A) the continuing assignments to Employee by the Board of duties materially and adversely inconsistent with the duties specified to be performed by Employee under this Agreement or with Employee's position as Chairman of the Board of the Bank and/or Chairman of the Board of PAGI; (B) a material, adverse and continuing change in the nature of Employee's responsibilities; (C) the requirement that Employee must regularly report to persons other than the Board and the PAGI Board; or (D) the removal of Employee from, or failure to re-elect Employee as, the Chairman of the Bank Board or the PAGI Board. ii) Other than as set forth in Section 5(e)(i), Employee may terminate his employment hereunder at any time upon not less than thirty (30) days written notice to Employer. In such event, Employee shall be entitled to all Accrued Obligations under this Agreement, except payment of the Prorated Incentive Bonus, through the effective date of such termination. (f) No Limitation. Employer's exercise of its right to terminate ------------- shall be without prejudice to any other right or remedy to which it or any of its affiliates may be entitled at law or in equity to enforce its rights under this Agreement. (g) Exclusive Remedy. Employee agrees that the payments expressly ---------------- provided and contemplated by this Agreement shall constitute the sole and exclusive obligation of Employer in respect to Employee's employment with and relationship to Employer and that the payment thereof shall be the sole and exclusive remedy for any termination of Employee's employment. Employee covenants not to assert or pursue any other remedies, at law or in equity, with respect to any termination of employment. (h) Expiration of Term. No payment shall be due to Employee under ------------------ this Agreement by reason of the expiration of the Initial Term and the failure by Employer to exercise its option for the Extended Term. (i) No Mitigation. In the event this Agreement is terminated for any ------------- reason, Employee shall not be obligated to mitigate any damages Employee -9- might otherwise suffer. Employer's obligation to make payments to Employee pursuant to this Agreement shall not be affected by any other employers or sources or any setoff, counterclaim, recoupment, defense or other right which Employer or its subsidiaries may have against Employee. 6. Change in Control. Employee shall be entitled to receive the amounts ----------------- set forth in Section 5(b) of this Agreement if Employer terminates his employment without cause, or he terminates his employment with Employer for a Reduction in Authority, within the "Applicable Period" (as defined below) after a "Change in Control" (as defined below). A "Change in Control" means a merger, consolidation, transfer of all or substantially all in the assets of the Bank and PAGI, or any other corporate reorganization or transaction or series of transactions, which results in any person, group of related persons, or any other organization or entity acquiring 50% or more of the outstanding voting securities or partnership interests of PAGI and the Bank. The "Applicable Period" begins on the date of a Change in Control and ends on the later of the expiration of the Initial Term or Extended Term (as the case may be) in which the Change in Control occurs, or twelve (12) months after the Change in Control occurs. 7. Business Expenses. During the term of this Agreement, to the extent ----------------- that such expenditures satisfy the criteria under the Internal Revenue Code for deductibility by Employer (whether or not fully deductible by Employer) for federal income tax purposes as ordinary and necessary business expenses, Employer shall reimburse Employee promptly for reasonable business expenditures, including travel, entertainment, parking, business meetings, and professional dues but not the costs of (or dues associated with) maintaining club memberships, made and substantiated in accordance with policies, practices and procedures established from time to time by Employer generally and incurred in pursuit and furtherance of Employer's business and good will. 8. Indemnification. --------------- (a) Indemnification by Employer. Pursuant to the terms of Section --------------------------- 545.121 of the OTS Rules and Regulations ("Section 545.121"). Employer agrees to indemnify, defend and hold harmless, Employee, from and against (a) the amount of any judgment for which Employee becomes liable as a result of any Action (as defined in -10- Section 545.121) brought against Employee in his capacity as an officer or director of Employer, and (b) if he attains a favorable judgment in such Action, reasonable costs and expenses, including reasonable attorneys' fees, actually paid or incurred by Employee in defending or settling such Action, or in enforcing his rights under Section 545.121; provided however, that Employer shall have no obligation to indemnify Employee hereunder unless (a) Final Judgment (as defined in Section 545.121) on the merits is in Employee's favor; or (b) in the case of Settlement (as defined in Section 545.121), Final Judgment against him, or Final Judgment in his favor other than on the merits, the disinterested directors of Employer determine that Employee was acting in good faith within the scope of his employment or authority as he could reasonably have perceived it under the circumstances and for a purpose he could reasonably have believed under the circumstances was in the best interests of Employer. If the disinterested directors of Employer reasonably conclude that, in connection with an Action, Employee may be entitled to indemnification, the directors shall authorize Employer to advance to Employee reasonable costs and expenses, including reasonable attorneys' fees, arising from the defense or settlement of such Action, subject to an undertaking by Employee to repay such amounts in the event of a final nonappealable determination that Employee is not entitled to indemnification, and the provisions of this Section 8. (b) Notification of Claims. After receipt of notice of commencement ---------------------- of any Action giving rise to a right of indemnification hereunder, Employee shall promptly notify Employer in writing of such Action and, when known, the facts constituting the basis for such Action (in reasonable detail). Failure by Employee to so notify Employer shall not relieve Employer of any liability hereunder unless such failure materially prejudices Employer. (c) Indemnification Procedure. Employer shall be entitled, if it so ------------------------- elects, to take control of the defense and investigation with respect to an Action and to employ and engage attorneys of its own choice to handle and defend the same, upon written notice to Employee of such election which notice acknowledges Employer's obligation to provide indemnification -11- hereunder. Employer shall not settle any Action that is the subject of indemnification without the written consent of Employee, which consent shall not be unreasonably withheld; provided, however, that Employer may settle an Action without -------- ------- Employee's consent if such Settlement (i) makes no admission or acknowledgment of liability or culpability with respect to Employee, (ii) includes a complete release of Employee, and (iii) does not require Employee to make any payment or forego, relinquish or take any action or right. Employee shall cooperate in all reasonable respects with Employer and its attorneys in the investigation, trial and defense of any Action (including the filing in Employee's name of appropriate cross claims and counterclaims). Employee may, at his own cost, participate in any investigation, trial and defense of such Action controlled by Employer. If, after receipt of a claim notice pursuant to Section 8(b), Employer does not undertake to defend any such Action, Employee may, but shall have no obligation to, contest such Action and Employer shall be bound by the result obtained with respect thereto by Employee (including, but not limited to, any Settlement thereof); provided, however, that Employee shall not settle such Action without the written consent of Employer, which Employer shall not unreasonably withhold. Employer may, at its own cost, participate in any investigation, trial and defense of any Action controlled by Employee. If Employee reasonably believes that there may be a conflict of interest between himself and Employer in the conduct of the defense of any Action, Employee shall have the right, at the expense of Employer, to select his own counsel and assume the defense of the Action; provided, however, that Employee may not settle such Action -------- ------- without the consent of Employer which consent shall not be unreasonably withheld; provided, further, that Employee may -------- ------- settle an Action without Employer's consent if such Settlement (i) makes no admission or acknowledgment of liability or culpability, (ii) includes a complete release of Employer and (iii) does not require Employer to make any payment or forego, relinquish or take any action or right. At any time after the commencement of defense of any Action, Employer may request Employee to agree in writing to the abandonment of such contest or to the payment or compromise by Employer of such claim, whereupon such action shall be taken unless Employee determines that the contest should be -12- continued and so notifies Employer in writing within 15 days of such request from Employer. If Employee determines that the contest should be continued, Employer shall be liable hereunder only to the extent of the lesser of (i) the amount which the other party(ies) to the contested claim have agreed to accept in payment or compromise as of the time Employer made its request therefor to Employee less any additional expenses incurred by Employer subsequent to such event or (ii) such amount for which Employer would otherwise be liable with respect to such Action by reason of the provisions hereof. 9. Miscellaneous. ------------- (a) Succession; Survival. This Agreement shall inure to the benefit -------------------- of and shall be binding upon Employer, its successors and assigns, but without the prior written consent of Employee, this Agreement may not be assigned other than in connection with a merger or sale of substantially of all the assets of Employer or a similar transaction in which the successor or assignee assumes (whether by operation of law or express assumption) all the obligations of Employer hereunder. The obligations and duties of Employee hereunder are personal and otherwise not assignable. (b) Notices. Any notice or other communication provided for in this ------- Agreement shall be in writing and sent if to Employer to its office at: Pan American Bank, FSB 1300 South El Camino Real Suite 320 San Mateo, California 94402-2962 Facsimile: (650) 349-8504 Attention: Mr. Lawrence J. Grill, President or at such other address as Employer may from time to time in writing designate, and if to Employee to such address as Employee may from time to time in writing designate (or Employee's business address of record in the absence of such designation). Each such notice or other communication shall be effective (i) if given by mail, three days after such communication is deposited in the mails with first class postage prepaid, addressed as aforesaid or (ii) if given by any other means, when actually delivered at such address. (c) Entire Agreement; Amendments. This Agreement ---------------------------- -13- contains the entire agreement of the parties relating to the subject matter hereof and it supersedes any prior agreements, undertakings, commitments and practices relating to Employee's employment by Employer or its affiliates. No amendment or modification of the terms of this Agreement shall be valid unless made in writing and signed by Employee and, on behalf of Employer, by its President. (d) Waiver. No failure on the part of any party to exercise or delay ------ in exercising any right hereunder shall be deemed a waiver thereof or of any other right, nor shall any single or partial exercise preclude any further or other exercise of such right or any other right. (e) Choice of Law. This Agreement, the legal relations between the ------------- parties and any action, whether contractual or non-contractual, instituted by any party with respect to matters arising under or growing out of or in connection with or in respect of this Agreement, the relationship of the parties or the subject matter hereof shall be governed by and construed in accordance with the laws of the State of California applicable to contracts made and performed in such State and without regard to conflicts of law doctrines, to the extent permitted by law and applicable regulations. (f) Arbitration. Any dispute, controversy or claim arising out of or ----------- in respect of this Agreement (or its validity, interpretation or enforcement), the employment relationship or the subject matter hereof shall at the request of either party be submitted to and settled by arbitration conducted at a mutually convenient office of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"). Employer and Employee may agree on a retired judge from the JAMS panel. If they are unable to agree upon a retired judge, JAMS will provide a list of three available judges and each party may strike one. If two of the three judges are stricken, the remaining judge will serve as arbitrator. If two arbitrators remain, the first judge listed shall serve as arbitrator. Employer and Employee agree that arbitration must be initiated within two years after the claimed breach occurred and that the failure to initiate arbitration within the two-year period constitutes an absolute bar to the institution of any new proceedings related to such alleged breach. The aggrieved party can initiate -14- arbitration by sending written notice of any intention to arbitrate by registered or certified mail to all parties and to JAMS. The notice must contain a description of the dispute, the amount involved and the remedy sought. Exhibit A sets forth the rights of Employer and Employee if the dispute is arbitrated and the rules and procedures to be followed at the arbitration hearing; provided, however, that the party or parties prevailing in such proceeding will be entitled to the reasonable attorneys' fees and expenses of counsel and costs incurred by reason of such arbitration. (g) Confidentiality; Proprietary Information. Employee agrees to not ---------------------------------------- make use of, divulge or otherwise disclose, directly or indirectly confidential or proprietary information concerning the business (including but not limited to its products, employees, services, practices or policies) of Employer or any of its affiliates of which Employee may learn or be aware as a result of Employee's employment during the Term or prior thereto as stockholder, employee, officer or director of or consultant to Employer or any of its affiliates, except to the extent such use or disclosure is (i) required by applicable law, (ii) lawfully obtainable from other sources, (iii) generally available to the public, or (iv) authorized in writing by Employer. The provision of this subsection (g) shall survive the expiration, suspension or termination, for any reason, of this Agreement. (h) Severability. If any provision of this Agreement is held invalid ------------ or unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other circumstances, to the fullest extent permitted by law. (i) Withholding: Deductions. All compensation payable hereunder ----------------------- including salary and other benefits, shall be subject to applicable taxes, withholding and other required, normal or elected employee deductions. (j) Section Headings. Section and other headings contained in this ---------------- Agreement are for convenience of reference only and shall not affect in any way the meaning or interpretation of this -15- Agreement. (k) Non-Solicitation. Employee agrees that for a period of one (1) ---------------- year after the termination of employment, Employee will not, on behalf of Employee or on behalf of any other individual, association or entity, call on any of the customers of Employer for the purpose of soliciting or inducing any of such customers to acquire (or providing to any of such customers) any product or service provided by Employer nor will Employee in any way, directly or indirectly , as agent or otherwise, in any other manner solicit, influence or encourage such customers to take away or to divert or direct their business to Employee or any other person or entity by or with which Employee is employed, associated, affiliated or otherwise related ("Employee Related ---------------- Entity"); provided, however, that during the one (1) year period ------ referred to above, Employee will be permitted to be involved in advertising and marketing deposit products and loans in communities served by Employer in its residential loan and deposit business. (l) Employees. Employee agrees that for a period of two (2) years --------- after the termination of Employee's employment, Employee will not, directly or indirectly, disrupt, damage, impair, or interfere with Employer's business by soliciting, influencing, encouraging or recruiting any employee of Employer to work for Employee or any Employee Related Entity. (m) Counterparts. This Agreement and any amendment hereto may be ------------ executed in one or more counterparts. All of such counterparts shall constitute one and the same agreement and shall become effective when a copy signed by each party has been delivered to the other party. (n) Representation By Counsel; Interpretation. Employer and Employee ----------------------------------------- each acknowledge that each party to this Agreement has been represented by counsel in connection with this Agreement and the matters contemplated by this Agreement. Accordingly, any rule of law, including but not limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any claimed ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. The provisions of this Agreement shall be interpreted in a reasonable manner of effect -16- the intent of the parties. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written. "Employer" PAN AMERICAN BANK, FSB By: /s/ LAWRENCE J. GRILL ---------------------------- Its: President PAN AMERICAN GROUP, INC. By: /s/ LAWRENCE J. GRILL ---------------------------- Its: President "EMPLOYEE" /s/ GUILLERMO BRON ------------------------------- Guillermo Bron Pan American Bank, FSB c/o Bastion Capital Corporation 1999 Avenue of the Stars Suite 2960 Los Angeles, California 90067 Facsimile: (310) 277-7582 -17- SCHEDULE TO PARAGRAPH 4(C) ADDITIONAL BENEFITS STOCK OPTION PLAN Concurrently upon execution of the Agreement, PAGI and Employee shall enter into a Stock Option Agreement pursuant to PAGI's most current Stock Option Plan. PAGI shall grant Employee additional stock options to purchase 30 shares upon the terms and conditions described in such Plan and Agreement, and at a price to be determined by the PAGI Board or its compensation committee. PERQUISITES See the schedule of additional benefits attached to this schedule. -18- EXHIBIT TO SCHEDULE TO PARAGRAPH 4(C) PERQUISITES PAID BY EMPLOYER ________________________________________________________________________________ a. $500,000 of term life insurance in excess of the amount provided by Employer under the Employer's group term life insurance plan in which its employees generally participate. b. Monthly car allowance of $500 c. Long-term Disability Insurance providing 60% of annual Base Salary up to $10,000 per month coverage as provided under the Employer's long-term disability plan in which its employees generally participate, or through individual coverage if such plan does not provide such coverage. d. Accidental Death and Dismemberment Insurance up to the maximum amount that can be purchased under the Employer's accidental death and dismemberment plan in which its employees generally participate. e. Monthly premium cost under the Employer's plan for family Medical, Dental and Vision Insurance, except that Employee shall pay family deductibles and co-payments. -19- EX-10.41 24 EMPLOYMENT AGREEMENT - JOHN T. FRENCH Exhibit 10.41 EMPLOYMENT AGREEMENT -------------------- This Employment Agreement (this "Agreement"), dated as of October 1, 1997 is by and between United PanAm Mortgage Corp., a California corporation (the "Company"), and John T. French ("Employee"), with reference to the following facts: A. Due to Employee's high degree of business acumen and experience in the mortgage banking field, the Company desires to Employee as its Chairman, President, and Chief Executive Officer on the terms set forth below. B. Employee is willing to enter into this Employment Agreement on the terms and conditions set forth below. NOW, THEREFORE, the Company and Employee hereby agree as follows: 1. Position. During the term of his employment with the Company -------- hereunder, Employee shall serve as Chairman, President, and Chief Executive Officer of the Company. Employee shall, subject to the direction and policies of the Board of Directors of the Company, perform those duties customarily performed by officers with the same or similar titles of companies comparable to the Company, and Employee shall not be required to perform any work not commonly performed by officers with the same or similar titles of companies comparable to the Company. While he is employed by the Company, Employee shall diligently devote his entire business skill, time and effort to his employment hereunder. Notwithstanding the foregoing, and provided that such activities do not interfere with the fulfillment of Employee's obligations hereunder, Employee may (a) serve as a director or trustee of any charitable or non-profit entity; (b) acquire solely as an investment any securities of an entity so long as he remains a passive investor in such entity and so long as such investment in any entity directly or indirectly in competition with the Company does not exceed 2% of such entity's outstanding voting securities; and (c) serve as a director of any corporation so long as such entity is not, directly or indirectly, in competition with the Company. Unless the Company and Employee agree to the contrary, Employee's primary place of employment shall be at the Company's offices in Orange, California. Employee shall travel to such other locations as may be necessary in order to discharge his duties hereunder. In the event of the termination of the employment of Employee before September 30, 1999 by the Company without "Cause" or by Employee with "Good Reason" (as such terms are defined in Section 6), Employee shall make himself available, during the Consulting Term (as defined below) to perform consulting services to the Company as the Company deems reasonable; provided, however, that Employee shall not be required to be available outside of regular business hours without reasonable advance notice. 2. Term of Employment. Employee's term of employment by the Company ------------------ under this Agreement (the "Employment Term") shall begin on the date hereof and shall continue until September 30, 1999, unless sooner terminated by either party. The "Consulting Term" shall begin on the termination of this Agreement before September 30, 1999 by the Company without "Cause" or by the Employee with "Good Reason" (as such terms are defined in Section 6), and shall continue until the later of the first anniversary of such termination or September 30, 1999. By giving written notice to Employee at least 15 days before the expiration of the Consulting Term, the Company may renew the Consulting Term for one additional year. Employee hereby acknowledges that the Company shall not be in breach of this Agreement by terminating this Agreement at any time without "Cause," or by giving Employee "Good Reason" to terminate this Agreement, provided that, after such termination, the Company pays the consulting fee set forth in Section 3(c) in accordance with the terms of this Agreement. 3. Compensation. As compensation for the services contemplated hereby, ------------ Employee shall receive the following: (a) A monthly base salary (the "Base Salary") of $16,667 during the Employment Term. (b) For each 12 month period during the Employment Term, Employee shall receive a bonus in an amount determined in the discretion of the Board of Directors of the Company; provided, however, that, assuming reasonable performance by Employee of his obligations under this Agreement, such bonus shall not be less than $100,000 payable on September 30, 1998 and September 30, 1999. (c) Employee shall receive a consulting fee of $10,000 per month during the Consulting Term. Payment of such consulting fee during the Consulting Term, however, shall be conditioned upon Employee's observance of the Covenant Not to Compete set forth in Section 8, consulting obligations set forth in Section 1, and covenant of confidentiality set forth in Section 7. In the event this Agreement is terminated for any reason, Employee shall not be obligated to mitigate any damages Employee might otherwise suffer. The Company's obligation to make payments to Employee pursuant to this Agreement shall not be affected by any other employers or sources or any setoff, counterclaim, recoupment, defense or other right which the Company or its subsidiaries may have against Employee. 4. Employee Benefits. Employee shall be entitled to participate while ----------------- employed by the Company in all employee benefit plans and programs and perquisites of the Company which are made generally available from time to time by the Company to its executive management employees. Employee shall -2- be entitled annually to a minimum of two weeks of vacation per year and sick leave in accordance with the Company's normal policies for its executive employees. The Company shall offer to employ an assistant designated by Employee on reasonable terms. Upon the execution of this Agreement, the Company shall assume Employee's obligations under that certain lease of the premises commonly known as One Civic Plaza, Suite 360, Newport Beach, California 92660, which Employee represents to be rent of $1,500 per month for a term expiring on October 31, 1998. Upon such assumption, the Company shall have the right to occupy or sublet such premises, and, if it elects to sublet such premises, to retain the proceeds. On the execution hereof, Employee shall receive options to purchase 30 shares of the common stock of Pan American Group, Inc., the parent corporation of the Company, which such options shall (a) have an exercise price per share equal to the price per share at which such shares are offered to the public in an initial public offering of the stock of Pan American Group, Inc., (b) vest and become exercisable 25% on the date of this Agreement, and 25% on each anniversary of the date of this Agreement; provided, however, that such options shall become fully vested and exercisable on September 30, 1999 if Employee is an employee of the Company on that date and the Company and Employee neither renew this Agreement nor enter into a new employment agreement, and (c) be in addition to any other options to purchase shares of the common stock of Pan American Group, Inc. which Employee has received before the date of this Agreement. 5. Expenses. The Company shall pay or reimburse Employee for any -------- expenses reasonably incurred by him in furtherance of his duties hereunder, including expenses for entertainment, traveling, meals and hotel accommodations, upon submission by him of vouchers or itemized lists thereof prepared in compliance with such reasonable rules and policies relating thereto as the Company may from time to time adopt and as may be required in order to facilitate the treatment of such payments as proper deductions to the Company under the Internal Revenue Code and the rules and regulations adopted pursuant thereto now or hereafter in effect. 6. Death, Disability, and Termination for Cause. -------------------------------------------- (a) The payment of compensation under this Agreement shall terminate upon the termination of the employment of Employee by reason of death or "Disability," by the Company for "Cause," or voluntary termination by Employee without "Good Reason," as such terms are defined in this Section 6. In the event of termination in one of the circumstances described in this Section 6, Employee shall be entitled to receive all Base Salary earned to the date of termination, but shall forfeit all rights to subsequent Minimum Bonuses and other bonuses that would have accrued during or would have been payable with respect to the year in which such termination occurs to the extent that such -3- termination occurs before the date on which they are payable. (b) As used herein, "Cause" shall mean (i) any action of Employee or any failure to act on the part of Employee which constitutes fraud, embezzlement or any felony in connection with Employee's duties as a principal officer or other employee of the Company or any subsidiary of the Company, or willful misconduct which causes substantial economic or reputational injury to the Company, (ii) willful breach of a material provision of this Agreement by Employee, and the failure of Employee to begin to cure such breach within ten (10) days after receiving written notice from the Company specifying such breach, provided that such ten (10) day period shall be extended during any period of Employee's disability or other physical or mental illness, or (iii) a material neglect or refusal (other than by reason of a mental or physical illness or disability) by Employee to follow the reasonable instructions of the Board of Directors of the Company and Employee's failure to begin to follow such instructions within ten (10) days after receiving written notice from the Company to do so, provided that such ten (10) day period shall be extended during any period of Employee's disability or other physical or mental illness. Termination for Cause shall be by written notice from the Company to Employee, and such notice shall identify with reasonable (under the circumstances) specificity the damage caused. (c) As used herein, "Good Reason" shall mean (i) the assignment to Employee of any duties inconsistent with Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1 of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated and insubstantial action not taken in bad faith and not intended to be inconsistent with this Agreement and which is remedied by the Company promptly after receipt of notice thereof given by Employee, (ii) any failure by the Company to comply with its obligations under this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by Employee, (iii) any purported termination of Employee's employment by the Company otherwise than as expressly permitted in this Agreement, or (iv) any failure by any successor to the Company to assume the obligations of the Company under this Agreement. (d) As used herein, "Disability" means the failure of Employee to render the services contemplated by this Agreement for three consecutive months, or for shorter periods aggregating 75 or more business days in any 12 month period, because of illness, incapacity or injury which is determined, within the applicable definitions under Employer's group disability insurance, to be total and permanent by a physician -4- selected by Employer or its insurers and acceptable to Employee or Employee's legal representative (with such agreement as to acceptability not to be unreasonably withheld). (e) In the event of Employee's death, his compensation shall be payable to any beneficiary which he has designated in writing to the Company, or, if he has not designated any such beneficiary, to his estate. In the event this Agreement is terminated for any reason, Employee shall not be obligated to mitigate any damages Employee might otherwise suffer. 7. Nondisclosure of Confidential Material. -------------------------------------- -5- In the performance of Employee's duties, Employee has previously had, and will have, access to confidential records and information, including, but not limited to, development, marketing, purchasing, organizational, strategic, financial, managerial, administrative, distribution and sales information, data, and specifications presently owned or at any time hereafter developed by the Company or its agents or consultants or used presently or at any time hereafter in the course of its business, that are not otherwise part of the public domain (collectively, the "Confidential Material"). All such Confidential Material is considered secret and has been and/or will be disclosed to Employee in confidence. Employee acknowledges that the Confidential Material constitutes proprietary information of the Company which draws independent economic value, actual or potential, from not being generally known to the public or to other persons who could obtain economic value from its disclosure or use, and that the Company has taken efforts reasonable under the circumstances, of which this Section 7 is an example, to maintain its secrecy. Except in the performance of Employee's duties to the Company, Employee shall not, directly or indirectly for any reason whatsoever, disclose or use any such Confidential Material, except that the foregoing disclosure prohibition shall not apply as to Confidential Material that (a) has been publicly disclosed or was within Employee's possession prior to its being furnished to Employee by Company or becomes available to Employee on a nonconfidential basis from a third party (in any of such cases, not due to a breach by Employee of Employee's obligations to the Company or by breach of any other person of a confidential or fiduciary obligation), (b) is required to be disclosed by Employee pursuant to applicable law, and Employee provides notice to Company of such requirement as promptly as possible, or (c) was independently acquired or developed by Employee without violating any of the obligations under this Agreement and without relying on Confidential Material of the Company. All records, files, drawings, documents, equipment and other tangible items, wherever located, relating in any way to the Confidential Material or otherwise to the Company's business, which Employee has prepared, used or encountered or shall in the future prepare, use or encounter, shall be and remain the Company's sole and exclusive property and shall be included in the Confidential Material. Upon Employee's termination of employment with the Company, or whenever requested by the Company, Employee shall promptly deliver to the Company any and all of the Confidential Material and copies thereof, not previously delivered to the Company, that may be, or at any previous time has been, in Employee's possession or under Employee's control. 8. Covenant Not to Compete. ----------------------- Employee acknowledges that the Company's business is highly innovative and competitive, and that the Confidential -6- Material involves valuable and proprietary information. Employee further acknowledges that this Confidential Material would necessarily be compromised were Employee to use this information for himself after his employment, or were Employee to become an employee or consultant or otherwise become associated with any competitor of the Company during the life-cycle of the development of the Company's products and services and the strategy associated with the marketing of such products and services. Although the lengths of such cycles vary depending upon the product or service, the Company and Employee agree that, in light of Employee's knowledge and position with the Company, a period ending on the later of September 30, 1999 or one year after the termination of Employee's employment with the Company (the "Applicable Period") is a reasonable and necessary period in order to protect the Company's Confidential Material. Employee hereby acknowledges that the Company's business is national in scope. Accordingly, Employee and the Company agree that, for the Applicable Period, Employee will not himself use any of the Confidential Material, and will not directly or indirectly become an employee of, consult with, render services for, own, manage, control, participate in, or in any manner engage in any business which competes with the business of the Company in any state in which the Company does business. Employee further agrees that for the Applicable Period, Employee will not induce or attempt to induce any employee of the Company to leave the employ of the Company or hire, directly or through another person or entity, any person who is an employee of the Company at any time during the last year of Employee's employment at the Company. Employee further agrees that he will not induce or attempt to induce any customer, supplier, licensee or other person or entity with a business relationship with the Company to cease doing business with the Company, or in any way interfere with the relationships between such customer, supplier, licensee or business relation and the Company. Nothing in this Section 8 shall prohibit Employee from being a passive owner of not more than two percent (2%) of the outstanding shares of any class of stock of a corporation which is publicly traded, so long as Employee does not serve such company in any capacity whether as a board member or otherwise, and Employee has no active participation in the business of such corporation or any of its subsidiaries or affiliates. If, at the time of enforcement of this Section 8, an arbitrator (or court) should hold that the duration or scope of the restrictions stated herein are unreasonable under the circumstances then existing, the parties agree that the maximum duration or scope which is reasonable under such circumstances shall be substituted for the stated duration or scope. Similarly, if, at the time of enforcement, an arbitrator (or court) should hold that the area of the restriction stated herein is unreasonable under the circumstances then existing, the parties agree that the maximum area which is reasonable under such circumstances shall be substituted for the stated area. -7- 9. Equitable Relief. ---------------- Employee acknowledges that violation of Sections 7 and 8 would cause the Company irreparable damage for which the Company cannot be reasonably compensated in damages in an action at law, and that therefore in the event of any breach by Employee of Sections 7 or 8, the Company shall be entitled to apply to a court of competent jurisdiction for equitable relief by way of injunction or otherwise, without being required to post a bond. This provision shall not, however, be construed as a waiver of any of the rights which the Company may have for damages under this Agreement or otherwise, and, except as limited in Section 12, all of the Company's rights and remedies shall be unrestricted. 10. Notices. ------- For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when personally delivered, telecopied, or sent by certified or overnight mail, return receipt requested, postage prepaid, addressed to the respective addressees, or sent to the respective telecopier numbers, last given by each party to the other. All notices and communications shall be deemed to have been received on the date of delivery thereof if personally delivered, upon return confirmation if telecopied, on the third business day after the mailing thereof, or on the date after sending by overnight mail, except that notice of change of address shall be effective only upon actual receipt. No objection to the method of delivery may be made if the written notice or other communication is actually received. 11. General. ------- (a) Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of California, without giving effect to conflicts of laws principles thereof which might refer such interpretations to the laws of a different state or jurisdiction; provided, however, that the construction and enforcement of the Covenant Not To Compete set forth in Section 8 in each state in which the Company does business shall be governed by the laws of such state, without giving effect to conflicts of laws principles thereof which might refer such interpretations to the laws of a different state or jurisdiction. (b) Captions. The section headings contained herein are for -------- reference purposes only and shall not in any way affect the meaning or interpretation of this Agreement. (c) Entire Agreement. This Agreement sets forth the entire agreement ---------------- and understanding of the parties relating to the subject matter hereof, and supersedes all prior -8- agreements, arrangements and understandings, written or oral, between the parties. (d) No Other Representations. No representation, promise or ------------------------ inducement has been made by any party hereto that is not embodied in this Agreement, and no party shall be bound by or liable for any alleged representation, promise or inducement not so set forth. (e) Successors and Assigns. This Agreement shall inure to the ---------------------- benefit of and shall be binding upon the Company and Employee and their respective heirs, executors, personal representatives, successors and assigns, including any resulting or surviving corporation or other entity with or into which the Company may merge or consolidate. (f) Amendments; Waivers. This Agreement may be amended, modified, ------------------- superseded, cancelled, renewed or extended, and the terms or covenants hereof may be waived, only by a written instrument executed by all of the parties hereto, or in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or covenant contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. (g) Representation By Counsel; Interpretation. Employee acknowledges ----------------------------------------- that (i) this Agreement has been drafted by counsel for the Company, (ii) the Company has advised him to obtain the advice of his own counsel in reviewing this Agreement and deciding whether to sign it, and (iii) he has either signed this Agreement after consulting with his own counsel, or intentionally deciding not to seek the advice of his own counsel. Accordingly, any rule of law, including but not limited to Section 1654 of the California Civil Code, or any legal decision that would require interpretation of any alleged ambiguities in this Agreement against the party that drafted it has no application and is expressly waived. 12. Arbitration of Disputes. ----------------------- Except for equitable relief as provided in Section 9, arbitration shall be the exclusive remedy for resolving any dispute or controversy between Employee and the Company, including, but not limited to, any dispute regarding Employee's employment or the termination of Employee's employment or any dispute regarding the application, interpretation or validity of this Agreement. Such arbitration shall be conducted in accordance with the then most applicable rules of the American Arbitration Association. -9- The arbitrator shall be empowered to grant only such relief as would be available in a court of law. In the event of any conflict between this Agreement and the rules of the American Arbitration Association, the provisions of this Agreement shall be determinative. If the parties are unable to agree upon an arbitrator, they shall select a single arbitrator from a list designated by the office of the American Arbitration Association having responsibility for the city in which Employee last resided while employed by the Company of seven arbitrators, all of whom shall be retired judges who are actively involved in hearing private cases or members of the National Academy of Arbitrators. If the parties are unable to agree upon an arbitrator from such list, they shall each strike names alternatively from the list, with the first to strike being determined by lot. After each party has used three strikes, the remaining name on the list shall be the arbitrator. The fees and expenses of the arbitrator shall initially be borne equally by the parties; provided, however, that each party shall initially be responsible for the fees and expenses of its own representatives and witnesses. If the parties cannot agree upon a location for the arbitration, the arbitrator shall determine the location. Judgment may be entered on the award of the arbitrator in any court having jurisdiction. The prevailing party in the arbitration proceeding, as determined by the arbitrator, in any enforcement or other court proceedings, or in any proceedings to obtain equitable relief under Section 9, shall be entitled to the extent provided by law to reimbursement from the other party for all of the prevailing party's costs (including but not limited to the arbitrator's compensation), expenses and reasonable attorney's fees. IN WITNESS WHEREOF, the parties have executed this Employment Agreement as of the date first above written. "Employee" /s/ JOHN T. FRENCH ------------------------------- John T. French the "Company" UNITED PANAM MORTGAGE CORP. By: /s/ WILLIAM BRON ----------------------------- Title: -10- EX-10.42 25 SALARY CONTINUATION AGREEMENT - LAWRENCE J. GRILL Exhibit 10.42 PAN AMERICAN BANK, FSB SALARY CONTINUATION AGREEMENT THIS AGREEMENT is made as of this 1st day of October, 1997, by and between PAN AMERICAN BANK, FSB, a Federal Stock Savings Bank located in San Mateo, California (the "Company") and LAWRENCE J. GRILL (the "Executive"). INTRODUCTION To encourage the Executive to remain an employee of the Company, the Company is willing to provide salary continuation benefits to the Executive. The Company will pay the benefits from its general assets. AGREEMENT The Executive and the Company agree as follows: ARTICLE 1 DEFINITIONS 1.1 Definitions. Whenever used in this Agreement, the following words and ----------- phrases shall have the meanings specified: 1.1.1 "Change of Control" means a "Change of Control" as defined in Section 6 of the Employment Agreement. 1.1.2 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.3 "Designated Investment" means the investment vehicle or vehicles set forth on Exhibit "A". 1.1.4 "Designated Amount" means, for any Plan Year, the amount of cash the Company could have withdrawn or realized from the Designated Investment in such Plan Year (net of any charges or penalties), assuming that the Company held the Designated Investment during the Plan Year, whether or not it actually did so, and assuming that the Company never withdrew or realized any cash from the Designated Investment for any purposes other than the payment of benefits under this Agreement, whether or not it actually did so. 1.1.5 "Disability" means an event giving rise to the termination of Executive's employment with the Company under Section 5(c) of the Employment Agreement. 1.1.6 "Early Termination" means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or Change of Control. 1.1.7 "Early Termination Date" means the month, day and year in which Early Termination occurs. 1.1.8 "Employment Agreement" means that certain Employment Agreement of even date herewith by and among the Executive, the Company, and Pan American Group, Inc. 1.1.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.10 "Normal Retirement Age" means the Executive's 67th birthday. 1.1.11 "Normal Retirement Date" means the later of the Normal Retirement -2- Age or Termination of Employment. 1.1.12 "Plan Year" means the calendar year except that the first plan year shall be a short plan year commencing on the effective date of this Agreement and ending on December 31, 1997. 1.1.13 "Termination for Cause" means the termination of the Executive's employment with the Company by the Company for fraud or dishonesty against the Company which materially adversely affects the business of the Company, or upon conviction of a felony which materially adversely affects the business of the Company. 1.1.14 "Termination of Employment" means that the Executive ceases to be employed by the Company for any reason whatsoever other than by reason of a leave of absence which is approved by the Company. The date of Termination of Employment shall be the actual date on which the Executive is no longer in the employ of the Company; provided, however, that the date of Termination of Employment shall be deemed to be (a) December 31, 1998 if the actual date on which the Executive is no longer in the employ of the Company occurs in 1997 or 1998, or (b) December 31, 1999 if the actual date on which the Executive is no longer in the employ of the Company occurs in 1999. 1.1.15 "Voluntary Termination" means that the Executive, prior to his Normal Retirement Age, has terminated his employment with the Company for reasons other than Termination for Cause, Disability, death, Change of Control or Involuntary Termination. 1.1.16 "Involuntary Termination" means that the Executive, prior to his Normal Retirement Age, has been notified in writing, pursuant to the Executive's Employment Agreement, that his employment with the Company is terminated for reasons -3- other than an approved leave of absence, Termination for Cause, Disability, or death. "Involuntary Termination" shall also mean the termination of the Executive's employment with the Company by the Executive upon a "Reduction in Authority" as set forth in Section 5(e) of the Employment Agreement. ARTICLE 2 BENEFITS OTHER THAN UPON DEATH 2.1 Normal Retirement Benefit. Upon Termination of Employment on or after ------------------------- the Normal Retirement Age for reasons other than Termination for Cause, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Agreement. 2.1.1 Amount of Benefit. The benefit under this Section 2.1 is ----------------- $100,000 per year, payable for 15 years. 2.1.2 Payment of Benefit. The Company shall pay the annual benefit to ------------------ the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following the Executive's Termination of Employment under this Section 2.1 and continuing for 179 additional months. 2.2 Early Termination Benefit. Upon Early Termination, the Company shall ------------------------- pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Agreement. 2.2.1 Amount of Benefit. The benefit Under this Section 2.2 is either ----------------- the benefit amount set forth in (a) or (b) below: (a) Involuntary Early Termination. The benefit under this ----------------------------- Section 2.2.1(a) is an annual benefit payable for 15 years equal to the "Weighted Average" (determined as set forth in Section 2.2.1(c) below) of -4- the Early Termination Annual Benefit/Involuntary Termination amount set forth in Schedule "A" for the Plan Year immediately before the year in which the Termination of Employment occurs (the "Prior Year") and the Early Termination Annual Benefit/Involuntary Termination amount set forth in Schedule "A" for the Plan Year in which the Termination of Employment occurs (the "Termination Year"); or (b) Voluntary Early Termination. The benefit under this --------------------------- Section 2.2.l(b) is an annual benefit payable for 15 years equal to the Weighted Average of the Early Termination Annual Benefit/Voluntary Termination amount set forth in Schedule "A" for the Prior Year and the Early Termination Annual Benefit/Voluntary Termination amount set forth in Schedule "A" for the Termination Year. (c) Weighted Average. The Weighted Average of the amount set ---------------- forth in Schedule "A" for the Prior Year (the "Prior Year Amount") and the amount set forth in Schedule "A" for the Termination Year (the "Termination Year Amount") shall be the sum of (1) the Termination Year Amount multiplied by the quotient obtained by dividing the number of days from January 1 of the Termination Year through and including the date of the Termination of Employment by 365, and (2) the Prior Year Amount multiplied by the quotient obtained by dividing the number of days from the day after the date of the Termination of Employment through and including December 31 of the Termination Year by 365. 2.2.2 Payment of Benefit. The Company shall pay the annual benefit to ------------------ the Executive in 12 equal monthly installments payable on the first day of each month -5- commencing with the month following the later of the Executive's Termination of Employment or the Executive's Normal Retirement Age and continuing for 179 additional months. 2.3 Disability Benefit. If the Executive terminates employment due to ------------------ Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Agreement. 2.3.1 Amount of Benefit. The benefit under this Section 2.3 is the ----------------- Weighted Average of the Disability Annual Benefit amount set forth in Schedule "A" for the Prior Year (as defined in Section 2.2.1(a)) and the Disability Annual Benefit amount set forth in Schedule "A" for the Termination Year (as defined in Section 2.2.1(a)), payable for 15 years. 2.3.2 Payment of Benefit. The Company shall pay the annual benefit ------------------ amount to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following Termination of Employment and continuing for 179 additional months. 2.4 Change of Control Benefit. If the Executive is in the active service ------------------------- of the Company at the time of a Change of Control, and the Executive's employment with the Company terminates within the "Applicable Period" (as defined in Section 6 of the Employment Agreement) for any reason other than death, Disability, retirement, or Termination for Cause, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement. 2.4.1 Amount of Benefit. The annual benefit under this Section 2.4 is ----------------- the Change of Control Benefit amount set forth in Schedule "A" for the Plan Year in which Termination of Employment occurs, payable for 15 years. -6- 2.4.2 Payment of Benefit. The Company shall pay the annual benefit ------------------ amount to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following the Termination of Employment and continuing for 179 additional months. ARTICLE 3 DEATH BENEFITS 3.1 Death During Active Service. If the Executive dies while in the --------------------------- active service of the Company, the Company shall pay to the Executive's beneficiary the benefit described in this Section 3.1. This benefit shall be paid in lieu of the Benefits described in Article 2. 3.1.1 Amount of Benefit. The annual benefit under this Section 3.1 is ----------------- the Normal Retirement Benefit amount described in Section 2.1.1, payable for 15 years. 3.1.2 Payment of Benefit. The Company shall pay the annual benefit to ------------------ the beneficiary in 12 equal monthly installments payable on the first day of each month commencing with the first day of the second month following the Executive's death and continuing for 179 additional months. 3.2 Death During Benefit Period. If the Executive dies after the benefit --------------------------- payments have commenced under this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts that would have been paid to the Executive had the Executive survived. 3.3 Death Following Termination of Employment But Before Benefits ------------------------------------------------------------- Commence. If the Executive is entitled to benefits under this Agreement, but - -------- dies prior to receiving said benefits, the Company shall pay to the Executive's beneficiary the same -7- benefits, in the same manner, that would have been paid to the Executive had the Executive survived, however, said benefit payments will commence as soon as practicable after the Executive's death. ARTICLE 4 BENEFICIARIES 4.1 Beneficiary Designations. The Executive shall designate a beneficiary ------------------------ by filing a written designation with the Company. The Executive may designate more than one beneficiary, and may designate primary and secondary beneficiaries. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Company during the Executive's lifetime; the Company shall be entitled to rely on the last beneficiary designation executed by the Executive and accepted by the Company before his death. If the Executive is married and names someone other than his spouse as a beneficiary, such beneficiary designation will not be effective unless his spouse executes and delivers to the Company a spousal consent, in a form designated by the Company. The Executive's beneficiary designation shall be deemed automatically revoked if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. Without limiting the generality of the preceding sentence, the interest in benefits of a spouse of the Executive who has predeceased the Executive or whose marriage has been dissolved shall automatically pass to the Executive, and shall not be transferrable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. If the Executive dies without a valid beneficiary designation, or if all beneficiaries have predeceased the Executive, all payments shall be made to the Executive's surviving spouse, or, if there is no surviving -8- spouse, to his estate. 4.2 Facility of Payment. If the benefit is payable to a minor, to a ------------------- person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incapacitated person or incapable person. The Company may require proof of incapacity, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit. ARTICLE 5 GENERAL LIMITATIONS The provisions of this Article 5 shall apply notwithstanding any other provision of this Agreement to the contrary. 5.1 No Payments in Excess of Designated Amount. In no event shall the ------------------------------------------ benefits payable to the Executive or to a beneficiary in any Plan Year exceed the Designated Amount for such Plan Year. 5.2 Termination for Cause. No benefits shall be payable under this --------------------- Agreement in the event of a Termination for Cause. Furthermore, if, after the Executive's Termination of Employment other than a Termination for Cause, the Company discovers facts which existed during the Executive's employment and which would have given the Company the right to Terminate the Executive's Employment for Cause, the Company may cease the payment of benefits hereunder and recover any payments theretofore made to the extent of the Company's loss from the Executive's misconduct. The provisions of this Section 5.2 shall not prejudice or limit any rights the Company may have for legal or equitable relief for any misconduct by the Executive. -9- 5.3 Suicide or Misstatement. No benefits shall be payable if the ----------------------- Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Company. 5.4 Benefits Conditioned On Release. Payment of benefits under this ------------------------------- Agreement shall be conditioned on the prior execution by the Executive or his beneficiary of a release of claims against the Company (other than claims under this Agreement, but including, but not limited to, discrimination claims based on age, gender, race, and similar factors), in form and substance satisfactory to the Company. ARTICLE 6 CLAIMS AND REVIEW PROCEDURES 6.1 Claim Procedure. The Company shall notify any person or entity that --------------- makes a claim against the Agreement (the "Claimant") in writing, within ninety (90) days of Claimant's written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Company determines that the Claimant is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement's claims review procedure and other appropriate information as to the steps to be taken if the claimant wishes to have the claim reviewed. If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the Claimant of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an -10- additional ninety-day period. 6.2 Review Procedure. If the Claimant is determined by the Company not to ---------------- be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. The Company shall notify the Claimant of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the Claimant and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty- day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the Claimant. 6.3 Arbitration. A Claimant's compliance with the foregoing provisions of ----------- this Article 6 is a mandatory prerequisite to a Claimant's right to commence any arbitration proceeding with respect to any claim for benefits under this Agreement. ARTICLE 7 AMENDMENT AND TERMINATION This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive. Notwithstanding the previous sentence, the Company -11- may unilaterally terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits). In the event of any such unilateral termination of this Agreement by the Company, the Executive shall be receive, in lieu of all other benefits under this Agreement, a lump sum payment equal to the lesser of (a) the Designated Amount for the Plan Year in which such termination occurs, or (b) the present value of all unpaid benefits under this Agreement discounted to present value at a discount rate equal to the rate of interest being earned by the Designated Investment as of the date of such termination. If the Executive has not yet begun to receive benefits as of the date of such unilateral termination of this Agreement by the Company, the unpaid benefits under this Agreement shall be deemed for purposes of the preceding sentence to be the Executive's Normal Retirement Benefits under Section 2 beginning on the first day of the month following such termination of the Agreement, or the first day of the month following the month in which the Executive reaches his Normal Retirement Age, whichever is later. ARTICLE 8 MISCELLANEOUS 8.1 Binding Effect. This Agreement shall bind the Executive and the -------------- Company, and their beneficiaries, survivors, executors, successors, administrators and transferees. 8.2 No Guarantee of Employment. This Agreement is not an employment -------------------------- policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the -12- Executive's right to terminate employment at any time. 8.3 Non-Transferability. Benefits under this Agreement cannot be sold, ------------------- transferred, assigned, pledged, attached or encumbered in any manner, except to or by the Company for any obligations owed by the Executive to the Company. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors, except by the Company for any obligations evidenced by a promissory note or other written instrument or contract evidencing a stated sum owed by the Executive to the Company. 8.4 Tax withholding. The Company shall withhold from any and all benefits --------------- paid under this Agreement, or, in the discretion of the Company, from any compensation or other amounts owing to the Executive or his beneficiary, all federal, state and local income, employment and other taxes required to be withheld by the Company in connection with the benefits hereunder, in amounts to be determined in the sole discretion of the Company. 8.5 Applicable Law. The Agreement and all rights hereunder shall be -------------- governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America. 8.6 Unfunded Arrangement. The Executive and his beneficiaries, heirs, -------------------- successors, and assigns shall have no legal or equitable rights, claims, or interests in any specific property or assets of the Company. No assets of the Company shall be held under any trust, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Agreement. This Agreement shall not cause the Company's assets to be pledged or restricted. The Company's obligation under this Agreement shall be merely that of an unfunded and unsecured promise of the Company to pay money in the -13- future, and the rights of the Executive and his beneficiaries shall be no greater than those of unsecured general creditors of the Company. The Company may, but need not, acquire the Designated Investment or any other investment, and it is not under any obligation to maintain any investment it may make. Any such investments, if made, shall be in the name of the Company, and shall be its sole property in which the Executive and his beneficiaries shall have no interest. This Agreement is intended to be an unfunded plan for purposes of Title I of ERISA. The benefits represent the mere promise by the Company to pay such benefits. Any insurance on the Executive's life is a general asset of the Company to which the Executive and beneficiary have no preferred or secured claim. 8.7 Administration. This Agreement constitutes a pension benefit plan -------------- within the meaning of Section 3(2) of ERISA. The "Administrator" of such plan, within the meaning of Section 3(16) of ERISA, and the "Named Fiduciary" thereof, within the meaning of Section 402 of ERISA, is the Board of Directors of the Company. In its capacity as the Administrator, the Company shall have the full and sole discretion, power, and authority (which it shall exercise in good faith and not in an arbitrary or capricious manner) to (a) construe and interpret the provisions of this Agreement, (b) compute the amounts payable hereunder and determine the persons entitled thereto, and (c) make all decisions regarding the implementation and operation of this Agreement. Attached hereto as Exhibit "B" is a statement of Employee's rights under ERISA. 8.8 Severability. If any provision of this Agreement is held invalid or ------------ unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other -14- circumstances, to the fullest extent permitted by law. ARTICLE 9 ARBITRATION Any dispute, controversy or claim arising out of or in respect of this Agreement, or its validity, interpretation or enforcement, or the subject matter hereof, which is not resolved under Article 6 hereof, shall at the request of either party be submitted to and settled by arbitration conducted at a mutually convenient office of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"). The Company and the Executive or his beneficiary may agree on a retired judge from the JAMS panel. If they are unable to agree upon a retired judge, JAMS will provide a list of three available judges and each party may strike one. If two of the three judges are stricken, the remaining judge will serve as arbitrator. If two arbitrators remain, the first judge listed shall serve as arbitrator. The Company and the Executive agree that arbitration must be initiated within two years after the claimed breach occurred and that the failure to initiate arbitration within the two-year period constitutes an absolute bar to the institution of any new proceedings related to such alleged breach. The aggrieved party can initiate arbitration by sending written notice of any intention to arbitrate by registered or certified mail to all parties and to JAMS. The notice must contain a description of the dispute, the amount involved and the remedy sought. Exhibit "C" sets forth the rights of Company and the Executive or his beneficiaries if the dispute is arbitrated and the rules and procedures to be followed at the arbitration hearing; provided, however, that the party or parties prevailing in such proceeding will be entitled to the reasonable attorneys' fees and expenses of counsel and costs incurred by reason of such arbitration. -15- IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement. EXECUTIVE: COMPANY: PAN AMERICAN BANK, FSB /s/ LAWRENCE J. GRILL By: /s/ LAWRENCE J. GRILL - ---------------------------- --------------------- Lawrence J. Grill Title: President ------------------ -16- EX-10.43 26 SALARY CONTINUATION AGREEMENT - GUILLERMO BRON Exhibit 10.43 PAN AMERICAN BANK, FSB SALARY CONTINUATION AGREEMENT THIS AGREEMENT is made as of this 1st day of October, 1997, by and between PAN AMERICAN BANK, FSB, a Federal Stock Savings Bank located in San Mateo, California (the "Company") and GUILLERMO BRON (the "Executive"). INTRODUCTION To encourage the Executive to remain an employee of the Company, the Company is willing to provide salary continuation benefits to the Executive. The Company will pay the benefits from its general assets. AGREEMENT The Executive and the Company agree as follows: ARTICLE I. DEFINITIONS 1.1 Definitions. Whenever used in this Agreement, the following words and ----------- phrases shall have the meanings specified: 1.1.1 "Change of Control" means a "Change of Control" as defined in Section 6 of the Employment Agreement. 1.1.2 "Code" means the Internal Revenue Code of 1986, as amended. 1.1.3 "Designated Investment" means the investment vehicle or vehicles set forth on Exhibit "A". 1.1.4 "Designated Amount" means, for any Plan Year, the amount of cash the Company could have withdrawn or realized from the Designated Investment in such Plan Year (net of any charges or penalties), assuming that the Company held the Designated Investment during the Plan Year, whether or not it actually did so, and assuming that the Company never withdrew or realized any cash from the Designated Investment for any purposes other than the payment of benefits under this Agreement, whether or not it actually did so. 1.1.5 "Disability" means an event giving rise to the termination of Executive's employment with the Company under Section 5(c) of the Employment Agreement. 1.1.6 "Early Termination" means the Termination of Employment before Normal Retirement Age for reasons other than death, Disability, Termination for Cause or Change of Control. 1.1.7 "Early Termination Date" means the month, day and year in which Early Termination occurs. 1.1.8 "Employment Agreement" means that certain Employment Agreement of even date herewith by and among the Executive, the Company, and Pan American Group, Inc. 1.1.9 "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. 1.1.10 "Normal Retirement Age" means the Executive's 65th birthday. 1.1.11 "Normal Retirement Date" means the later of the Normal Retirement -2- Age or Termination of Employment. 1.1.12 "Plan Year" means the calendar year except that the first plan year shall be a short plan year commencing on the effective date of this Agreement and ending on December 31, 1997. 1.1.13 "Termination for Cause" means the termination of the Executive's employment with the Company by the Company for fraud or dishonesty against the Company which materially adversely affects the business of the Company, or upon conviction of a felony which materially adversely affects the business of the Company. 1.1.14 "Termination of Employment" means that the Executive ceases to be employed by the Company for any reason whatsoever other than by reason of a leave of absence which is approved by the Company. The date of Termination of Employment shall be the actual date on which the Executive is no longer in the employ of the Company; provided, however, that the date of Termination of Employment shall be deemed to be (a) December 31, 1998 if the actual date on which the Executive is no longer in the employ of the Company occurs in 1997 or 1998, or (b) December 31, 1999 if the actual date on which the Executive is no longer in the employ of the Company occurs in 1999. 1.1.15 "Voluntary Termination" means that the Executive, prior to his Normal Retirement Age, has terminated his employment with the Company for reasons other than Termination for Cause, Disability, death, Change of Control or Involuntary Termination. 1.1.16 "Involuntary Termination" means that the Executive, prior to his Normal Retirement Age, has been notified in writing, pursuant to the Executive's Employment Agreement, that his employment with the Company is terminated for reasons -3- other than an approved leave of absence, Termination for Cause, Disability, or death. "Involuntary Termination" shall also mean the termination of the Executive's employment with the Company by the Executive upon a "Reduction in Authority" as set forth in Section 5(e) of the Employment Agreement. ARTICLE 2 BENEFITS OTHER THAN UPON DEATH 2.1 Normal Retirement Benefit. Upon Termination of Employment on or after ------------------------- the Normal Retirement Age for reasons other than Termination for Cause, the Company shall pay to the Executive the benefit described in this Section 2.1 in lieu of any other benefit under this Agreement. 2.1.1 Amount of Benefit. The benefit under this Section 2.1 is ----------------- $100,000 per year, payable for 15 years. 2.1.2 Payment of Benefit. The Company shall pay the annual ------------------ benefit to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following the Executive's Termination of Employment under this Section 2.1 and continuing for 179 additional months. 2.2 Early Termination Benefit. Upon Early Termination, the Company shall ------------------------- pay to the Executive the benefit described in this Section 2.2 in lieu of any other benefit under this Agreement. 2.2.1 Amount of Benefit. The benefit Under this Section 2.2 is ----------------- either the benefit amount set forth in (a) or (b) below: (a) Involuntary Early Termination. The benefit under this ----------------------------- Section 2.2.1(a) is an annual benefit payable for 15 years equal to the "Weighted Average" (determined as set forth in Section 2.2.1(c) below) of -4- the Early Termination Annual Benefit/Involuntary Termination amount set forth in Schedule "A" for the Plan Year immediately before the year in which the Termination of Employment occurs (the "Prior Year") and the Early Termination Annual Benefit/Involuntary Termination amount set forth in Schedule "A" for the Plan Year in which the Termination of Employment occurs (the "Termination Year"); or (b) Voluntary Early Termination. The benefit under this --------------------------- Section 2.2.l(b) is an annual benefit payable for 15 years equal to the Weighted Average of the Early Termination Annual Benefit/Voluntary Termination amount set forth in Schedule "A" for the Prior Year and the Early Termination Annual Benefit/Voluntary Termination amount set forth in Schedule "A" for the Termination Year. (c) Weighted Average. The Weighted Average of the amount ---------------- set forth in Schedule "A" for the Prior Year (the "Prior Year Amount") and the amount set forth in Schedule "A" for the Termination Year (the "Termination Year Amount") shall be the sum of (1) the Termination Year Amount multiplied by the quotient obtained by dividing the number of days from January 1 of the Termination Year through and including the date of the Termination of Employment by 365, and (2) the Prior Year Amount multiplied by the quotient obtained by dividing the number of days from the day after the date of the Termination of Employment through and including December 31 of the Termination Year by 365. 2.2.2 Payment of Benefit. The Company shall pay the annual ------------------ benefit to the Executive in 12 equal monthly installments payable on the first day of each month -5- commencing with the month following the later of the Executive's Termination of Employment or the Executive's Normal Retirement Age and continuing for 179 additional months. 2.3 Disability Benefit. If the Executive terminates employment due to ------------------ Disability prior to Normal Retirement Age, the Company shall pay to the Executive the benefit described in this Section 2.3 in lieu of any other benefit under this Agreement. 2.3.1 Amount of Benefit. The benefit under this Section 2.3 is ----------------- the Weighted Average of the Disability Annual Benefit amount set forth in Schedule "A" for the Prior Year (as defined in Section 2.2.1(a)) and the Disability Annual Benefit amount set forth in Schedule "A" for the Termination Year (as defined in Section 2.2.1(a)), payable for 15 years. 2.3.2 Payment of Benefit. The Company shall pay the annual ------------------ benefit amount to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following Termination of Employment and continuing for 179 additional months. 2.4 Change of Control Benefit. If the Executive is in the active service ------------------------- of the Company at the time of a Change of Control, and the Executive's employment with the Company terminates within the "Applicable Period" (as defined in Section 6 of the Employment Agreement) for any reason other than death, Disability, retirement, or Termination for Cause, the Company shall pay to the Executive the benefit described in this Section 2.4 in lieu of any other benefit under this Agreement. 2.4.1 Amount of Benefit. The annual benefit under this Section ----------------- 2.4 is the Change of Control Benefit amount set forth in Schedule "A" for the Plan Year in which Termination of Employment occurs, payable for 15 years. -6- 2.4.2 Payment of Benefit. The Company shall pay the annual ------------------ benefit amount to the Executive in 12 equal monthly installments payable on the first day of each month commencing with the month following the Termination of Employment and continuing for 179 additional months. ARTICLE 3 DEATH BENEFITS 3.1 Death During Active Service. If the Executive dies while in the --------------------------- active service of the Company, the Company shall pay to the Executive's beneficiary the benefit described in this Section 3.1. This benefit shall be paid in lieu of the Benefits described in Article 2. 3.1.1 Amount of Benefit. The annual benefit under this Section ----------------- 3.1 is the Normal Retirement Benefit amount described in Section 2.1.1, payable for 15 years. 3.1.2 Payment of Benefit. The Company shall pay the annual ------------------ benefit to the beneficiary in 12 equal monthly installments payable on the first day of each month commencing with the first day of the second month following the Executive's death and continuing for 179 additional months. 3.2 Death During Benefit Period. If the Executive dies after the benefit --------------------------- payments have commenced under this Agreement but before receiving all such payments, the Company shall pay the remaining benefits to the Executive's beneficiary at the same time and in the same amounts that would have been paid to the Executive had the Executive survived. 3.3 Death Following Termination of Employment But Before Benefits ------------------------------------------------------------- Commence. If the Executive is entitled to benefits under this Agreement, but - -------- dies prior to receiving said benefits, the Company shall pay to the Executive's beneficiary the same -7- benefits, in the same manner, that would have been paid to the Executive had the Executive survived, however, said benefit payments will commence as soon as practicable after the Executive's death. ARTICLE 4 BENEFICIARIES 4.1 Beneficiary Designations. The Executive shall designate a beneficiary ------------------------ by filing a written designation with the Company. The Executive may designate more than one beneficiary, and may designate primary and secondary beneficiaries. The Executive may revoke or modify the designation at any time by filing a new designation. However, designations will only be effective if signed by the Executive and accepted by the Company during the Executive's lifetime; the Company shall be entitled to rely on the last beneficiary designation executed by the Executive and accepted by the Company before his death. If the Executive is married and names someone other than his spouse as a beneficiary, such beneficiary designation will not be effective unless his spouse executes and delivers to the Company a spousal consent, in a form designated by the Company. The Executive's beneficiary designation shall be deemed automatically revoked if the Executive names a spouse as beneficiary and the marriage is subsequently dissolved. Without limiting the generality of the preceding sentence, the interest in benefits of a spouse of the Executive who has predeceased the Executive or whose marriage has been dissolved shall automatically pass to the Executive, and shall not be transferrable by such spouse in any manner, including but not limited to such spouse's will, nor shall such interest pass under the laws of intestate succession. If the Executive dies without a valid beneficiary designation, or if all beneficiaries have predeceased the Executive, all payments shall be made to the Executive's surviving spouse, or, if there is no surviving -8- spouse, to his estate. 4.2 Facility of Payment. If the benefit is payable to a minor, to a ------------------- person declared incapacitated, or to a person incapable of handling the disposition of his or her property, the Company may pay such benefit to the guardian, legal representative or person having the care or custody of such minor, incapacitated person or incapable person. The Company may require proof of incapacity, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Such distribution shall completely discharge the Company from all liability with respect to such benefit. ARTICLE 5 GENERAL LIMITATIONS The provisions of this Article 5 shall apply notwithstanding any other provision of this Agreement to the contrary. 5.1 No Payments in Excess of Designated Amount. In no event shall the ------------------------------------------ benefits payable to the Executive or to a beneficiary in any Plan Year exceed the Designated Amount for such Plan Year. 5.2 Termination for Cause. No benefits shall be payable under this --------------------- Agreement in the event of a Termination for Cause. Furthermore, if, after the Executive's Termination of Employment other than a Termination for Cause, the Company discovers facts which existed during the Executive's employment and which would have given the Company the right to Terminate the Executive's Employment for Cause, the Company may cease the payment of benefits hereunder and recover any payments theretofore made to the extent of the Company's loss from the Executive's misconduct. The provisions of this Section 5.2 shall not prejudice or limit any rights the Company may have for legal or equitable relief for any misconduct by the Executive. -9- 5.3 Suicide or Misstatement. No benefits shall be payable if the ----------------------- Executive commits suicide within two years after the date of this Agreement, or if the Executive has made any material misstatement of fact on any application for life insurance purchased by the Company. 5.4 Benefits Conditioned On Release. Payment of benefits under this ------------------------------- Agreement shall be conditioned on the prior execution by the Executive or his beneficiary of a release of claims against the Company (other than claims under this Agreement, but including, but not limited to, discrimination claims based on age, gender, race, and similar factors), in form and substance satisfactory to the Company. ARTICLE 6 CLAIMS AND REVIEW PROCEDURES 6.1 Claim Procedure. The Company shall notify any person or entity that --------------- makes a claim against the Agreement (the "Claimant") in writing, within ninety (90) days of Claimant's written application for benefits, of his or her eligibility or noneligibility for benefits under the Agreement. If the Company determines that the Claimant is not eligible for benefits or full benefits, the notice shall set forth (1) the specific reasons for such denial, (2) a specific reference to the provisions of the Agreement on which the denial is based, (3) a description of any additional information or material necessary for the Claimant to perfect his or her claim, and a description of why it is needed, and (4) an explanation of the Agreement's claims review procedure and other appropriate information as to the steps to be taken if the claimant wishes to have the claim reviewed. If the Company determines that there are special circumstances requiring additional time to make a decision, the Company shall notify the Claimant of the special circumstances and the date by which a decision is expected to be made, and may extend the time for up to an -10- additional ninety-day period. 6.2 Review Procedure. If the Claimant is determined by the Company not to ---------------- be eligible for benefits, or if the Claimant believes that he or she is entitled to greater or different benefits, the Claimant shall have the opportunity to have such claim reviewed by the Company by filing a petition for review with the Company within sixty (60) days after receipt of the notice issued by the Company. Said petition shall state the specific reasons which the Claimant believes entitle him or her to benefits or to greater or different benefits. Within sixty (60) days after receipt by the Company of the petition, the Company shall afford the Claimant (and counsel, if any) an opportunity to present his or her position to the Company orally or in writing, and the Claimant (or counsel) shall have the right to review the pertinent documents. The Company shall notify the Claimant of its decision in writing within the sixty-day period, stating specifically the basis of its decision, written in a manner calculated to be understood by the Claimant and the specific provisions of the Agreement on which the decision is based. If, because of the need for a hearing, the sixty- day period is not sufficient, the decision may be deferred for up to another sixty-day period at the election of the Company, but notice of this deferral shall be given to the Claimant. 6.3 Arbitration. A Claimant's compliance with the foregoing provisions of ----------- this Article 6 is a mandatory prerequisite to a Claimant's right to commence any arbitration proceeding with respect to any claim for benefits under this Agreement. ARTICLE 7 AMENDMENT AND TERMINATION This Agreement may be amended or terminated only by a written agreement signed by the Company and the Executive. Notwithstanding the previous sentence, the Company -11- may unilaterally terminate this Agreement at any time if, pursuant to legislative, judicial or regulatory action, continuation of the Agreement would (i) cause benefits to be taxable to the Executive prior to actual receipt, or (ii) result in significant financial penalties or other significantly detrimental ramifications to the Company (other than the financial impact of paying the benefits). In the event of any such unilateral termination of this Agreement by the Company, the Executive shall be receive, in lieu of all other benefits under this Agreement, a lump sum payment equal to the lesser of (a) the Designated Amount for the Plan Year in which such termination occurs, or (b) the present value of all unpaid benefits under this Agreement discounted to present value at a discount rate equal to the rate of interest being earned by the Designated Investment as of the date of such termination. If the Executive has not yet begun to receive benefits as of the date of such unilateral termination of this Agreement by the Company, the unpaid benefits under this Agreement shall be deemed for purposes of the preceding sentence to be the Executive's Normal Retirement Benefits under Section 2 beginning on the first day of the month following such termination of the Agreement, or the first day of the month following the month in which the Executive reaches his Normal Retirement Age, whichever is later. ARTICLE 8 MISCELLANEOUS 8.1 Binding Effect. This Agreement shall bind the Executive and the -------------- Company, and their beneficiaries, survivors, executors, successors, administrators and transferees. 8.2 No Guarantee of Employment. This Agreement is not an employment -------------------------- policy or contract. It does not give the Executive the right to remain an employee of the Company, nor does it interfere with the Company's right to discharge the Executive. It also does not require the Executive to remain an employee nor interfere with the -12- Executive's right to terminate employment at any time. 8.3 Non-Transferability. Benefits under this Agreement cannot be sold, ------------------- transferred, assigned, pledged, attached or encumbered in any manner, except to or by the Company for any obligations owed by the Executive to the Company. The rights to benefits are not subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment, or garnishment by creditors, except by the Company for any obligations evidenced by a promissory note or other written instrument or contract evidencing a stated sum owed by the Executive to the Company. 8.4 Tax withholding. The Company shall withhold from any and all benefits --------------- paid under this Agreement, or, in the discretion of the Company, from any compensation or other amounts owing to the Executive or his beneficiary, all federal, state and local income, employment and other taxes required to be withheld by the Company in connection with the benefits hereunder, in amounts to be determined in the sole discretion of the Company. 8.5 Applicable Law. The Agreement and all rights hereunder shall be -------------- governed by the laws of the State of California, except to the extent preempted by the laws of the United States of America. 8.6 Unfunded Arrangement. The Executive and his beneficiaries, heirs, -------------------- successors, and assigns shall have no legal or equitable rights, claims, or interests in any specific property or assets of the Company. No assets of the Company shall be held under any trust, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Agreement. This Agreement shall not cause the Company's assets to be pledged or restricted. The Company's obligation under this Agreement shall be merely that of an unfunded and unsecured promise of the Company to pay money in the -13- future, and the rights of the Executive and his beneficiaries shall be no greater than those of unsecured general creditors of the Company. The Company may, but need not, acquire the Designated Investment or any other investment, and it is not under any obligation to maintain any investment it may make. Any such investments, if made, shall be in the name of the Company, and shall be its sole property in which the Executive and his beneficiaries shall have no interest. This Agreement is intended to be an unfunded plan for purposes of Title I of ERISA. The benefits represent the mere promise by the Company to pay such benefits. Any insurance on the Executive's life is a general asset of the Company to which the Executive and beneficiary have no preferred or secured claim. 8.7 Administration. This Agreement constitutes a pension benefit plan -------------- within the meaning of Section 3(2) of ERISA. The "Administrator" of such plan, within the meaning of Section 3(16) of ERISA, and the "Named Fiduciary" thereof, within the meaning of Section 402 of ERISA, is the Board of Directors of the Company. In its capacity as the Administrator, the Company shall have the full and sole discretion, power, and authority (which it shall exercise in good faith and not in an arbitrary or capricious manner) to (a) construe and interpret the provisions of this Agreement, (b) compute the amounts payable hereunder and determine the persons entitled thereto, and (c) make all decisions regarding the implementation and operation of this Agreement. Attached hereto as Exhibit "B" is a statement of Employee's rights under ERISA. 8.8 Severability. If any provision of this Agreement is held invalid or ------------ unenforceable, the remainder of this Agreement shall nevertheless remain in full force and effect, and if any provision is held invalid or unenforceable with respect to particular circumstances, it shall nevertheless remain in full force and effect in all other -14- circumstances, to the fullest extent permitted by law. ARTICLE 9 ARBITRATION Any dispute, controversy or claim arising out of or in respect of this Agreement, or its validity, interpretation or enforcement, or the subject matter hereof, which is not resolved under Article 6 hereof, shall at the request of either party be submitted to and settled by arbitration conducted at a mutually convenient office of the Judicial Arbitration and Mediation Services, Inc. ("JAMS"). The Company and the Executive or his beneficiary may agree on a retired judge from the JAMS panel. If they are unable to agree upon a retired judge, JAMS will provide a list of three available judges and each party may strike one. If two of the three judges are stricken, the remaining judge will serve as arbitrator. If two arbitrators remain, the first judge listed shall serve as arbitrator. The Company and the Executive agree that arbitration must be initiated within two years after the claimed breach occurred and that the failure to initiate arbitration within the two-year period constitutes an absolute bar to the institution of any new proceedings related to such alleged breach. The aggrieved party can initiate arbitration by sending written notice of any intention to arbitrate by registered or certified mail to all parties and to JAMS. The notice must contain a description of the dispute, the amount involved and the remedy sought. Exhibit "C" sets forth the rights of Company and the Executive or his beneficiaries if the dispute is arbitrated and the rules and procedures to be followed at the arbitration hearing; provided, however, that the party or parties prevailing in such proceeding will be entitled to the reasonable attorneys' fees and expenses of counsel and costs incurred by reason of such arbitration. -15- IN WITNESS WHEREOF, the Executive and a duly authorized Company officer have signed this Agreement. EXECUTIVE: COMPANY: PAN AMERICAN BANK, FSB /s/ GUILLERMO BRON By: /s/ LAWRENCE J. GRILL - --------------------------- -------------------------------- Guillermo Bron Title: President ----------------------------- -16- EX-10.44 27 FORM OF INDEMNIFICATION AGREEMENT EXHIBIT 10.44 UNITED PANAM FINANCIAL CORP. INDEMNIFICATION AGREEMENT This Indemnification Agreement (the "Agreement"), dated as of __________, 1997, is made and effective as of the date set forth in Section 15 of the Agreement, by and between United PanAm Financial Corp., a Delaware corporation and holding company of a federally insured depository institution (the "Corporation"), and ______________, a director and/or officer of the Corporation (the "Indemnitee"). RECITALS A. The Corporation and the Indemnitee recognize that the Federal Deposit Insurance Corporation has promulgated regulations governing indemnification agreements between federally insured depository institutions or affiliated depository institution holding companies and their directors and officers (the "Regulations") set forth at 12 CFR Part 359, which Regulations prohibit the making of certain indemnification agreements and the payment of funds subject to such agreements. The Corporation and the Indemnitee intend this Agreement to comply with the Regulations [and that this Indemnification Agreement replace any and all agreements between the Corporation and the Indemnitee which provide for the payment of any indemnification payments which were entered into before the promulgation of the Regulations.] B. The Corporation and the Indemnitee recognize that the present state of the law relating to director and officer liability is too uncertain to provide the Corporation's directors and officers with adequate and reliable advance knowledge or guidance with respect to the legal risks and potential liabilities to which they may become personally exposed as a result of performing their duties for the Corporation; C. The Corporation and the Indemnitee are aware of the substantial growth in the number of lawsuits filed against corporate directors and officers in connection with their activities in such capacities and by reason of their status as such; D. The Corporation and the Indemnitee recognize that the cost of defending against such lawsuits, whether or not meritorious, is typically beyond the financial resources of most directors and officers of the Corporation; E. The Corporation and the Indemnitee recognize that the legal risks and potential liabilities, and the threat thereof, associated with proceedings filed against the directors and officers of the Corporation bear no reasonable relationship to the amount of compensation received by the Corporation's directors and officers; F. The Corporation, after reasonable investigation prior to the date hereof, has determined that the liability insurance coverage available to the Corporation as of the date hereof is 1 inadequate, unreasonably expensive or both. The Corporation believes, therefore, that the interest of the Corporation's stockholders would be best served by a combination of (i) such insurance as the Corporation may elect to obtain pursuant to the Corporation's obligations hereunder and (ii) a contract with its directors and officers, including the Indemnitee, to indemnify them to the fullest extent permitted by law (as in effect on the date hereof, or, to the extent any amendment may expand such permitted indemnification, as hereafter in effect) against personal liability for actions taken in the performance of their duties to the Corporation; G. Section 145 of the General Corporation Law of the State of Delaware empowers Delaware corporations to indemnify their directors and officers and further states that the indemnification and advancement of expenses provided by Section 145 "shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office;" thus, Section 145 does not by itself limit the extent to which the Corporation may indemnify persons serving as its directors and officers; [H. The Corporation's Certificate of Incorporation and Bylaws authorize the indemnification of the directors and officers of the Corporation in excess of that expressly permitted by Section 145, subject to the limitations set forth in Section 102(b)(7) of the General Corporation Law of the State of Delaware;] I. The Board of Directors of the Corporation has concluded that, to retain and attract talented and experienced individuals to serve as directors and officers of the Corporation and to encourage such individuals to take the business risks necessary for the success of the Corporation, it is necessary for the Corporation to contractually indemnify its directors and officers, and to assume for itself liability for expenses and damages in connection with certain claims against such directors and officers in connection with their service to the Corporation, and has further concluded that the failure to provide such contractual indemnification could result in great harm to the Corporation and its stockholders; J. The Corporation desires and has requested the Indemnitee to serve or continue to serve as a [director/officer] of the Corporation, free from undue concern for the risks and potential liabilities associated with such services to the Corporation; and K. The Indemnitee is willing to serve, or continue to serve, the Corporation, provided, and on the expressed condition, that he is furnished with the indemnification provided for herein. 2 AGREEMENT NOW, THEREFORE, the Corporation and Indemnitee agree as follows: 1. Definitions. ----------- a. "Expenses" means, for the purposes of this Agreement, all direct and indirect costs of any type or nature whatsoever (including, without limitation, any fees and disbursements of Indemnitee's counsel, accountants and other experts and other out-of-pocket costs) actually and reasonably incurred by the Indemnitee in connection with the investigation, preparation, defense or appeal of a Proceeding; provided, however, that Expenses shall not include judgments, fines, penalties or amounts paid in settlement of a Proceeding. b. "Other enterprise" includes, for the purposes of this Agreement, employee benefit plans; references to "fines" includes any excise taxes assessed on Indemnitee with respect to an employee benefit plan; and references to "serving at the request of the Corporation" includes any service as a director, officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or its beneficiaries; and if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not opposed to the best interests of the Corporation" as referred to in this Agreement. c. "Proceeding" means, for the purposes of this Agreement, any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (including an action brought by or in the right of the Corporation) in which Indemnitee may be or may have been involved as a party or otherwise, by reason of the fact that Indemnitee is or was a [director/officer] of the Corporation, by reason of any action taken by Indemnitee or of any inaction on Indemnitee's part while acting as such [director/officer] or by reason of the fact that Indemnitee is or was serving at the request of the Corporation as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director and/or officer of the foreign or domestic corporation which was a predecessor corporation to the Corporation or of another enterprise at the request of such predecessor corporation, whether or not Indemnitee is serving in such capacity at the time any liability or expense is incurred for which indemnification or reimbursement can be provided under this Agreement. 2. Agreement to Serve. In consideration of the protection afforded ------------------ by this Agreement, if Indemnitee is a director of the Corporation, Indemnitee agrees to serve at least for the balance of the current term as a director and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. If Indemnitee is an officer of the corporation not serving under an employment contract, Indemnitee agrees to serve in such capacity at least for 3 the balance of the current fiscal year of the Corporation and not to resign voluntarily during such period without the written consent of a majority of the Board of Directors. Following the applicable period set forth above, Indemnitee agrees to serve or continue to serve in such capacity as a director or officer of the Corporation to the best of his or her abilities at the will of the Corporation or under separate contract, if such contract exists, for so long as Indemnitee is duly elected or appointed and qualified or until such time as Indemnitee tenders his or her resignation in writing. Nothing contained in this Agreement is intended to create in Indemnitee any right to continued employment. 3. Indemnification. --------------- a. Third Party Proceedings. The Corporation shall, except to the ----------------------- extent prohibited by the Regulations, indemnify Indemnitee against Expenses, judgments, fines, penalties or amounts paid in settlement (if the settlement is approved in advance by the Corporation) actually and reasonably incurred by Indemnitee in connection with a Proceeding (other than a Proceeding by or in the right of the Corporation) if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe Indemnitee's conduct was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption - --------------- that Indemnitee did not act in good faith and in a manner which Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal Proceeding, had no reasonable cause to believe that Indemnitee's conduct was unlawful. b. Proceedings by or in the Right of the Corporation. To the fullest ------------------------------------------------- extent permitted by law, the Corporation shall, except to the extent prohibited by the Regulations, indemnify Indemnitee against Expenses and amounts paid in settlement, actually and reasonably incurred by Indemnitee in connection with a Proceeding by or in the right of the Corporation to procure a judgment in its favor if Indemnitee acted in good faith and in a manner Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation. Notwithstanding the foregoing, no indemnification shall be made in respect of any claim, issue or matter as to which Indemnitee shall have been adjudged liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court deems proper. c. Scope. Notwithstanding any other provision of this Agreement but ----- subject to Section 14(b), the Corporation shall, except to the extent prohibited by the Regulations, indemnify the Indemnitee to the fullest extent permitted by law, notwithstanding that such indemnification is not specifically authorized by other provisions of this Agreement, the Corporation's Certificate of Incorporation, the Corporation's Bylaws or by statute. 4 4. Limitations on Indemnification. Any other provision herein to the ------------------------------ contrary notwithstanding, the Corporation shall not be obligated pursuant to the terms of this Agreement: a. Excluded Acts. To indemnify Indemnitee for any acts or omissions ------------- or transactions from which a director may not be relieved of liability under Section 102(b)(7)of the General Corporation Law of the State of Delaware; or b. Claims Initiated by Indemnitee. To indemnify or advance Expenses ------------------------------ to Indemnitee with respect to Proceedings or claims initiated or brought voluntarily by Indemnitee and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under this Agreement or any other statute or law or otherwise as required under Section 145 of the General Corporation Law of the State of Delaware, but such indemnification or advancement of Expenses may be provided by the Corporation in specific cases if the Board of Directors has approved the initiation or bringing of such suit; or c. Lack of Good Faith. To indemnify Indemnitee for any Expenses ------------------ incurred by the Indemnitee with respect to any proceeding instituted by Indemnitee to enforce or interpret this Agreement, if a court of competent jurisdiction determines that each of the material assertions made by the Indemnitee in such proceeding was not made in good faith or was frivolous; or d. Insured Claims. To indemnify Indemnitee for Expenses or -------------- liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid directly to or on behalf of Indemnitee by an insurance carrier under a policy of directors' and officers' liability insurance maintained by the Corporation or any other policy of insurance maintained by the Corporation, or a subsidiary of the Corporation, or Indemnitee; or e. Claims Under Section 16(b). To indemnify Indemnitee for Expenses -------------------------- and the payment of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 16(b) of the Securities Exchange Act of 1934, as amended, or any similar successor statute; or f. Claims Affected by the Regulations. To indemnify Indemnitee for ---------------------------------- any Expenses, fines, monetary penalties or amounts paid in settlement prohibited by the Regulations. 5. Determination of Right to Indemnification. Upon receipt of a ----------------------------------------- written claim addressed to the Board of Directors for indemnification pursuant to Section 3, the Corporation shall determine by any of the methods set forth in Section 145(d) of the General Corporation Law of the State of Delaware and the Regulations whether Indemnitee has met the applicable standards of conduct which make it permissible under applicable law to indemnify Indemnitee. If a claim under Section 3 is not paid in full by the Corporation within thirty (30) days after such written claim has been received by the Corporation or if applicable, whatever time is reasonably necessary for the 5 Corporation to complete the investigation contemplated in Section 3 of this Agreement, the Indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. The Indemnitee's Expenses incurred in connection with successfully establishing his or her right to indemnification or advances, in whole or in part, in any such Proceeding shall also be indemnified by the Corporation. Neither the failure of the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) to make a determination prior to the commencement of such action that indemnification of the Indemnitee is proper in the circumstances because Indemnitee has met the applicable standard of conduct under applicable law, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel or its stockholders) that the Indemnitee has not met such applicable standard of conduct, shall create a presumption that Indemnitee has not met the applicable standard of conduct. The Corporation shall have the burden of proof concerning whether the Indemnitee has or has not met the applicable standard of conduct. 6. Advancement and Repayment of Expense. ------------------------------------- a. Proceedings. The Expenses incurred by Indemnitee in defending and ----------- investigating any Proceeding shall, except to the extent prohibited by the Regulations, be paid by the Corporation in advance of the final disposition of such Proceeding within thirty (30) days after receiving from Indemnitee the copies of invoices presented to Indemnitee for such Expenses, if Indemnitee shall provide an undertaking to the Corporation to repay such amount to the extent it is ultimately determined that Indemnitee is not entitled to indemnification. In determining whether or not to make an advance hereunder, the ability of Indemnitee to repay shall not be a factor. Notwithstanding the foregoing, in a proceeding brought by the Corporation directly, in its own right (as distinguished from an action bought derivatively or by Any receiver or trustee), the Corporation shall not be required to make the advances called for hereby if the Board of Directors determines, in its sole discretion, that it does not appear that Indemnitee has met the standards of conduct which make it permissible under applicable law to indemnify Indemnitee and the advancement of Expenses would not be in the best interests of the Corporation and its stockholders. b. Mandatory Payment of Expenses. To the extent that Indemnitee has ----------------------------- been successful on the merits, in defense of any action, suit, or proceeding referred to in Section (3) hereof or in defense of any claim, issue or matter therein, Indemnitee shall, except to the extent prohibited by the Regulations, be indemnified against all Expenses incurred by Indemnitee in connection therewith. 7. Partial Indemnification. If the Indemnitee is entitled under the ----------------------- Regulations and any provision of this Agreement to indemnification or advancement by the Corporation of some or a portion of any Expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, penalties, and amounts paid in settlement) incurred by Indemnitee in the investigation, defense, settlement or appeal of a Proceeding, but is not entitled to indemnification or advancement of the total amount thereof, the Corporation shall, except to the extent prohibited by 6 the Regulations, nevertheless indemnify or pay advancements to the Indemnitee for the portion of such Expenses or liabilities to which the Indemnitee is entitled. 8. Notice to Corporation by Indemnitee. Indemnitee shall notify the ----------------------------------- Corporation in writing of any matter with respect to which Indemnitee intends to seek indemnification hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof; provided that any delay in so notifying Corporation shall not constitute a waiver by Indemnitee of his or her rights hereunder. The written notification to the Corporation shall be addressed to the Board of Directors and shall include a description of the nature of the Proceeding and the facts underlying the Proceeding and be accompanied by copies of any documents filed by any state or federal regulatory agency or with the court in which the Proceeding is pending. In addition, Indemnitee shall give the Corporation such information and cooperation as it may reasonably require and as shall be within Indemnitee's power. 9. Maintenance of Liability Insurance. ---------------------------------- a. The Corporation hereby agrees that so long as Indemnitee shall continue to serve as a [director/officer] of the Corporation and thereafter so long as Indemnitee shall be subject to any possible Proceeding, the Corporation, subject to Section 9(b), it shall use its best efforts to obtain and maintain in full force and effect directors' and officers' liability insurance ("D&O Insurance") which complies with the Regulations and which provides Indemnitee the same rights and benefits as are accorded to the most favorably insured of the Corporation's directors, if Indemnitee is a director; or of the Corporation's officers, if Indemnitee is not a director of the Corporation but is an officer. b. Notwithstanding the foregoing, the Corporation shall have no obligation to obtain or maintain D&O Insurance if the Corporation determines in good faith that such insurance is not reasonably available, the premium costs for such insurance are disproportionate to the amount of coverage provided, the coverage provided by such insurance is limited by exclusions so as to provide an insufficient benefit, or the Indemnitee is covered by similar insurance maintained by a subsidiary or parent of the Corporation. c. Notice to Insurers. If, at the time of the receipt of a notice of ------------------ a claim pursuant to Section 8 hereof, the Corporation has D&O Insurance in effect, the Corporation shall give prompt notice of the commencement of such claim to the insurers in accordance with the procedures set forth in the respective policies. The Corporation shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies. 10. Defense of Claim. In the event that the Corporation shall be ---------------- obligated under Section 6 hereof to pay any Expenses of any Proceeding against Indemnitee, the Corporation, if appropriate, shall be entitled to assume the defense of such Proceeding, with counsel approved by Indemnitee, which approval shall not be unreasonably withheld, upon the delivery to Indemnitee of 7 written notice of its election to do so. After delivery of such notice, approval of such counsel by Indemnitee and the retention of such counsel by the Corporation, the Corporation will not be liable to Indemnitee under this Agreement for any fees of counsel subsequently incurred by Indemnitee with respect to the same Proceeding, provided that (i) Indemnitee shall have the right to employ his or her counsel in any such Proceeding, at Indemnitee's expense; and (ii) if (A) the employment of counsel by Indemnitee has been previously authorized by the Corporation, or (B) Indemnitee shall have reasonably concluded that there may be a conflict of interest between the Corporation and the Indemnitee in the conduct of such defense or (C) the Corporation shall not, in fact, have employed counsel to assume the defense of such Proceeding, then the fees and expenses of Indemnitee's counsel shall be at the expense of the Corporation. 11. Attorneys' Fees. In the event that Indemnitee or the Corporation --------------- institutes an action to enforce or interpret any terms of this Agreement, the Corporation shall reimburse Indemnitee for all of the Indemnitee's reasonable fees and expenses in bringing and pursuing such action or defense, unless as part of such action or defense, a court of competent jurisdiction determines that the material assertions made by Indemnitee as a basis for such action or defense were not made in good faith or were frivolous. 12. Continuation of Obligations. All agreements and obligations of --------------------------- the Corporation contained herein shall continue during the period the Indemnitee is a [director/officer] of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, and shall continue thereafter so long as the Indemnitee shall be subject to any possible proceeding by reason of the fact that Indemnitee served in any capacity referred to herein. 13. Successors and Assigns. This Agreement establishes contract ---------------------- rights that shall be binding upon, and shall inure to the benefit of, the successors, assigns, heirs and legal representatives of the parties hereto. 14. Non-exclusivity. --------------- a. The provisions for indemnification and advancement of expenses set forth in this Agreement shall not be deemed to be exclusive of any other rights that the Indemnitee may have under any provision of law, the Corporation's Certificate of Incorporation or Bylaws, the vote of the Corporation's stockholders or disinterested directors, other agreements or otherwise, both as to action in his or her official capacity and action in another capacity while occupying his or her position as a [director/officer] of the Corporation. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity even though Indemnitee may have ceased to serve in such capacity. b. In the event of any changes, after the date of this Agreement, in any applicable law, statute, or rule which expand the right of a Delaware corporation or a depository institution holding company to indemnify its officers and directors, the Indemnitee's rights and the 8 Corporation's obligations under this Agreement shall be expanded to the full extent permitted by such changes. In the event of any changes in any applicable law, statute or rule, which narrow the right of a Delaware corporation or a depository institution holding company to indemnify a director or officer, such changes, to the extent not otherwise required by such law, statute or rule to be applied to this Agreement, shall have no effect on this Agreement or the parties' rights and obligations hereunder. 15. Effectiveness of Agreement. [To the extent that the -------------------------- indemnification permitted under the terms of certain provisions of this Agreement exceeds the scope of the indemnification provided for in the General Corporation Law of the State of Delaware, such provisions shall not be effective unless and until the Corporation's Certificate of Incorporation authorize such additional rights of indemnification. In all other respects, the balance of] This Agreement shall be effective as of the date set forth on the first page and may apply to acts or omissions of Indemnitee which occurred prior to such date if Indemnitee was an officer, director, employee or other agent of the Corporation, or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred. [The Agreement shall be made and effective simultaneously with the effectiveness (the "Effective Date") of the sale of the Common Stock of the Corporation contemplated by that certain Registration Statement on Form S-1 (File No. ________) filed by the Corporation with the Securities and Exchange Commission on ________, 1997. The Agreement shall to the extent permitted by law, apply to acts of omissions of the Indemnitee which occurred prior to such date if the Indemnitee was an officer, director, employee or other agent of the Corporation, or was serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, at the time such act or omission occurred.] 16. Severability. Nothing in this Agreement is intended to require or ------------ shall be construed as requiring the Corporation to do or fail to do any act in violation of applicable law. The Corporation's inability, pursuant to court order, to perform its obligations under this Agreement shall not constitute a breach of this Agreement. The provisions of this Agreement shall be severable as provided in this Section 16. If this Agreement or any portion hereof shall be invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify Indemnitee to the full extent permitted by any applicable portion of this Agreement that shall not have been invalidated, and the balance of this Agreement not so invalidated shall be enforceable in accordance with its terms. 17. Governing Law. This Agreement shall be interpreted and enforced ------------- in accordance with the laws of the State of Delaware, except to the extent federal law is applicable. To the extent permitted by applicable law, the parties hereby waive any provisions of law which render any provision of this Agreement unenforceable in any respect. 9 18. Notice. All notices, requests, demands and other communications ------ under this Agreement shall be in writing and shall be deemed duly given (i) if delivered by hand and receipted for by the party addressee or (ii) if mailed by certified or registered mail with postage prepaid, on the third business day after the mailing date. Addresses for notice to either party are as shown on the signature page of this Agreement, or as subsequently modified by written notice. 19. Mutual Acknowledgment. Both the Corporation and Indemnitee --------------------- acknowledge that in certain instances, federal law or applicable public policy may prohibit the Corporation from indemnifying its directors and officers under this Agreement or otherwise. Indemnitee understands and acknowledges that the Corporation has undertaken or may be required in the future to undertake with the Securities and Exchange Commission to submit the question of indemnification to a court in certain circumstances for a determination of the Corporation's right under public policy to indemnify Indemnitee. 20. Subrogation. In the event of payment under this Agreement, the ----------- Corporation shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all documents required and shall do all acts that may be necessary to secure such rights and to enable the Corporation effectively to bring suit to enforce such rights. 21. Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall constitute an original. 22. Amendment and Termination. No amendment, modification, ------------------------- termination or cancellation of this Agreement shall be effective unless in writing signed by both parties hereto. 10 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year set forth above. UNITED PANAM FINANCIAL CORP. By:____________________________ [Title] Address: INDEMNITEE: _________________________ (Type Name) _________________________ (Signature) _________________________ (Address) 11 EX-10.47 28 PAN AMERICAN GROUP, INC. 1997 STOCK INCENTIVE PLAN UNITED PANAM FINANCIAL CORP. 1997 EMPLOYEE STOCK INCENTIVE PLAN Exhibit 10.47 ---------------------------------- Adopted as of November 5, 1997 Section 1. PURPOSE OF PLAN (a) The purpose of this 1997 Employee Stock Incentive Plan ("Plan") of United PanAm Financial Corp., a Delaware corporation (the "Company"), is to enable the Company and its subsidiaries to attract, retain and motivate their employees and consultants by providing for or increasing the proprietary interests of such employees and consultants in the Company, and to enable the Company and its subsidiaries to attract, retain and motivate nonemployee directors and further align their interests with those of the stockholders of the Company by providing for or increasing the proprietary interest of such directors in the Company. (b) This Plan shall constitute an amendment and restatement of the 1994 Stock Option Plan (the "Prior Plan") of Pan American Bank, FSB, and on the effective date of this Plan each option granted under the Prior Plan shall be reconstituted as an option under this Plan on the same terms and conditions as set forth in the Prior Plan or any form of stock option agreement evidencing such option under the Prior Plan. Section 2. PERSONS ELIGIBLE UNDER PLAN Each of the following persons (each, a "Participant") shall be eligible to be considered for the grant of Awards (as hereinafter defined) hereunder: (1) any employee of the Company or any of its subsidiaries, including any director who is also such an employee, (2) any director of the Company or any of its subsidiaries who is not also an employee of the Company or any of its subsidiaries (a "Nonemployee Director") and (3) any consultant of the Company or any of its subsidiaries. Section 3. AWARDS (a) The Committee (as hereinafter defined), on behalf of the Company, is authorized under this Plan to enter into any type of arrangement with a Participant that is not inconsistent with the provisions of this Plan and that, by its terms, involves or might involve the issuance of (i) shares of common stock of the Company ("Common Shares") or (ii) a Derivative Security (as such term is defined in Rule 16a-1 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as such rule may be amended from time to time) with an exercise or conversion privilege at a price related to the Common Shares or with a value derived from the value of the Common Shares. The entering into of any such arrangement is referred to herein as the "grant" of an "Award." (b) 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 1 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, and an Award may consist of one such security or benefit, or two or more of them in tandem or in the alternative. (c) Awards may be issued, and Common Shares may be issued pursuant to an Award, for any lawful consideration as determined by the Committee, including, without limitation, services rendered by the recipient of such Award. (d) Subject to the provisions of this Plan, the Committee, in its sole and absolute discretion, shall determine all of the terms and conditions of each Award granted under this Plan, which terms and conditions may include, among other things: (i) a provision permitting the recipient of such Award, including any recipient who is a director or officer of the Company, to pay the purchase price of the Common Shares or other property issuable pursuant to such Award, in whole or in part, by any one or more of the following: (A) the delivery of cash; (B) the delivery of other property deemed acceptable by the Committee; (C) the delivery of previously owned shares of capital stock of the Company (including "pyramiding") or other property; or (D) a reduction in the amount of Common Shares or other property otherwise issuable pursuant to such Award; (ii) a provision conditioning or accelerating the receipt of benefits pursuant to such Award, either automatically or in the discretion of the Committee, upon the occurrence of specified events, including, without limitation, a change of control of the Company (as defined by the Committee), an acquisition of a specified percentage of the voting power of the Company, the dissolution or liquidation of the Company, a sale of substantially all of the property and assets of the Company or an event of the type described in Section 7 hereof; or (iii) a provision required in order for such Award to qualify as an incentive stock option under Section 422 of the Internal Revenue Code (an "Incentive Stock Option"); provided, however, that no Award issued to -------- ------- any consultant or any Nonemployee Director may qualify as an Incentive Stock Option. (e) Notwithstanding anything to the contrary contained in this Section 3, neither an Award nor any interest therein may be sold, assigned, transferred, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner other than by will or the laws of descent and distribution. 2 (f) All certificates evidencing Awards or Common Shares issued pursuant thereto should bear any legend determined by the Board or the Committee (as defined below) to be necessary or appropriate. Section 4. STOCK SUBJECT TO PLAN (a) At any time, the aggregate number of Common Shares issued and issuable pursuant to all Awards (including all Incentive Stock Options) granted under this Plan shall not exceed 2,287,500 subject to adjustment as provided in Section 7 hereof. In the case of stock options and stock appreciation rights, the maximum number of Common Shares with respect to which options or rights may be granted to any person during a calendar year shall be 200,000 shares. (b) For purposes of Section 4(a) hereof, the aggregate number of Common Shares issued and issuable pursuant to Awards granted under this Plan shall at any time be deemed to be equal to the sum of the following: (i) the number of Common Shares that were issued prior to such time pursuant to Awards granted under this Plan, other than Common Shares that were subsequently reacquired by the Company pursuant to the terms and conditions of such Awards and with respect to which the holder thereof received no benefits of ownership such as dividends; plus (ii) the number of Common Shares that were otherwise issuable prior to such time pursuant to Awards granted under this Plan, but that were withheld by the Company as payment of the purchase price of the Common Shares issued pursuant to such Awards; plus (iii) the maximum number of Common Shares that are or may be issuable at or after such time pursuant to Awards granted under this Plan prior to such time. Section 5. DURATION OF PLAN No Awards shall be made under this Plan after November 5, 2007. Although Common Shares may be issued after November 5, 2007 pursuant to Awards made prior to such date, no Common Shares shall be issued under this Plan after November 5, 2017. Section 6. ADMINISTRATION OF PLAN (a) This Plan shall be administered by a committee (the "Committee") of the Board of Directors of the Company (the "Board") consisting of two or more directors, each of whom is an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended, and who otherwise comply with the requirements of Rule 16b-3; provided, however, that before the -------- ------- registration of the Common Shares under Section 12 of the Exchange Act, grants of Awards may, in the absence of action of the Committee, be made by the entire Board. 3 (b) Subject to the provisions of this Plan, the Committee shall be authorized and empowered to do all things necessary or desirable in connection with the administration of this Plan, including, without limitation, the following: (i) adopt, amend and rescind rules and regulations relating to this Plan; (ii) determine which persons are Participants and to which of such Participants, if any, Awards shall be granted hereunder; (iii) grant Awards to Participants and determine the terms and conditions thereof, including the number of Common Shares issuable pursuant thereto; (iv) determine whether, and the extent to which adjustments are required pursuant to Section 7 hereof; (v) interpret and construe this Plan and the terms and conditions of any Award granted hereunder; and (vi) certify in writing prior to payment of compensation that the performance goals and any other material terms of an Award were in fact satisfied. For this purpose, approved minutes of the Committee meeting in which the certification is made are treated as a written certification. Section 7. ADJUSTMENTS If the outstanding securities of the class then subject to this Plan are increased, decreased or exchanged for or converted into cash, property or a different number or kind of securities, or if cash, property or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, merger, consolidation, recapitalization, restructuring, reclassification, dividend (other than a regular cash dividend) or other distribution, stock split, reverse stock split or the like, or if substantially all of the property and assets of the Company are sold, then, unless the terms of such transaction shall provide otherwise, the Committee shall make appropriate and proportionate adjustments in (i) the number and type of shares or other securities or cash or other property that may be acquired pursuant to Awards theretofore granted under this Plan and (ii) the maximum number and type of shares or other securities that may be issued pursuant to Awards thereafter granted under this Plan. Section 8. AMENDMENT AND TERMINATION OF PLAN The Board may amend or terminate this Plan at any time and in any manner, provided that no such amendment or termination shall deprive the recipient of any Award theretofore granted under this Plan, without the consent of such recipient, of any of his or her rights thereunder or with respect thereto. 4 Section 9. EFFECTIVE DATE OF PLAN This Plan shall be effective as of November 5, 1997, the date upon which it was approved by the Board; provided, however, that no Common Shares may -------- ------- be issued under this Plan until it has been approved, directly or indirectly, by the affirmative votes of the holders of a majority of the securities of the Company present, or represented, and entitled to vote at a meeting duly held in accordance with the laws of the State of Delaware. Section 10. GOVERNING LAW This Plan and any Award granted hereunder shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without reference to choice or conflict of law principles. 5 UNITED PANAM FINANCIAL CORP. 1997 EMPLOYEE STOCK INCENTIVE PLAN INCENTIVE STOCK OPTION AGREEMENT -------------------------------- This Stock Option Agreement ("Agreement") is made and entered into as of the Date of Grant indicated below by and between United PanAm Financial Corp., a Delaware corporation (the "Company"), and the person named below ("Employee"). WHEREAS, Employee is an employee of the Company or one or more of its subsidiaries; and WHEREAS, pursuant to the Company's 1997 Employee Stock Incentive Plan (the "Plan"), the committee of the Board of Directors of the Company administering the Plan (the "Committee") has approved the grant to Employee of an option to purchase shares of the common stock of the Company (the "Common Stock"), on the terms and conditions set forth herein; and WHEREAS, the amount of compensation the recipient of the Option (as defined below) could receive hereunder is based solely on an increase in the value of the stock of the Company after the date of the grant; NOW, THEREFORE, in consideration of the foregoing recitals and the covenants set forth herein, the parties hereto hereby agree as follows: 1. Grant of Option; Certain Terms and Conditions. The Company --------------------------------------------- hereby grants to Employee, and Employee hereby accepts, as of the Date of Grant, an option to purchase the number of shares of Common Stock indicated below (the "Option Shares") at the Exercise Price per share indicated below, which option shall expire at 5:00 p.m., California time, on the Expiration Date indicated below and shall be subject to all of the terms and conditions set forth in this Agreement (the "Option"). On each anniversary of the Date of Grant, the Option shall become exercisable to purchase, and shall vest with respect to, that number of Option Shares (rounded to the nearest whole share) equal to the total number of Option Shares multiplied by the Annual Vesting Rate indicated below. Employee: -------------------------- Date of Grant: ---------- Number of shares purchasable: ---------- Exercise Price per share: ---------- Expiration Date: ---------- 1 Annual Vesting Rate: % ---------- The Option is intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (an "Incentive Stock Option"), and consequently: (i) the Expiration Date shall not be more than ten years after the Date of Grant and the Exercise Price per share shall not be less than the Fair Market Value (as defined in the Plan) per share on the Date of Grant; provided, however, that if, on the Date of Grant, Employee owns -------- ------- (after application of the family and other attribution rules of Section 425(d) of the Internal Revenue Code of 1986, as amended) more than 10% of the total combined voting power of all classes of stock of the Company or of its parent or subsidiary corporations, then the Expiration Date shall not be more than five years after the Date of Grant and the Exercise Price per share shall not be less than 110% of the Fair Market Value per share on the Date of Grant; and (ii) the aggregate Fair Market Value (determined as of the date such options are granted) of the shares of Common Stock with respect to which Incentive Stock Options are exercisable for the first time by Employee during any calendar year (under the Plan and all other stock option plans of the Company and its parent and subsidiary corporations) shall not exceed $100,000. 2. Acceleration and Termination of Option. -------------------------------------- (a) Termination of Employment. (i) Termination Within One Year After Change of Control. In --------------------------------------------------- the event that Employee shall cease to be an employee of the Company or any of its subsidiaries (such event shall be referred to herein as the "Termination" of Employee's "Employment") for any reason, or for no reason, within one year after a Change of Control (as hereinafter defined), then (A) the portion of the Option that has not vested on or prior to the date of such Termination of Employment shall fully vest on such date and (B) the Option shall terminate upon the earlier of the Expiration Date or three months after the date of such Termination of Employment. "Change of Control" shall mean the first to occur of the following events: (A) any date upon which the directors of the Company who were last nominated by the Board of Directors (the "Board") for election as directors cease to constitute a majority of the directors of the Company; (B) the date of the first public announcement that any person or entity, together with all Affiliates and Associates (as such capitalized terms are defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such person or entity, shall have become the Beneficial Owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company representing 25% or more of the voting power of the 2 Company (a "25% Stockholder"); provided, however, that the terms -------- ------- "person" and "entity," as used in this clause (B), shall not include (1) the Company or any of its subsidiaries, (2) any employee benefit plan of the Company or any of its subsidiaries, (3) any entity holding voting securities of the Company for or pursuant to the terms of any such plan, (4) any person or entity if the transaction that resulted in such person or entity becoming a 25% Stockholder was approved in advance by the Board or (5) any person or entity who was a 25% Stockholder on the date of adoption of the Plan by the Board; or (C) a reorganization, merger or consolidation of the Company (other than a reorganization, merger or consolidation the sole purpose of which is to change the Company's domicile solely within the United States) the consummation of which results in the outstanding securities of any class then subject to the Option being exchanged for or converted into cash, property or a different kind of securities. (ii) Retirement. If Employee's Employment is Terminated by ---------- reason of Employee's retirement in accordance with the Company's then- current retirement policy ("Retirement"), and a Change of Control shall not have occurred within one year prior thereto, then (A) the portion of the Option that has not vested on or prior to the date of such Retirement shall terminate on such date and (B) the remaining vested portion of the Option shall terminate on the date three (3) months after the date of such Termination of Employment. (iii) Death or Permanent Disability. If Employee's Employment ----------------------------- is Terminated by reason of the death or Permanent Disability (as hereinafter defined) of Employee, and a Change of Control shall not have occurred within one year prior thereto, then (A) the portion of the Option that has not vested on or prior to the date of such Termination of Employment shall terminate on such date and (B) the remaining vested portion of the Option shall terminate upon the earlier of the Expiration Date or the first anniversary of the date of such Termination of Employment. "Permanent Disability" shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. Employee shall not be deemed to have a Permanent Disability until proof of the existence thereof shall have been furnished to the Board in such form and manner, and at such times, as the Board may require. Any determination by the Board that Employee does or does not have a Permanent Disability shall be final and binding upon the Company and Employee. (iv) Other Termination. If Employee's Employment is ----------------- Terminated for no reason, or for any reason other than Retirement, death or Permanent Disability, and a Change of Control shall not have occurred within one year prior thereto, then the Option shall terminate upon the date of such Termination of Employment. 3 (b) Death Following Termination of Employment. Notwithstanding ----------------------------------------- anything to the contrary contained in this Agreement, if Employee shall die at any time after the Termination of his or her Employment and prior to the Expiration Date, then (i) the portion of the Option that has not vested on or prior to the date of such death shall terminate on such date and (ii) the remaining vested portion of the Option shall terminate on the earlier of the Expiration Date or the first anniversary of the date of such death. (c) Other Events Causing Acceleration of Option. The Committee, in ------------------------------------------- its sole discretion, may accelerate the exercisability of the Option at any time and for any reason. (d) Other Events Causing Termination of Option. Notwithstanding ------------------------------------------ anything to the contrary contained in this Agreement, the Option shall terminate upon the consummation of any of the following events, or, if later, the thirtieth day following the first date upon which such event shall have been approved by both the Board and the shareholders of the Company: (i) the dissolution or liquidation of the Company; or (ii) a sale of substantially all of the property and assets of the Company, unless the terms of such sale shall provide otherwise. 3. Adjustments. In the event that the outstanding securities of the ----------- class then subject to the Option are increased, decreased or exchanged for or converted into cash, property or a different number or kind of securities, or cash, property or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, merger, consolidation, recapitalization, reclassification, dividend (other than a regular cash dividend) or other distribution, stock split, reverse stock split or the like, or in the event that substantially all of the property and assets of the Company are sold, then, unless such event shall cause the Option to terminate pursuant to Section 2(d) hereof, the Committee shall make appropriate and proportionate adjustments in the number and type of shares or other securities or cash or other property that may thereafter be acquired upon the exercise of the Option; provided, however, that any such adjustments in the -------- ------- Option shall be made without changing the aggregate Exercise Price of the then unexercised portion of the Option. 4. Exercise. -------- (a) The Option shall be exercisable during Employee's lifetime only by Employee or by his or her guardian or legal representative, and after Employee's death only by the person or entity entitled to do so under Employee's last will and testament or applicable intestate law. The Option may only be exercised by the delivery to the Company of a written notice of such exercise, which notice shall specify the number of Option Shares to be purchased (the "Purchased Shares") and the aggregate Exercise Price for such shares (the "Exercise Notice"), together with payment in full of such aggregate Exercise Price in cash or by check payable to the Company; provided, however, that payment of such -------- ------- aggregate Exercise Price may instead be made, in whole or in part, by the delivery to the Company of a certificate or certificates representing shares of Common Stock, duly endorsed or accompanied by a duly executed stock powers, which delivery effectively transfers to the Company good and valid title to such shares, free and clear of any pledge, commitment, lien, claim or other encumbrance 4 (such shares to be valued on the basis of the aggregate Fair Market Value (as defined below) thereof on the date of such exercise), provided that the Company is not then prohibited from purchasing or acquiring such shares of Common Stock. (b) The "Fair Market Value" of a Common Share on any date (the "Determination Date") shall be equal to the closing price per Common Share on the business day immediately preceding the Determination Date, as reported in The Wall Street Journal, Western Edition, or, if no closing price was so reported for such immediately preceding business day, the closing price for the next preceding business day for which a closing price was so reported, or, if no closing price was so reported for any of the 30 business days immediately preceding the Determination Date, the average of the high bid and low asked prices per Common Share on the business day immediately preceding the Determination Date in the over-the-counter market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if the Common Shares were not quoted by any such organization on such immediately preceding business day, the average of the closing bid and asked prices on such day as furnished by a professional market maker making a market in the Common Shares selected by the Board. 5. Payment of Withholding Taxes. If the Company becomes obligated ---------------------------- to withhold an amount on account of any tax imposed as a result of the exercise of the Option, including, without limitation, any federal, state, local or other income tax, or any F.I.C.A., state disability insurance tax or other employment tax, then Employee shall, on the first day upon which the Company becomes obligated to pay such amount to the appropriate taxing authority, pay such amount to the Company in cash or by check payable to the Company. 6. Notices. All notices and other communications required or ------- permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally or five days after mailing by certified or registered mail, postage prepaid, return receipt requested, to the Company at 1300 South El Camino Real, San Mateo, California 94402, Attention: Chief Financial Officer, or to Employee at the address set forth beneath his or her signature on the signature page hereto, or at such other addresses as they may designate by written notice in the manner aforesaid. 7. Stock Exchange Requirements; Applicable Laws. Notwithstanding -------------------------------------------- anything to the contrary in this Agreement, no shares of stock purchased upon exercise of the Option, and no certificate representing all or any part of such shares, shall be issued or delivered if (i) such shares have not been admitted to listing upon official notice of issuance on each stock exchange upon which shares of that class are then listed or (ii) in the opinion of counsel to the Company, such issuance or delivery would cause the Company to be in violation of or to incur liability under any federal, state or other securities law, or any requirement of any stock exchange listing agreement to which the Company is a party, or any other requirement of law or of any administrative or regulatory body having jurisdiction over the Company. 8. Nontransferability. Neither the Option nor any interest therein ------------------ may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner other than by will or the laws of descent and distribution. 5 UNITED PANAM FINANCIAL CORP. 1997 EMPLOYEE STOCK INCENTIVE PLAN NON-QUALIFIED STOCK OPTION AGREEMENT ------------------------------------ This Stock option Agreement ("Agreement") is made and entered into as of the Date of Grant indicated below by and between United PanAm Financial Corp., a Delaware corporation (the "Company"), and the person named below ("Participant"). WHEREAS, Participant is an employee, director or independent contractor of the Company or one or more of its subsidiaries; and WHEREAS, pursuant to the Company's 1997 Employee Stock Incentive Plan (the "Plan"), the committee of the Board of Directors of the Company administering the Plan (the "Committee") has approved the grant to Participant of an option to purchase shares of the common stock of the Company (the "Common Stock"), on the terms and conditions set forth herein; and WHEREAS, the amount of compensation the recipient of the Option (as defined below) could receive hereunder is based solely on an increase in the value of the stock of the Company after the date of the grant; NOW, THEREFORE, in consideration of the foregoing recitals and the covenants set forth herein, the parties hereto hereby agree as follows: 1. Grant Of Option; Certain Terms and Conditions. The Company --------------------------------------------- hereby grants to Participant, and Participant hereby accepts, as of the Date of Grant, an option to purchase the number of shares of Common Stock indicated below (the "Option Shares") at the Exercise Price per share indicated below, which option shall expire at 5:00 p.m., California time, on the Expiration Date indicated below and shall be subject to all of the terms and conditions set forth in this Agreement (the "Option"). On each anniversary of the Date of Grant, the option shall become exercisable to purchase, and shall vest with respect to, that number of Option Shares (rounded to the nearest whole share) equal to the total number of Option Shares multiplied by the Annual Vesting Rate indicated below. Participant: ______________________ Date of Grant: __________ Number of shares purchasable: __________ Exercise Price per share: __________ Expiration Date: __________ 1 Annual Vesting Rate: __________% The Option is not intended to qualify as an incentive stock option under Section 422 of the Internal Revenue Code of 1986, as amended (an "Incentive Stock Option"). 2. Acceleration and Termination of Option. -------------------------------------- (a) Termination of Employment. (i) Termination Within One Year After Change of Control. In the --------------------------------------------------- event that Participant shall cease to be an employee, director or independent contractor of the Company or any of its subsidiaries (such event shall be referred to herein as the "Termination" of Participant's "Employment") for any reason, or for no reason, within one year after a Change of Control (as hereinafter defined), then (A) the portion of the Option that has not vested on or prior to the date of such Termination of Employment shall fully vest on such date and (B) the Option shall terminate upon the earlier of the Expiration Date or the first anniversary of the date of such Termination of Employment. "Change of Control" shall mean the first to occur of the following events: (A) any date upon which the directors of the Company who were last nominated by the Board of Directors (the "Board") for election as directors cease to constitute a majority of the directors of the Company; (B) the date of the first public announcement that any person or entity, together with all Affiliates and Associates (as such capitalized terms are defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such person or entity, shall have become the Beneficial Owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company representing 25% or more of the voting power of the Company (a "25% Stockholder"); provided, however, that the -------- ------- terms "person" and "entity," as used in this clause (B), shall not include (1) the Company or any of its subsidiaries, (2) any employee benefit plan of the Company or any of its subsidiaries, (3) any entity holding voting securities of the Company for or pursuant to the terms of any such plan, (4) any person or entity if the transaction that resulted in such person or entity becoming a 25% Stockholder was approved in advance by the Board or (5) any person or entity who was a 25% Stockholder on the date of adoption of the Plan by the Board; or (C) a reorganization, merger or consolidation of the Company (other than a reorganization, merger or consolidation the sole purpose of which is to change the Company's domicile solely within the United States) the consummation of which results in the outstanding securities of any class then subject to the Option being exchanged for or converted into cash, property or a different kind of securities; provided, however, that -------- ------- 2 a Change of Control shall not be deemed to occur if, as a result of such reorganization, merger or consolidation of the Company, the securities of any class then subject to the Option (the "Option Securities") are exchanged for or converted into securities that represent the same beneficial ownership of the Company and possess the same voting, liquidation and other rights to which the Option Securities were entitled immediately prior to such reorganization, merger or consolidation. (ii) Retirement. If Participant's Employment is Terminated by ----------- reason of Participant's retirement in accordance with the Company's then current retirement policy ("Retirement"), and a Change of Control shall not have occurred within one year prior thereto, then (A) the portion of the Option that has not vested on or prior to the date of such Retirement shall terminate on such date and (B) the remaining vested portion of the Option shall terminate upon the Expiration Date. (iii) Death or Permanent Disability. If Participant's ------------------------------ Employment is Terminated by reason of the death or Permanent Disability (as hereinafter defined) of Participant, and a Change of Control shall not have occurred within one year prior thereto, then (A) the portion of the Option that has not vested on or prior to the date of such Termination of Employment shall terminate on such date and (B) the remaining vested portion of the Option shall terminate upon the earlier of the Expiration Date or the first anniversary of the date of such Termination of Employment. "Permanent Disability" shall mean the inability to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that can be expected to result in death or that has lasted or can be expected to last for a continuous period of not less than 12 months. Participant shall not be deemed to have a Permanent Disability until proof of the existence thereof shall have been furnished to the Board in such form and manner, and at such times, as the Board may require. Any determination by the Board that Participant does or does not have a Permanent Disability shall be final and binding upon the Company and Participant. (iv) Other Termination. If Participant's Employment is ------------------ Terminated for no reason, or for any reason other than Retirement, death or Permanent Disability, and a Change of Control shall not have occurred within one year prior thereto, then the Option shall terminate upon the date of such Termination of Employment. (b) Death Following Termination of Employment. Notwithstanding ----------------------------------------- anything to the contrary contained in this Agreement, if Participant shall die at any time after the Termination of his or her Employment and prior to the Expiration Date, then (i) the portion of the Option that has not vested on or prior to the date of such death shall terminate on such date and (ii) the remaining vested portion of the Option shall terminate on the earlier of the Expiration Date or the first anniversary of the date of such death. (c) Other Events Causing Acceleration of Option. The Committee, in ------------------------------------------- its sole discretion, may accelerate the exercisability of the Option at any time and for any reason. (d) Other Events Causing Termination of Option. Notwithstanding ------------------------------------------ anything to the contrary contained in this Agreement, the Option shall terminate upon the consummation 3 of any of the following events, or, if later, the thirtieth day following the first date upon which such event shall have been approved by both the Board and the shareholders of the Company: (i) the dissolution or liquidation of the Company; or (ii) a sale of substantially all of the property and assets of the Company, unless the terms of such sale shall provide otherwise. 3. Adjustments. In the event that the outstanding securities of the ----------- class then subject to the Option are increased, decreased or exchanged for or converted into cash, property or a different number or kind of securities, or cash, property or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, merger, consolidation, recapitalization, reclassification, dividend (other than a regular cash dividend) or other distribution, stock split, reverse stock split or the like, or in the event that substantially all of the property and assets of the Company are sold, then, unless such event shall cause the Option to terminate pursuant to Section 2(d) hereof, the Committee shall make appropriate and proportionate adjustments in the number and type of shares or other securities or cash or other property that may thereafter be acquired upon the exercise of the Option; provided, however, that any such adjustments in the -------- ------- Option shall be made without changing the aggregate Exercise Price of the then unexercised portion of the Option. 4. Exercise. -------- (a) The Option shall be exercisable during Participant's lifetime only by Participant or by his or her guardian or legal representative, and after Participant's death only by the person or entity entitled to do so under Participant's last will and testament or applicable intestate law. The Option may only be exercised by the delivery to the Company of a written notice of such exercise, which notice shall specify the number of Option Shares to be purchased (the "Purchased Shares") and the aggregate Exercise Price for such shares (the "Exercise Notice"), together with payment in full of such aggregate Exercise Price in cash or by check payable to the Company; provided, however, that -------- ------- payment of such aggregate Exercise Price may instead be made, in whole or in part, by the delivery to the Company of a certificate or certificates representing shares of Common Stock, duly endorsed or accompanied by a duly executed stock powers, which delivery effectively transfers to the Company good and valid title to such shares, free and clear of any pledge, commitment, lien, claim or other encumbrance (such shares to be valued on the basis of the aggregate Fair Market Value (as defined below) thereof on the date of such exercise), provided that the Company is not then prohibited from purchasing or acquiring such shares of Common Stock. (b) The "Fair Market Value" of a Common Share on any date (the "Determination Date") shall be equal to the closing price per Common Share on the business day immediately preceding the Determination Date, as reported in The Wall Street Journal, Western Edition, or, if no closing price was so reported for such immediately preceding business day, the closing price for the next preceding business day for which a closing price was so reported, or, if no closing price was so reported for any of the 30 business days immediately preceding the Determination Date, the average of the high bid and low asked prices per Common Share on the business day immediately preceding the Determination Date in the over-the-counter 4 market, as reported by the National Association of Securities Dealers, Inc. Automated Quotations System ("NASDAQ") or such other system then in use, or, if the Common Shares were not quoted by any such organization on such immediately preceding business day, the average of the closing bid and asked prices on such day as furnished by a professional market maker making a market in the Common Shares selected by the Board. 5. Payment of Withholding Taxes. If the Company becomes obligated ---------------------------- to withhold an amount on account of any tax imposed as a result of the exercise of the Option, including, without limitation, any federal, state, local or other income tax, or any F.I.C.A., state disability insurance tax or other employment tax, then Participant shall, on the first day upon which the Company becomes obligated to pay such amount to the appropriate taxing authority, pay such amount to the Company in cash or by check payable to the Company. 6. Notices. All notices and other communications required or ------- permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given if delivered personally or five days after mailing by certified or registered mail, postage prepaid, return receipt requested, to the Company at 1300 South El Camino Real, San Mateo, California 94402, Attention: Chief Financial Officer, or to Participant at the address set forth beneath his or her signature on the signature page hereto, or at such other addresses as they may designate by written notice in the manner aforesaid. 7. Stock Exchange Requirements; Applicable Laws. Notwithstanding -------------------------------------------- anything to the contrary in this Agreement, no shares of stock purchased upon exercise of the Option, and no certificate representing all or any part of such shares, shall be issued or delivered if (i) such shares have not been admitted to listing upon official notice of issuance on each stock exchange upon which shares of that class are then listed or (ii) in the opinion of counsel to the Company, such issuance or delivery would cause the Company to be in violation of or to incur liability under any federal, state or other securities law, or any requirement of any stock exchange listing agreement to which the Company is a party, or any other requirement of law or of any administrative or regulatory body having jurisdiction over the Company. 8. Nontransferability. Neither the Option nor any interest therein ------------------ may be sold, assigned, conveyed, gifted, pledged, hypothecated or otherwise transferred in any manner other than by will or the laws of descent and distribution. 9. Plan. The Option is granted pursuant to the Plan, as in effect ---- on the Date of Grant, and is subject to all the terms and conditions of the Plan, as the same may be amended from time to time; provided, however, that no -------- ------- such amendment shall deprive Participant, without his or her consent, of the Option or of any of Participant's rights under this Agreement. The interpretation and construction by the Committee of the Plan, this Agreement, the Option and such rules and regulations as may be adopted by the Committee for the purpose of administering the Plan shall be final and binding upon Participant. Until the Option shall expire, terminate or be exercised in full, the Company shall, upon written request therefor, send a copy of the Plan, in its then-current form, to Participant or any other person or entity then entitled to exercise the Option. 5 10. Shareholder Rights. No person or entity shall be entitled to ------------------ vote, receive dividends or be deemed for any purpose the holder of any Option Shares until the Option shall have been duly exercised to purchase such Option Shares in accordance with the provisions of this Agreement. 11. Employment or Contract Rights. No provision of this Agreement or ----------------------------- of the Option granted hereunder shall (i) confer upon Participant any right to continue in the employ of or contract with the Company or any of its subsidiaries, (ii) affect the right of the Company and each of its subsidiaries to terminate the employment or contract of Participant, with or without cause, or (iii) confer upon Participant any right to participate in any employee welfare or benefit plan or other program of the Company or any of its subsidiaries other than the plan. Participant hereby acknowledges and agrees that the Company and each of its subsidiaries may terminate the employment or contract of Participant at any time and for any reason, or for no reason, unless Participant and the Company or such subsidiary are parties to a written employment or independent contractor agreement that expressly provides otherwise. 6 12. Governing Law. This Agreement and the Option granted hereunder ------------- shall be governed by and construed and enforced in accordance with the laws of the State of Delaware without reference to choice or conflict of law principles. IN WITNESS WHEREOF, the Company and Participant have duly executed this Agreement as of the Date of Grant. UNITED PANAM FINANCIAL CORP. By ---------------------------- Authorized Representative PARTICIPANT ------------------------------ Signature ------------------------------ Printed Name ------------------------------ Street Address ------------------------------ City, State and Zip Code ------------------------------ Social Security Number 7 UNITED PANAM FINANCIAL CORP. 1997 EMPLOYEE STOCK INCENTIVE PLAN RESTRICTED STOCK AGREEMENT -------------------------- This Restricted Stock Agreement ("Agreement") is made and entered into as of the Date of Award indicated below by and between United PanAm Financial Corp., a Delaware corporation (the "Company"), and the person named below ("Participant"). WHEREAS, Participant is an employee, director or independent contractor of the Company or one or more of its subsidiaries; and WHEREAS, pursuant to the Company's 1997 Employee Stock Incentive Plan (the "Plan"), the committee of the Board of Directors of the Company administering the Plan (the "Committee") has approved the award to Participant of the right to purchase shares of the common stock of the Company (the "Common Stock"), on the terms and conditions set forth herein; NOW, THEREFORE, in consideration of the foregoing recitals and the covenants set forth herein, the parties hereto hereby agree as follows: 1. Award; Certain Terms and Conditions. The Company hereby awards ----------------------------------- to Participant, and Participant hereby accepts, as of the Date of Award, the right to purchase the number of shares of Common Stock indicated below (the "Restricted Shares") for the Cash Purchase Price per share indicated below. THE AGGREGATE CASH PURCHASE PRICE MUST BE PAID TO THE COMPANY ON OR PRIOR TO 5:00 P.M. (LOCAL TIME AT THE COMPANY'S PRINCIPAL EXECUTIVE OFFICE) UPON THE SIXTIETH DAY FOLLOWING THE DATE OF AWARD. The Restricted Shares shall be subject to all of the terms and conditions set forth in this Agreement, including the restrictions imposed pursuant to Section 3 hereof; provided, however, that on -------- ------- each anniversary of the Date of Award, such restrictions shall terminate with respect to that number of Restricted Shares (rounded to the nearest whole share) equal to the total number of Restricted Shares multiplied by the Annual Vesting Rate indicated below (the termination of such restrictions with respect to any Restricted Share, for any reason, shall be referred to herein as the "vesting" of such share). Participant: -------------------------- Date of Award: --------------- Number of shares purchasable: --------------- Cash Purchase Price per share: $ --------------- Annual Vesting Rate: % --------------- 1 2. Consideration for Shares; Method of Payment. ------------------------------------------- (a) The consideration for the issuance and sale of Restricted Shares contemplated hereby may include, in addition to the Cash Purchase Price per share indicated in Section 1 hereof, consideration in the form of past services to the Company or one or more of its subsidiaries. If the Cash Purchase Price per share is $0, then (i) the total consideration for the issuance and sale of the Restricted Shares shall be deemed to be equal to $0.01 per share and (ii) such consideration shall be deemed to have been received by the Company, on or prior to the Date of Award, in the form of past services. (b) The aggregate Cash Purchase Price must be paid to the Company in cash or by check payable to the Company. Upon payment to the Company in full of the aggregate Cash Purchase Price as provided herein on or prior to 5:00 p.m. (local time at the Company's principal executive office) on the sixtieth day following the Date of Award, Participant shall be deemed to have purchased the Restricted Shares effective as of the Date of Award. 3. Restrictions. Until a Restricted Share vests, it may not be ------------ sold, assigned, conveyed, gifted, pledged, hypothecated, or otherwise transferred in any manner. 4. Acceleration of Vesting. ----------------------- (a) Notwithstanding anything to the contrary contained in this Agreement, in the event that Participant shall cease to be an employee or independent contractor of the Company or any of its subsidiaries for any reason, or for no reason, within one year after a Change of Control (as hereinafter defined), all of the then unvested Restricted Shares shall vest upon the date of such event. (b) "Change of Control" shall mean the first to occur of the following events: (i) any date upon which the directors of the Company who were nominated by the Board of Directors (the "Board") for election as directors cease to constitute a majority of the directors of the Company; (ii) the date of the first public announcement that any person or entity, together with all Affiliates and Associates (as such capitalized terms are defined in Rule 12b-2 promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such person or entity, shall have become the Beneficial Owner (as defined in Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company representing 25% or more of the voting power of the Company (a "25% Stockholder"); provided, however, that the terms "person" and "entity," as -------- ------- used in this clause (ii) shall not include (A) the Company or any of its subsidiaries, (B) any employee benefit plan of the Company or any of its subsidiaries, (C) any entity holding voting securities of the Company for or pursuant to the terms of any such plan, (D) any person or entity if the transaction that resulted in such person or entity becoming a 25% Stockholder was approved in advance by the Board or (E) any person or entity who was a 25% Stockholder on the date of adoption of the Plan by the Board; or 2 (iii) a reorganization, merger or consolidation of the Company (other than a reorganization, merger or consolidation the sole purpose of which is to change the Company's domicile solely within the United States) the consummation of which results in the outstanding securities of any class then comprising the Restricted Shares being exchanged for or converted into cash, property or a different kind of securities; provided, -------- however, that a Change of Control shall not be deemed to occur if, as a ------- result of such reorganization, merger or consolidation of the Company, the securities of any class then subject to the Option (the "Option Securities") are exchanged for or converted into securities that represent the same beneficial ownership of the Company and possess the same voting, liquidation and other rights to which the Option Securities were entitled immediately prior to such reorganization, merger or consolidation. (c) In addition, the Committee, in its sole discretion, may accelerate the vesting of any or all of the Restricted Shares at any time. 5. Repurchase of Restricted Shares. Notwithstanding anything to the ------------------------------- contrary contained in this Agreement, if Participant shall cease to be an employee, director or independent contractor of the Company or any of its subsidiaries for any reason, or for no reason, then, unless the Committee shall determine otherwise, the Company shall repurchase each then unvested Restricted Share at a purchase price equal to the Cash Purchase Price per share. 6. Payment of Withholding Taxes. If the Company becomes obligated ---------------------------- to withhold an amount on account of any federal, state or local tax imposed as a result of the sale of the Restricted Shares to Participant pursuant to this Agreement or the termination of the restrictions imposed upon the Restricted Shares hereunder, including, without limitation, any federal, state or other income tax, or any F.I.C.A., state disability insurance tax or other employment tax (the date upon which the Company becomes so obligated shall be referred to herein as the "Withholding Date"), then Participant shall pay such amount (the "Withholding Liability") to the Company on the Withholding Date in cash or by check payable to the Company. 7. Escrow. ------ (a) Until a Restricted Share vests, (i) the record address of the holder of record of such Restricted Share shall be c/o the Secretary of the Company at the address of the Company's principal executive office, (ii) the stock certificate representing such Restricted Share (together with any cash, property or securities comprising all or any part of such Restricted Share as provided in Section 8 hereof) shall be held in escrow in the custody of the Secretary of the Company, duly endorsed in blank or accompanied by a duly executed stock power, and (iii) such stock certificate shall contain the following legend: "The transfer and registration of transfer of the securities represented by this certificate are subject to certain restrictions as provided in a Restricted Stock Agreement dated as of [Date of Award to be inserted] by and between the Corporation and [name of Participant to be inserted]." 3 (b) From and after the date upon which a Restricted Share vests, the holder of record of such Restricted Share shall be entitled (provided that Participant shall have paid the Withholding Liability to the Company pursuant to Section 6 hereof) to receive the stock certificate representing such Restricted Share (together with any cash, property or securities comprising all or any part of such Restricted Share as provided in Section 8 hereof), which stock certificate shall not contain the legend set forth in subsection (a)(iii) above. 8. Voting; Dividends; Certain Corporate Transactions. The holder of ------------------------------------------------- record of any Restricted Share shall be entitled to exercise all voting rights with respect to such share and to receive all regular cash dividends paid with respect thereto. In the event that the outstanding securities of any class then comprising the Restricted Shares are increased, decreased or exchanged for or converted into cash, property or a different number or kind of securities, or cash, property or securities are distributed in respect of such outstanding securities, in either case as a result of a reorganization, merger, consolidation, recapitalization, reclassification, dividend (other than a regular cash dividend) or other distribution, stock split, reverse stock split or the like, then, unless the Committee shall determine otherwise, the term "Restricted Shares" shall, from and after the date of such event, include such cash, property or securities so distributed in respect of the Restricted Shares, or into or for which the Restricted Shares are so increased, decreased, exchanged or converted. 9. Plan. The Restricted Shares are being sold pursuant to the Plan, ---- as in effect on the Date of Award, and are subject to all the terms and conditions of the Plan, as the same may be amended from time to time; provided, -------- however, that no such amendment shall deprive Participant, without his or her - ------- consent, of the Restricted Shares or of any of Participant's rights under this Agreement. The interpretation and construction by the Committee of the Plan, this Agreement and such rules and regulations as may be adopted by the Committee for the purpose of administering the Plan shall be final and binding upon Participant. Until the Restricted Shares shall vest or be forfeited, the Company shall, upon written request therefor, send a copy of the Plan, in its then current form, to the holder of record of the Restricted Shares. 10. Employment or Contract Rights. No provision of this Agreement ----------------------------- shall (i) confer upon Participant any right to continue in the employ of or contract with the Company or any of its subsidiaries, (ii) affect the right of the Company and each of its subsidiaries to terminate the employment or contract of Participant, with or without cause, or (iii) confer upon Participant any right to participate in any employee welfare or benefit plan or other program of the Company or any of its subsidiaries other than the Plan. Participant hereby acknowledges and agrees that the Company and each of its subsidiaries may terminate the employment or contract of Participant at any time and for any reason, or for no reason, unless Participant and the Company or such subsidiary are parties to a written employment or independent contractor agreement that expressly provides otherwise. 11. Governing Law. This Agreement shall be governed by and construed ------------- and enforced in accordance with the laws of the State of Delaware without reference to choice or conflict of law principles. 4 IN WITNESS WHEREOF, the Company and Participant have duly executed this Agreement as of the Date of Award. UNITED PANAM FINANCIAL CORP. By ------------------------------- Authorized Representative PARTICIPANT --------------------------------- Signature --------------------------------- Printed Name --------------------------------- Street Address --------------------------------- City, State and Zip Code --------------------------------- Social Security Number 5 EX-10.61 29 PROMISSORY NOTE - LAWRENCE J. GRILL Exhibit 10.61 PROMISSORY NOTE --------------- $225,000.00 Los Angeles, California October 15, 1997 FOR VALUE RECEIVED, LAWRENCE J. GRILL (the "Borrower"), promises to pay to the order of UNITED PANAM FINANCIAL CORP., its successors and assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles, California 90067 or at such other place as might be designated in writing by the Lender, the principal sum of Three Hundred Thousand Dollars ($225,000.00) or so much thereof as remains unpaid, together with interest thereon at a fixed rate equal to Five and Eighty-One One Hundredths Percent (5.81%) per annum. Interest will be calculated on the basis of the actual days elapsed based on a per diem charge computed over a year composed of three hundred sixty (360) days. Principal and interest will be payable as follows: Interest from the date hereof on the outstanding amount of the Note will be payable annually on October 15 of each year beginning with October 15, 1998. On October 15, 2000, the entire unpaid principal balance and all accrued but unpaid interest thereon will be due and payable. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note, in whole or in part, without penalty, but with interest on the unpaid principal balance accrued to the date of prepayment. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note or otherwise relating to the indebtedness hereby evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. At the option of the Lender, after the failure of the Borrower to pay any such sum hereunder within thirty (30) days of the date due, the unpaid balance of this Note will bear interest at Ten Percent (10.0%) per annum. During the existence of any default, the Lender may apply payments received on any amount due hereunder or under the terms of any instrument now or hereafter evidencing or securing payment of this indebtedness as the Lender determines from time to time. This Note is issued pursuant to a Loan and Stock Pledge Agreement of even date herewith (the "LOAN AGREEMENT") and is secured by the security interests described therein. Upon the breach by the Borrower of any provision of this Note or of the Loan Agreement, or upon termination of Borrower's employment by Lender as provided in the Loan Agreement, or occurrence of any other default or event of default respecting this Note, the Loan Agreement or any other instrument now or hereafter evidencing or securing the indebtedness represented hereby, at the option of the Lender the entire indebtedness evidenced by this Note shall become immediately due, payable and collectible as the Lender may elect, regardless of the date of maturity of this Note. This Note is issued by the Borrower and accepted by the Lender pursuant to a lending transaction negotiated, consummated and to be performed in California. This Note is to be construed according to the internal laws of the State of California. The makers, endorsers, sureties, guarantors and all other persons who might become liable for all or any part of this obligation severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the collateral securing payment hereof or release of any party liable for the payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. This Note is intended to strictly conform with all usury laws to the extent applicable to the transactions contemplated hereby. The provisions of this Note and of all agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, shall the amount contracted for, charged, paid or agreed to be paid to the Lender for the use, forbearance or retention of money or credit hereunder or otherwise exceed the maximum rate permitted by law therefor. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between the Borrower and the Lender shall, at the time of the execution and delivery thereof, or at the time or performance of such provision shall be due, involve or purport to require any payment in excess of the limits prescribed by law, the obligation to be performed or fulfilled shall be reduced automatically to the limit prescribed by law without the necessity of the execution of any amendment or new document. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. /s/ LAWRENCE J. GRILL __________________________________ LAWRENCE J. GRILL 2 EX-10.62 30 LOAN & STOCK PLEDGE AGREEMENT - LAWRENCE J. GRILL Exhibit 10.62 LOAN AND STOCK PLEDGE AGREEMENT ------------------------------- THIS LOAN AND STOCK PLEDGE AGREEMENT (the "LOAN AGREEMENT" or "AGREEMENT") is made and executed as of October 15, 1997, by and among LAWRENCE J. GRILL ("PLEDGOR") and UNITED PANAM FINANCIAL CORP., a Delaware corporation ("LENDER") in connection with a loan or loans of up to $300,000.00 to be made by Lender to Pledgor ("LOAN") pursuant to a Promissory Note or Notes (each a "NOTE") of Borrower of even date herewith, the proceeds of which have been used by Pledgor to purchase 200 shares of the common stock of Lender (the "SHARES") acquired by exercise of a Stock Option (the "OPTION") pursuant to a Stock Option Agreement between Lender and Pledgor originally dated as of October 18, 1994. The Option was granted under and subject to the terms of Lender's 1994 Stock Option Plan. 1. Purchase of Shares. Pledgor hereby exercises the Option and ------------------ agrees, in connection therewith, to (i) the pledge of the Shares pursuant to this Agreement as security for the Loan; (ii) the terms and restrictions of the May 16, 1994 Stockholders Agreement governing ownership and transfer of the Shares; (iii) the acceptance of a certificate for the Shares subject to the legend conditions required by the May 16, 1994 Stockholders Agreement and applicable securities laws; and (iv) repay the Loan in full thirty days after termination of Pledgor's employment by Lender or its affiliates as provided in the 1994 Stock Option Plan of Lender. Pledgor represents he is acquiring Shares for his own account and not with a view toward the resale or other distribution thereof, and agrees that the Shares are "restricted securities" for purposes of the Securities Act of 1933 and Rule 144 thereunder. Lender hereby agrees that all installments of the Option shall be immediately vested and exercisable notwithstanding any contrary provision in the Stock Option Agreement between Lender and Pledgor. 2. Obligations; Security Interest. This Loan Agreement and the ------------------------------ security interest created hereby are given for the purpose of securing the payment and performance of any and all of Pledgor's presently existing or hereafter arising obligations and liabilities owing to Lender ("Obligations"), including, without implied limitation (i) payment of all indebtedn ess evidenced by the Note; (ii) all present and future obligations of Pledgor under this Agreement; and (iii) any and all amendments, modifications, renewals and/or extensions of any of the foregoing, including, but not limited to amendments, modifications, renewals or extensions which are evidenced by new or additional instruments, documents or agreements or which change the rate of interest on any indebtedness or obligations secured hereby. The term "Obligations" as used herein is intended to mean Obligations in its most comprehensive sense and includes all present and future indebtedness, liabilities, undertakings, covenants and other obligations of Pledgor, whether voluntary or involuntary, absolute or contingent, liquidated or unliquidated, determined or undetermined, earned or unearned, and due or not due. 3. PLEDGE. Pledgor hereby assigns, grants, pledges and transfers to ------ Lender, as security for the payment and performance of the Obligations described in Paragraph 1 above, a security interest in, and lien upon all of Pledgor's right, title and interest in and to the following: (a) the Shares; (b) stock powers ("POWERS") duly executed in blank, with such signatures properly guaranteed covering all of the Shares; and (c) the proceeds of each of the foregoing including, without limitation any and all dividends, cash, instruments and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for any of the Shares or Options (the "PROCEEDS"). The Shares, the Powers, and the Proceeds shall be collectively referred to as the "COLLATERAL". 4. DELIVERIES. Concurrent with the execution hereof, Pledgor has ---------- delivered Certificate(s) No(s). ____________________, representing all of the Shares, to Lender together with related Powers or endorsements, to be held pursuant to the terms hereof for the benefit of Lender. 5. LENDER'S DUTIES. Lender shall have no duty with respect to the --------------- Collateral other than the duty to use reasonable care if it is in its possession. Without limiting the generality of the foregoing, Lender shall be under no obligation to take any steps necessary to preserve rights in the Collateral against any other parties, to sell same if it threatens to decline in value, or to exercise any rights represented thereby; provided, however, that Lender may, at its option, do so, and any and all expenses incurred in connection therewith shall be for the sole account of Pledgor. 6. VOTING RIGHTS; DIVIDENDS; ETC. During the term of this Agreement ----------------------------- and as long as no breach of agreement, representation, warranty or obligation of Pledgor or other event of default, under this Loan Agreement or the Note (an "EVENT OF DEFAULT"), shall have occurred and be continuing beyond any applicable cure period: (a) Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Shares or any part thereof for any purpose not inconsistent with the terms of this Agreement. (b) Pledgor shall be entitled to receive and retain any and all dividends and distributions paid in respect of the Shares provided, however, that any and all (i) dividends and distributions paid or payable other than in cash in respect of, and instruments and other property received, receivable or otherwise distributed in respect of, or in exchange for, any Shares, (ii) dividends and distributions paid or payable in cash in respect of any Shares in connection with a partial or total liquidation or dissolution or in connection with a reduction of capital, capital surplus or paid-in surplus, and (iii) cash paid with respect to, payable or otherwise distributed on redemption of, or in exchange for, any Shares, shall be forthwith delivered to Lender to hold as Collateral and shall, if received by Pledgor, be received in trust for the benefit of Lender, be segregated from the other property or funds of Pledgor, and be forthwith delivered to Lender as Collateral in the same form as so received (with any necessary endorsement). (c) Lender shall execute and deliver (or cause to be executed and delivered) to Pledgor all such proxies and other instruments as Pledgor may reasonably request for the purpose of enabling Pledgor to exercise those voting and other rights which it is entitled to exercise pursuant to paragraph 6(a) above and to receive those dividends or distributions which it is authorized to receive and retain pursuant to paragraph 6(b) above. (d) If an Event of Default shall have occurred and be continuing and any amounts shall be due and payable (whether by acceleration, maturity, or otherwise) under any of the Obligations, all rights of Pledgor to exercise the voting and other consensual rights which it would otherwise be entitled to exercise pursuant to this paragraph 6 and to receive the dividends and distributions which it would otherwise be authorized to receive and retain pursuant to this paragraph shall, at Lender's option, cease, and all such rights shall, at Lender's option, thereupon become vested in Lender so long as an Event of Default shall continue, and Lender shall, at its option, thereupon have the sole right to exercise such voting and other consensual rights and to receive and hold as Collateral such dividends and interest payments. 7. REPRESENTATIONS. Pledgor warrants, represents and covenants that: --------------- (a) except as set forth in the Securities Act of 1933, as amended (the "Act") and the May 16, 1994 Shareholders Agreement, there are no restrictions upon the transfer of any of the Collateral and Pledgor has the right to pledge and grant a security interest in or otherwise transfer such Collateral free of any encumbrances or rights of third parties; (b) all of the Collateral is and shall remain free from all liens, claims, encumbrances, and purchase money or other security interests, and Pledgor shall not, without Lender's prior written consent, sell, transfer or otherwise dispose of any or all of the Collateral; (c) this Agreement, and the delivery to Lender of the certificates representing the Shares creates a valid and perfected security interest in the Collateral in favor of Lender, and all actions necessary or desirable to such perfection have been duly taken; (d) no authorization or other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (i) for the grant by Pledgor of the security interest granted hereby or for the execution, delivery or performance of this -3- Agreement by Pledgor; (ii) for the perfection of or exercise by Lender of its rights and remedies hereunder; or (iii) for the exercise by Lender of the voting or other rights provided for in this Agreement or the remedies in respect of the Shares pursuant to this Agreement (except as may be required in connection with a disposition of the Shares by laws affecting the offering and sale of securities generally); (e) Pledgor has made its own arrangements for keeping informed of changes or potential changes affecting the Collateral (including, but not limited to, rights to convert, rights to subscribe, payment of dividends, reorganization or other exchanges, tender offers and voting rights) and Pledgor agrees that Lender shall have no responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; and (f) All of the outstanding Shares have been duly and validly issued by Remediation and they are fully paid and nonassessable. 8. SHARE ADJUSTMENT. In the event that during the term of this ---------------- Agreement, any reclassification, readjustment or other change is declared or made in the capital structure of Borrower, or any Option is exercised, all new substituted and additional shares, options, or other securities, issued, or issuable, to Pledgor by reason of any such change or exercise shall be delivered to and held by Lender under the terms of this Agreement in the same manner as the Collateral originally pledged hereunder. 9. WARRANTS. In the event that during the term of this Agreement, -------- subscription warrants or any other rights or options shall be issued or exercised in connection with the Collateral, such warrants, rights and options acquired by Pledgor shall be immediately assigned by Pledgor to Lender and all new stock or other securities so acquired by Pledgor shall also be immediately assigned to Lender to be held under the terms of this Agreement in the same manner as the Collateral originally pledged hereunder. 10. CONSENT. Pledgor hereby consents that, from time-to-time, before ------- or after the occurrence or existence of any Event of Default, with or without notice to or assent from Pledgor, any other security at any time held by or available to Lender for any of the Obligations or any other security at any time held by or available to Lender of any other person, firm or corporation secondarily or otherwise liable for any of the Obligations, may be exchanged, surrendered, or released and any of the Obligations may be changed, altered, renewed, extended, continued, surrendered, compromised, waived or released, in whole or in part, as Lender may see fit, and Pledgor shall remain bound under this Agreement notwithstanding any such exchange, surrender, release, alteration, renewal, extension, continuance, compromise, waiver or inaction, or extension of further credit. 11. REMEDIES UPON DEFAULT. Upon the occurrence of an Event of --------------------- Default, Lender shall have, in addition to any other rights given by law or the rights hereunder, all of -4- the rights and remedies with respect to the Collateral of a secured party under the California Uniform Commercial Code ("CODE"). In addition, with respect to the Collateral, or any part thereof, upon ten (10) business days' notice to Pledgor following the occurrence of an Event of Default and Pledgor's failure to cause such Event of Default to be cured within such period, Lender may sell or cause the same to be sold at any public or private sale, in one or more sales or lots, at such price as Lender may deem best, and for cash or on credit or for future delivery, without assumption of any credit risk, and the purchaser of any or all of the Collateral so sold shall thereafter hold the same absolutely, free from any claim, encumbrance or right of any kind whatsoever. Any sale of the Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies or other financial institutions disposing of property similar to the Collateral and any sale made through NASDAQ, any securities exchange or any NASD member shall be conclusively deemed to be commercially reasonable. Any requirements of reasonable notice shall be met if such notice is mailed to Pledgor, at the address set forth in the Loan Agreement, at least ten (10) calendar days before the time of the sale or disposition. Any other retirement of notice, demand or advertisement for sale, is, to the extent permitted by law, waived. Lender may, in its own name, or in the name of a designee or nominee, buy at any public sale of the Collateral, or to the extent permitted by the Code, at any private sale. Lender shall have the right to execute any document or form, in its name or in the name of the Pledgor, which may be necessary or desirable in connection with such sale of Collateral. In addition to specific rights provided herein with respect to sales of the Shares, and subject to applicable law, sales of the Collateral may be conducted with or without demand and with or without notice or advertisement, for cash, credit or for future delivery, all as the Lender shall deem appropriate. Without limiting the foregoing, the Lender may (i) approach and negotiate with potential purchasers, and (ii) restrict the prospective bidders or purchasers to persons who will represent and agree that they are purchasing such Collateral for their own account for investment and not with a view to the distribution or resale thereof. In the event any such Collateral is sold at private sale, Pledgor agrees that such sale shall not, by reason merely that it is a private sale subject to the potential restrictions described herein, or that there is a possibility that a substantially higher price might have been realized at a public sale, be deemed to have not been made in a commercially reasonable manner. Pledgor recognizes that no ready market may exist for such Collateral and that a sale by Lender of any such Collateral for an amount substantially less than the value of the Shares may be commercially reasonable in view of the difficulties that may be encountered in attempting to sell a large block of the securities of Remediation. Upon consummation of any such sale, Lender shall have the right to assign, transfer and deliver to the purchaser or purchasers thereof, the Collateral so sold. Each such Purchaser of any such sale shall hold the Property sold absolutely free from any claim or right on the part of the Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay and/or appraisal which Pledgor now has or may at any time in the future -5- have under any rule of law or statute now existing or hereafter enacted. If any consent, approval or authorization of any state, municipal or other governmental agency or authority shall be necessary to effectuate any sale or disposition of the Collateral, Pledgor shall execute all such applications and other instruments as may be required in connection with securing any such consent, approval or authorization and, will otherwise use its best efforts to secure the same. Under no circumstances will Lender be obligated to register any securities under the Securities Act of 1933 or any similar qualification or registration law of any state, unless, in its sole discretion, it shall elect to do so, in which case the cost of such registration and qualification shall become part of the Obligations secured hereby. 12. LENDER AS PLEDGOR'S ATTORNEY-IN-FACT. Pledgor hereby irrevocably ------------------------------------ appoints Lender as its attorney-in-fact to arrange for the transfer at any time of the Collateral on the books of Pledgor to the name of Lender or to the name of Lender's nominee. 13. FURTHER ASSURANCES. Pledgor agrees that it will cooperate with ------------------ Lender and will execute and deliver, or cause to be executed and delivered, all such other stock powers, proxies, instruments, and documents and will take all such other action, as Lender may reasonably request from time to time in order to carry out the provisions and purposes hereof. 14. ATTORNEYS' FEES AND COSTS. Pledgor hereby agrees to pay all ------------------------- reasonable attorneys' fees and all other costs and expenses which may be incurred by Lender in the enforcement of this Agreement, whether or not suit is brought. 15. NOTICES. All notices or demands by any party hereto to the other ------- party and relating to this Agreement shall be made in the manner and to the addresses set forth in the Loan Modification Agreement. 16. CALIFORNIA LAW APPLICABLE. This Agreement shall be governed by, ------------------------- and construed in accordance with, the laws of the State of California. 17. GENERAL PROVISIONS. ------------------ (a) This Agreement shall be binding and deemed effective when executed by Pledgor and accepted and executed by Lender. (b) This Agreement shall bind and inure to the benefit of the respective successors and assigns of Pledgor and Lender; provided, however, that Pledgor may not assign this Agreement or any rights hereunder without Lender's prior written consent and any prohibited assignment shall be absolutely void. No consent to an assignment by Lender shall release Pledgor from its obligations to Lender hereunder. Lender may assign its rights and duties hereunder. Lender reserves the right to sell, assign, transfer, negotiate, or grant participations in all or any part of, or any interest in rights and benefits hereunder. In connection therewith, Lender may disclose all documents and information which Lender now or hereafter may have relating to Pledgor or Pledgor's business. -6- (c) Section headings and numbers have been set forth herein for convenience only. Unless the contrary is compelled by the context, everything contained in each Section hereof applies equally to this entire Agreement. (d) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Lender or Pledgor, whether under any rule of construction or otherwise, by virtue of such party's having prepared the same. On the contrary, this Agreement has been reviewed by each of the parties and their counsel and shall be construed and interpreted according to the ordinary meaning of the words used so as to fairly accomplish the purposes and intentions of all parties hereto. (e) Each provision of this Agreement shall be severable from every other provision of this Agreement for the purpose of determining the legal enforceability of any specific provision. (f) This Agreement cannot be changed or terminated orally. All prior agreements, understandings, representations, warranties, and negotiations, if any, are merged into this Agreement and the other documents and written agreements entered into in connection herewith and therewith. (g) THE PARTIES HEREBY EXPRESSLY WAIVE ANY RIGHT TO TRIAL BY JURY OF ANY CLAIM, DEMAND, ACTION OR CAUSE OF ACTION (1) ARISING UNDER THIS AGREEMENT, ANY OF THE LOAN DOCUMENTS OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR (2) IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS OF THE PARTIES HERETO OR ANY OF THEM WITH RESPECT TO THIS AGREEMENT, THE LOAN DOCUMENTS, OR ANY OTHER INSTRUMENT, DOCUMENT OR AGREEMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH, OR THE TRANSACTIONS RELATED HERETO OR THERETO, IN EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING, AND WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE; AND THE PARTIES HEREBY AGREE AND CONSENT THAT ANY SUCH CLAIM, DEMAND, ACTION OR CAUSE OF ACTION SHALL BE DECIDED BY COURT TRIAL WITHOUT A JURY, AND THAT ANY PARTY TO THIS AGREEMENT MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION WITH ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF THE PARTIES HERETO TO THE WAIVER OF THEIR RIGHT TO TRIAL BY JURY. IN WITNESS WHEREOF, the parties have executed this Agreement on the date first written. UNITED PANAM FINANCIAL CORP. A DELAWARE CORPORATION /s/ LAWRENCE J. GRILL BY: /s/ GUILLERMO BRON - --------------------------- ---------------------------- LAWRENCE J. GRILL ITS: Chairman --------------------------- -7- EX-10.63 31 PROMISSORY NOTE - $1,628,000 EXHIBIT 10.63 PROMISSORY NOTE --------------- $1,628,000.00 (Unsecured Loan) Los Angeles, California July 1, 1997 FOR VALUE RECEIVED, PAN AMERICAN GROUP, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of PAN AMERICAN FINANCIAL, L.P., a Delaware limited partnership, its successors and assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles, California 90067 or at such other place as might be designated in writing by the Lender, the principal sum of One Million Six Hundred Twenty-Eight Thousand Dollars ($1,628,000.00) or so much thereof as has been disbursed by the Lender and remains unpaid, together with interest thereon at a fixed rate equal to Eight Percent (8.0%) per annum. Interest will be calculated on the basis of the actual days elapsed based on a per diem charge computed over a year composed of three hundred sixty (360) days. Principal and interest will be paid as follows: Interest on the amounts disbursed, accrued from the date of disbursement through the last day of each semi annual period ending June 30 and December 31, will be paid by the 15th day of each succeeding month, commencing on October 15, 1997. On June 30, 1999, the entire unpaid principal balance and all accrued but unpaid interest thereon will be due and payable. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note, in whole or in part, without penalty, but with interest on the unpaid principal balance accrued to the date of prepayment. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note or otherwise relating to the indebtedness hereby evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. At the option of the Lender, after the failure of the Borrower to pay any such sum hereunder within ten (10) days of the date due, the unpaid balance of this Note will bear interest at Ten percent (10.0%) per annum. During the existence of any default, the Lender may apply payments received on any amount due hereunder or under the terms of any instrument now or hereafter evidencing or securing payment of this indebtedness as the Lender determines from time to time. This Note is issued by the Borrower and accepted by the Lender pursuant to a lending transaction negotiated, consummated and to be performed in California. This Note is to be construed according to the internal laws of the State of California. The makers, endorsers, sureties, guarantors and all other persons who might become liable for all or any part of this obligation severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the collateral securing payment hereof or release of any party liable for the payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. This Note is intended to strictly conform with all usury laws to the extent applicable to the transactions contemplated hereby. The provisions of this Note and of all agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, shall the amount contracted for, charged, paid or agreed to be paid to the Lender for the use, forbearance or retention of money or credit hereunder or otherwise exceed the maximum rate permitted by law therefor. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between the Borrower and the Lender shall, at the time of the execution and delivery thereof, or at the time or performance of such provision shall be due, involve or purport to require any payment in excess of the limits prescribed by law, the obligation to be performed or fulfilled shall be reduced automatically to the limit prescribed by law without the necessity of the execution of any amendment or new document. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. PAN AMERICAN GROUP, INC. a Delaware corporation By: /s/ GUILLERMO BRON -------------------------------- Its: Chairman ---------------------------- 2 EX-10.64 32 PROMISSORY NOTE - $258,000 Exhibit 10.64 PROMISSORY NOTE --------------- $258,000.00 (Unsecured Loan) Los Angeles, California July 1, 1997 FOR VALUE RECEIVED, PAN AMERICAN GROUP, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of BVG WEST CORP., its successors and assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles, California 90067 or at such other place as might be designated in writing by the Lender, the principal sum of Two Hundred Fifty-Eight Thousand Dollars ($258,000.00) or so much thereof as has been disbursed by the Lender and remains unpaid, together with interest thereon at a fixed rate equal to Eight Percent (8.0%) per annum. Interest will be calculated on the basis of the actual days elapsed based on a per diem charge computed over a year composed of three hundred sixty (360) days. Principal and interest will be paid as follows: Interest on the amounts disbursed, accrued from the date of disbursement through the last day of each semi annual period ending June 30 and December 31, will be paid by the 15th day of each January and July, commencing with January 15, 1998. On June 30, 1999, the entire unpaid principal balance and all accrued but unpaid interest thereon will be due and payable. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note, in whole or in part, without penalty, but with interest on the unpaid principal balance accrued to the date of prepayment. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note or otherwise relating to the indebtedness hereby evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. At the option of the Lender, after the failure of the Borrower to pay any such sum hereunder within ten (10) days of the date due, the unpaid balance of this Note will bear interest at Ten Percent (10.0%) per annum. During the existence of any default, the Lender may apply payments received on any amount due hereunder or under the terms of any instrument now or hereafter evidencing or securing payment of this indebtedness as the Lender determines from time to time. This Note is issued by the Borrower and accepted by the Lender pursuant to a lending transaction negotiated, consummated and to be performed in California. This Note is to be construed according to the internal laws of the State of California. The makers, endorsers, sureties, guarantors and all other persons who might become liable for all or any part of this obligation severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the collateral securing payment hereof or release of any party liable for the payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. This Note is intended to strictly conform with all usury laws to the extent applicable to the transactions contemplated hereby. The provisions of this Note and of all agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, shall the amount contracted for, charged, paid or agreed to be paid to the Lender for the use, forbearance or retention of money or credit hereunder or otherwise exceed the maximum rate permitted by law therefor. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between the Borrower and the Lender shall, at the time of the execution and delivery thereof, or at the time or performance of such provision shall be due, involve or purport to require any payment in excess of the limits prescribed by law, the obligation to be performed or fulfilled shall be reduced automatically to the limit prescribed by law without the necessity of the execution of any amendment or new document. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. PAN AMERICAN GROUP, INC. a Delaware corporation By: /s/ GUILLERMO BRON ----------------------------------- Its: Chairman ----------------------------- 2 EX-10.65 33 PROMISSORY NOTE - $52,500 Exhibit 10.65 PROMISSORY NOTE --------------- $52,500.00 (Unsecured Loan) Los Angeles, California July 1, 1997 FOR VALUE RECEIVED, PAN AMERICAN GROUP, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of LAWRENCE J. GRILL, his successors and assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles, California 90067 or at such other place as might be designated in writing by the Lender, the principal sum of Fifty-Two Thousand Five Hundred Dollars ($52,500.00) or so much thereof as has been disbursed by the Lender and remains unpaid, together with interest thereon at a fixed rate equal to Eight Percent (8.0%) per annum. Interest will be calculated on the basis of the actual days elapsed based on a per diem charge computed over a year composed of three hundred sixty (360) days. Principal and interest will be paid as follows: Interest on the amounts disbursed, accrued from the date of disbursement through the last day of each semi annual period ending June 30 and December 31, will be paid by the 15th day of each January and July, commencing with January 15, 1998. On June 30, 1999, the entire unpaid principal balance and all accrued but unpaid interest thereon will be due and payable. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note, in whole or in part, without penalty, but with interest on the unpaid principal balance accrued to the date of prepayment. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note or otherwise relating to the indebtedness hereby evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. At the option of the Lender, after the failure of the Borrower to pay any such sum hereunder within ten (10) days of the date due, the unpaid balance of this Note will bear interest at Ten Percent (10.0%) per annum. During the existence of any default, the Lender may apply payments received on any amount due hereunder or under the terms of any instrument now or hereafter evidencing or securing payment of this indebtedness as the Lender determines from time to time. This Note is issued by the Borrower and accepted by the Lender pursuant to a lending transaction negotiated, consummated and to be performed in California. This Note is to be construed according to the internal laws of the State of California. The makers, endorsers, sureties, guarantors and all other persons who might become liable for all or any part of this obligation severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the collateral securing payment hereof or release of any party liable for the payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. This Note is intended to strictly conform with all usury laws to the extent applicable to the transactions contemplated hereby. The provisions of this Note and of all agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, shall the amount contracted for, charged, paid or agreed to be paid to the Lender for the use, forbearance or retention of money or credit hereunder or otherwise exceed the maximum rate permitted by law therefor. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between the Borrower and the Lender shall, at the time of the execution and delivery thereof, or at the time or performance of such provision shall be due, involve or purport to require any payment in excess of the limits prescribed by law, the obligation to be performed or fulfilled shall be reduced automatically to the limit prescribed by law without the necessity of the execution of any amendment or new document. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. PAN AMERICAN GROUP, INC. a Delaware corporation By: /s/ GUILLERMO BRON -------------------------------- Its: Chairman -------------------------- 2 EX-10.66 34 PROMISSORY NOTE - $33,000 Exhibit 10.66 PROMISSORY NOTE --------------- $33,000.00 (Unsecured Loan) Los Angeles, California July 1, 1997 FOR VALUE RECEIVED, PAN AMERICAN GROUP, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of ROBERT WILSON, his successors and assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles, California 90067 or at such other place as might be designated in writing by the Lender, the principal sum of Thirty-Three Thousand Dollars ($33,000.00) or so much thereof as has been disbursed by the Lender and remains unpaid, together with interest thereon at a fixed rate equal to Eight Percent (8.0%) per annum. Interest will be calculated on the basis of the actual days elapsed based on a per diem charge computed over a year composed of three hundred sixty (360) days. Principal and interest will be paid as follows: Interest on the amounts disbursed, accrued from the date of disbursement through the last day of each semi annual period ending June 30 and December 31, will be paid by the 15th day of each January and July, commencing with January 15, 1998. On June 30, 1999, the entire unpaid principal balance and all accrued but unpaid interest thereon will be due and payable. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note, in whole or in part, without penalty, but with interest on the unpaid principal balance accrued to the date of prepayment. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note or otherwise relating to the indebtedness hereby evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. At the option of the Lender, after the failure of the Borrower to pay any such sum hereunder within ten (10) days of the date due, the unpaid balance of this Note will bear interest at Ten Percent (10.0%) per annum. During the existence of any default, the Lender may apply payments received on any amount due hereunder or under the terms of any instrument now or hereafter evidencing or securing payment of this indebtedness as the Lender determines from time to time. This Note is issued by the Borrower and accepted by the Lender pursuant to a lending transaction negotiated, consummated and to be performed in California. This Note is to be construed according to the internal laws of the State of California. The makers, endorsers, sureties, guarantors and all other persons who might become liable for all or any part of this obligation severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the collateral securing payment hereof or release of any party liable for the payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. This Note is intended to strictly conform with all usury laws to the extent applicable to the transactions contemplated hereby. The provisions of this Note and of all agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, shall the amount contracted for, charged, paid or agreed to be paid to the Lender for the use, forbearance or retention of money or credit hereunder or otherwise exceed the maximum rate permitted by law therefor. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between the Borrower and the Lender shall, at the time of the execution and delivery thereof, or at the time or performance of such provision shall be due, involve or purport to require any payment in excess of the limits prescribed by law, the obligation to be performed or fulfilled shall be reduced automatically to the limit prescribed by law without the necessity of the execution of any amendment or new document. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. PAN AMERICAN GROUP, INC. a Delaware corporation By: /s/ GUILLERMO BRON ----------------------------- Its: Chairman ---------------------- 2 EX-10.67 35 PROMISSORY NOTE - $28,500 Exhibit 10.67 PROMISSORY NOTE --------------- $28,500.00 (Unsecured Loan) Los Angeles, California July 1, 1997 FOR VALUE RECEIVED, PAN AMERICAN GROUP, INC., a Delaware corporation (the "Borrower"), promises to pay to the order of VILLANEUVA MANAGEMENT, INC., its successors and assigns (the "Lender") at 1999 Avenue of the Stars, Suite 2960, Los Angeles, California 90067 or at such other place as might be designated in writing by the Lender, the principal sum of Twenty-Eight Thousand Five Hundred Dollars ($28,500.00) or so much thereof as has been disbursed by the Lender and remains unpaid, together with interest thereon at a fixed rate equal to Eight Percent (8.0%) per annum. Interest will be calculated on the basis of the actual days elapsed based on a per diem charge computed over a year composed of three hundred sixty (360) days. Principal and interest will be paid as follows: Interest on the amounts disbursed, accrued from the date of disbursement through the last day of each semi annual period ending June 30 and December 31, will be paid by the 15th day of each January and July, commencing with January 15, 1998. On June 30, 1999, the entire unpaid principal balance and all accrued but unpaid interest thereon will be due and payable. The Borrower will have the right at any time and from time to time to prepay the unpaid principal balance of this Note, in whole or in part, without penalty, but with interest on the unpaid principal balance accrued to the date of prepayment. The Borrower agrees that if, and as often as, this Note is placed in the hands of an attorney for collection or to defend or enforce any of the Lender's rights under this Note or otherwise relating to the indebtedness hereby evidenced, the Borrower will pay the Lender's reasonable attorneys' fees, all court costs and all other expenses incurred by the Lender in connection therewith. At the option of the Lender, after the failure of the Borrower to pay any such sum hereunder within ten (10) days of the date due, the unpaid balance of this Note will bear interest at Ten Percent (10.0%) per annum. During the existence of any default, the Lender may apply payments received on any amount due hereunder or under the terms of any instrument now or hereafter evidencing or securing payment of this indebtedness as the Lender determines from time to time. This Note is issued by the Borrower and accepted by the Lender pursuant to a lending transaction negotiated, consummated and to be performed in California. This Note is to be construed according to the internal laws of the State of California. The makers, endorsers, sureties, guarantors and all other persons who might become liable for all or any part of this obligation severally waive presentment for payment, protest and notice of nonpayment. Such parties consent to any extension of time (whether one or more) of payment hereof, release of all or any part of the collateral securing payment hereof or release of any party liable for the payment of this obligation. Any such extension or release may be made without notice to any such party and without discharging such party's liability hereunder. This Note is intended to strictly conform with all usury laws to the extent applicable to the transactions contemplated hereby. The provisions of this Note and of all agreements between the Borrower and the Lender are hereby expressly limited so that in no contingency or event whatsoever, shall the amount contracted for, charged, paid or agreed to be paid to the Lender for the use, forbearance or retention of money or credit hereunder or otherwise exceed the maximum rate permitted by law therefor. If, from any circumstance whatsoever, performance or fulfillment of any provision hereof or of any agreement between the Borrower and the Lender shall, at the time of the execution and delivery thereof, or at the time or performance of such provision shall be due, involve or purport to require any payment in excess of the limits prescribed by law, the obligation to be performed or fulfilled shall be reduced automatically to the limit prescribed by law without the necessity of the execution of any amendment or new document. IN WITNESS WHEREOF, the Borrower has executed this instrument effective the date first above written. PAN AMERICAN GROUP, INC. a Delaware corporation By: /s/ GUILLERMO BRON -------------------------- Its: Chairman ---------------------- 2 EX-10.68 36 MASTER REPURCHASE AGREEMENT EXHIBIT 10.68 MASTER REPURCHASE AGREEMENT GOVERNING PURCHASES AND SALES OF MORTGAGE LOANS Dated as of October 31, 1997 Between LEHMAN COMMERCIAL PAPER INC., as Buyer and PAN AMERICAN BANK, FSB, as Seller 1. APPLICABILITY From time to time, the parties hereto may, subject to the terms hereof, enter into transactions in which Pan American Bank, FSB ("Seller") agrees to transfer ------ to Lehman Commercial Paper Inc. ("Buyer") Mortgage Loans against the transfer of ----- funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Mortgage Loans at a date certain not later than the date of transfer specified in the Confirmation, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be ----------- governed by this Agreement and the related Confirmation, unless otherwise agreed in writing. This Agreement does not constitute a commitment of Buyer or Seller to enter into Transactions but rather sets forth the procedures to be followed in connection with requests to enter into Transactions by the Seller to Buyer. Seller hereby acknowledges that Buyer is under no obligation to agree to enter into Transactions under this Agreement. 2. DEFINITIONS "Act of Insolvency" means, with respect to Buyer or Seller, Seller's corporate ----------------- parent or United PanAm Mortgage Corporation, (i) the filing of a petition, commencing, or authorizing the commencement of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law relating to the protection of creditors, or suffering any such petition or proceeding to be commenced by another which is consented to, not timely contested or results in entry of an order for relief; (ii) the seeking the appointment of a receiver, trustee, custodian or similar official for such party or any substantial part of the property of either, (iii) the appointment of a receiver, conservator, or manager for such party by any governmental agency or authority having the jurisdiction to do so; (iv) the making or offering by such party of a composition with its creditors or a general assignment for the benefit of creditors, (v) the admission by such party of its inability to pay its debts or discharge its obligations as they become due or mature; or (vi) that any governmental authority or agency or any person, agency or entity acting or purporting to act under governmental authority shall have taken any action to condemn, seize or appropriate, or to assume custody or control of, all or any substantial part of the property of such party, or shall have taken any action to displace the management of such party or to curtail its authority in the conduct of the business of such party. "Additional Loans" means Mortgage Loans or cash provided by Seller to Buyer or ---------------- its designee pursuant to Section 4(a). "Affiliate" means an affiliate of a party as such term is defined in the United --------- States Bankruptcy Code in effect from time to time. "Agency" means FNMA, FHLMC or GNMA. ------ "Agreement" means this Master Repurchase Agreement Governing Purchases and Sales --------- of Mortgage Loans between Buyer and Seller, as amended from time to time. "Balloon Loan" means any Mortgage Loan with a remaining term of less than 15 ------------ years that provided on the date of origination for scheduled payments by the Mortgagor based upon an amortization schedule extending beyond its maturity date. "Business Day" means a day other than (i) a Saturday or Sunday, or (ii) a day in ------------ which the New York Stock Exchange is authorized or obligated by law or executive order to be closed. "Buyer" has the meaning specified in Section 1. ----- "`C' Loan" means a Mortgage Loan made by Seller to a Mortgagor with a `C+', `C' -------- or `C-' credit history which is underwritten in accordance with Seller's underwriting guidelines for `C+', `C' or `C-' credit Mortgage Loans, a copy of which is attached as Exhibit VI hereto. ---------- "Collateral" has the meaning specified in Section 6. ---------- "Collateral Amount" means, with respect to any Transaction, the amount obtained ----------------- by application of the applicable Collateral Amount Percentage to the related Repurchase Price for such Transaction. "Collateral Amount Percentage" means the amount set forth in the Confirmation ---------------------------- which, in any event, (i) shall not be less than 103% with respect to all Mortgage Loans in determining whether a Market Value Collateral Deficit exists pursuant to the first sentence of Section 4(a) hereof and (ii) shall not be less than 105% with respect to all Mortgage Loans in determining whether a 2 Securitization Value Collateral Deficit exists pursuant to the second sentence of Section 4(a) hereof. "Collateral Deficit" means either a Market Value Collateral Deficit or a ------------------ Securitization Value Collateral Deficit. "Collateral Information" means the following information with respect to each ---------------------- Mortgage Loan: (i) Seller's loan number , (ii) the Mortgagor's name, (iii) the address of the Mortgaged Property, (iv) the current interest rate, (v) the original balance, (vi) current balance as of the last day of the immediately preceding month, (vii) the paid to date, (viii) the appraisal value of the Mortgaged Property, (ix) whether interest rate is fixed or adjustable (and if adjustable, the ARM terms, including the index, spread, adjustment frequency, next adjustment date, caps and floors), (x) whether the Mortgage Loan is convertible from ARM to fixed, (xi) the lien position of the Mortgage Loan on the Mortgaged Property (and if a second lien, the outstanding principal balance of the first lien), (xii) the occupancy status of the Mortgaged Property (including whether owner occupied), (xiii) whether the Mortgage Loan is a Balloon Loan, (xiv) the first payment date, (xv) the maturity date, (xvi) the principal and interest payment , (xvii) the property type of the Mortgaged Property, (xviii) the applicable credit grade, (xix) the note date, (xx) whether the Mortgage Loan is a Wet Ink Mortgage Loan and (xxi) whether the Mortgage Loan is originated by Seller (i.e. a retail loan) or by a correspondent lender (i.e. a correspondent loan). "Confirmation" has the meaning specified in Section 3(a). ------------ "Custodial Agreement" means that custodial agreement, dated as of November 31, ------------------- 1997, by and among Buyer, Seller and the Custodian. "Custodial Delivery" means the form executed by the Seller in order to deliver ------------------ the Mortgage Loan Schedule and/or the Mortgage File to Buyer or its designee (including the Custodian) pursuant to Section 7, a form of which is attached hereto as Exhibit II. "Custodian" means the custodian under the Custodial Agreement. The initial --------- custodian is Bankers Trust Company. "`D' Loan" means a Mortgage Loan made by Seller to a Mortgagor with a `D+', `D' -------- or `D-' credit history which is underwritten in accordance with Seller's underwriting guidelines for `D+', `D' or `D-' credit Mortgage Loans, a copy of which is attached as Exhibit VI hereto. ---------- "Delinquent" means, with respect to any Mortgage Loan, the period of time from ---------- the date on which a Mortgagor fails to pay an obligation under the terms of such Mortgage Loan (without regard to any applicable grace periods) to the date on which such payment is made. "Event of Default" has the meaning specified in Section 13. ---------------- "FHA" means the Federal Housing Administration, an agency within HUD. --- 3 "FHLMC" means the Federal Home Loan Mortgage Corporation. ----- "FHLMC Guide" means the FHLMC Sellers/Servicers Guide, as amended from time to ----------- time. "First Mortgage" means the Mortgage that is the first lien on the Mortgaged -------------- Property. "FNMA" means the Federal National Mortgage Association. ---- "FNMA Guide" means the FNMA Selling, Servicing and MBS Guides, as amended from ---------- time to time. "GNMA" means the Government National Mortgage Association. ---- "GNMA Guide" means the GNMA Mortgage-Backed Securities Guide, as amended from ---------- time to time. "Hedge" means, with respect to any or all of the Purchased Mortgage Loans, any ----- interest rate swap, cap or collar agreement or similar arrangements providing for protection against fluctuations in interest rates or the exchange of nominal interest obligations, either generally or under specific contingencies, entered into by Seller with Buyer or its Affiliates, and reasonably acceptable to the Buyer. "HUD" means the United States Department of Housing and Urban Development. --- "Income" means, with respect to any Purchased Mortgage Loan at any time, any ------ principal thereof then payable and all interest, dividends or other distributions payable thereon less any related servicing fee(s) charged by a subservicer. "LIBOR" means the London Interbank Offered Rate for one-month United States ----- dollar deposits as set forth on page 3750 of Telerate as of 11:00 a.m., London time, on the date of determination. "Loan-to-Value Ratio" means with respect to any Mortgage Loan as of any date, ------------------- the fraction, expressed as a percentage, the numerator of which is the principal balance of such Mortgage Loan at the date of determination and the denominator of which is the value of the related Mortgaged Property as set forth in the appraisal of such Mortgaged Property obtained in connection with the origination of such Mortgage Loan. For purposes of calculating a Mortgage Loan secured by a Second Mortgage, the principal balance of the related First Mortgage as well as the Second Mortgage shall be included in the numerator. "Market Value" means as of any date with respect to any Mortgage Loan, the price ------------ at which such Mortgage Loan could readily be sold as determined by Buyer in its sole discretion; provided, however, that Buyer shall not take into account, for purposes of calculating Market Value, any Mortgage Loan (i) which has been subject to Transactions for more than 180 days, (ii) which, 4 together with the other Mortgage Loans subject to then outstanding Transactions, would cause the 30+ Delinquency Percentage to exceed 3%, (iii) which are more than 59 days Delinquent, (iv) which is a Wet Ink Mortgage Loan for more than 5 Business Days, or (v) with respect to which there is a breach of a representation, warranty or covenant made by Seller in this Agreement. "Market Value Collateral Deficit" has the meaning specified in Section 4(a). ------------------------------- "Mortgage" means a mortgage, deed of trust, deed to secure debt or other -------- instrument, creating a valid and enforceable first or second lien on or a first or second priority ownership interest in an estate in fee simple in real property and the improvements thereon, securing a mortgage note or similar evidence of indebtedness. "Mortgage File" means the documents specified as the "Mortgage File" in Section ------------- 7(d), together with any additional documents and information required to be delivered to Buyer or its designee (including the Custodian) pursuant to this Agreement. "Mortgage Loan" means (i) a non-securitized whole loan, namely a conventional ------------- mortgage loan secured by a first or second lien on a one to four family residential property which conform to Seller's underwriting guidelines (including, without limitation, Wet-Ink Mortgage Loans) or (ii) another type of non-securitized whole loan as may be agreed upon in writing by the parties hereto from time to time. "Mortgage Loan Schedule" means a schedule of Mortgage Loans attached to each ---------------------- Trust Receipt, Confirmation and Custodial Delivery. "Mortgage Note" means a note or other evidence of indebtedness of a Mortgagor ------------- secured by a Mortgage. "Mortgaged Property" means the real property securing repayment of the debt ------------------ evidenced by a Mortgage Note. "Mortgagee" means the record holder of a Mortgage Note secured by a Mortgage. --------- "Mortgagor" means the obligor on a Mortgage Note and the grantor of the related --------- Mortgage. "Periodic Payment" has the meaning specified in Section 5(b). ---------------- "Person" means an individual, partnership, corporation, joint stock company, ------ trust or unincorporated organization or a governmental agency or political subdivision thereof. "Price Differential" means, with respect to any Transaction hereunder as of any ------------------ date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and 5 ending on (but excluding) the Repurchase Date (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction). "Pricing Rate" means the per annum percentage rate specified in the Confirmation ------------ for determination of the Price Differential which shall not exceed LIBOR plus the applicable Pricing Spread. "Pricing Spread" means [Material ommitted pursuant to a request for confidential -------------- treatment and filed separately with the Securities and Exchange Commission.]%; provided that during any period for which any such Mortgage Loans are Wet Ink Mortgage Loans, the applicable Pricing Spread shall be [Material ommitted pursuant to a request for confidential treatment and filed separately with the Securities and Exchange Commission.]% with respect to such Mortgage Loans. "Prime Rate" means the rate of interest published by The Wall Street Journal, ---------- northeast edition, as the "prime rate". "Purchase Date" means the date on which Purchased Mortgage Loans are transferred ------------- by Seller to Buyer or its designee (including the Custodian) as specified in the Confirmation. "Purchase Price" means on each Purchase Date, the price at which Purchased -------------- Mortgage Loans are transferred by Seller to Buyer or its designee (including the Custodian), which, subject to compliance with the collateral maintenance requirements of Section 4, shall equal the outstanding principal amount of such Purchased Mortgage Loans; provided, however, that the Purchase Price of any Mortgage Loan shall not in any event exceed the outstanding principal amount thereof. "Purchased Mortgage Loans" means the Mortgage Loans sold by Seller to Buyer in a ------------------------ Transaction, any Additional Loans and any Substituted Mortgage Loans. "Replacement Loans" has the meaning specified in Section 14(b)(ii). ----------------- "Repurchase Date" means the date on which Seller is to repurchase the Purchased --------------- Mortgage Loans from Buyer, including any date determined by application of the provisions of Sections 3 or 14, as specified in the Confirmation. "Repurchase Price" means the price at which Purchased Mortgage Loans are to be ---------------- transferred from Buyer or its designee (including the Custodian) to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination decreased by all cash, Income and Periodic Payments actually received by Buyer pursuant to Sections 4(a), 5(a) and 5(b), respectively. "Second Mortgage" means a Mortgage that is a second lien on the Mortgaged --------------- Property. "Securitization Value" means, as of any date with respect to any Mortgage Loans, -------------------- the price at 6 which such Mortgage Loans could be securitized and sold in a securitization as determined by Buyer in its sole discretion; provided, however, that Buyer shall not take into account, for purposes of calculating Securitization Value, any Mortgage Loan (i) which has been subject to Transactions for more than 180 days, (ii) which, together with the other Mortgage Loans subject to then outstanding Transactions, would cause the 30+ Delinquency Percentage to exceed 2%, (iii) which are more than 59 days Delinquent, (iv) which is a Wet Ink Mortgage Loan for more than 5 Business Days or (v) with respect to which there is a breach of a representation, warranty or covenant made by Seller in this Agreement. "Securitization Value Collateral Deficit" has the meaning specified in --------------------------------------- Section 4(a). "Seller" has the meaning specified in Section 1. ------ "Servicing Agreement" has the meaning specified in Section 25. ------------------- "Servicing Records" has the meaning specified in Section 25. ----------------- "Substituted Mortgage Loans" means any Mortgage Loans substituted for Purchased -------------------------- Mortgage Loans in accordance with Section 9 hereof. "30+ Delinquency Percentage" means the fraction, expressed as a percentage, the -------------------------- numerator of which is the aggregate Purchase Price of Purchased Mortgage Loans subject to then outstanding Transactions which are more than 30 days Delinquent and the denominator of which is the aggregate Purchase Price of all Purchased Mortgage Loans subject to then outstanding Transactions. "Transaction" has the meaning specified in Section 1. ----------- "Trust Receipt" means a trust receipt issued by Custodian to Buyer confirming ------------- the Custodian's possession of certain mortgage loan files which are the property of and held by Custodian for the benefit of the Buyer or the registered holder of such trust receipt. "Wet Ink Mortgage Loan" means a non-securitized whole loan, namely a --------------------- conventional mortgage loans secured by a first lien on a one to four family residential property for which a Mortgage File has not been delivered to the Custodian. 3. INITIATION; CONFIRMATION; TERMINATION; MAXIMUM TRANSACTION AMOUNTS (a) An agreement to enter into a Transaction may be entered into orally or in writing at the initiation of either Buyer or Seller. In any event, Buyer shall confirm the terms of each 7 Transaction by issuing a written confirmation to Seller promptly after the parties enter into such Transaction in the form of Exhibit I attached hereto (a "Confirmation"). Such Confirmation shall describe the Purchased Mortgage Loans, ------------ identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate applicable to the Transaction, (v) the applicable Collateral Amount Percentages and (vi) additional terms or conditions not inconsistent with this Agreement. After receipt of the Confirmation, Seller shall, subject to the provisions of subsection (c) below, sign the Confirmation and promptly return it to Buyer. The Purchase Price for any Transaction shall exceed $1,000,000. (b) Any Confirmation by Buyer shall be deemed to have been received by Seller on the date actually received by Seller. (c) Each Confirmation, together with this Agreement, shall be conclusive evidence of the terms of the Transaction(s) covered thereby unless objected to in writing by Seller no more than two (2) Business Days after the date the Confirmation was received by Seller or unless a corrected Confirmation is sent by Buyer. An objection sent by Seller must state specifically that writing which is an objection, must specify the provision(s) being objected to by Seller, must set forth such provision(s) in the manner that the Seller believes they should be stated, and must be received by Buyer no more than two (2) Business Days after the Confirmation was received by Seller. (d) In the case of Transactions terminable upon demand, such demand shall be made by Seller by telephone or otherwise, no later than 1:00 p.m. (New York Time) on the Business Day prior to the day on which such termination will be effective. (e) On the Repurchase Date, termination of the Transaction will be effected by transfer to Seller or its designee of the Purchased Mortgage Loans (and any Income in respect thereof received by Buyer not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Section 5) against the simultaneous transfer of the Repurchase Price to an account of Buyer. Seller is obligated to obtain the Mortgage Files from Buyer or its designee at Seller's expense on the Repurchase Date. (f) With respect to all Transactions hereunder, the aggregate Purchase Price for all Purchased Mortgage Loans at any one time subject to then outstanding Transactions shall not exceed $100,000,000. (g) The aggregate Purchase Price of all Purchased Mortgage Loans which are Wet Ink Mortgage Loans subject to then outstanding Transactions shall not exceed the lesser of $15,000,000 or 15% of the aggregate Purchase Price of all Purchased Mortgage Loans subject to Transactions. 4. COLLATERAL AMOUNT MAINTENANCE (a) If at any time the aggregate Market Value of all Purchased Mortgage Loans subject to all Transactions is less than the aggregate Collateral Amount for all such Transactions (a "Market Value Collateral Deficit"), then Buyer may by ------------------------------- notice to Seller require Seller to transfer to Buyer or its designee (including the Custodian) Mortgage Loans ("Additional Loans") or cash, so that the cash and ---------------- aggregate Market Value of the Purchased Mortgage Loans, including any such Additional Loans, will thereupon equal or exceed the aggregate Collateral Amount. If at any 8 time the aggregate Securitization Value of all Mortgage Loans subject to Transactions is less than the aggregate Collateral Amount for all such Transactions (a "Securitization Value Collateral Deficit"), then Buyer may by --------------------------------------- notice to Seller require Seller to transfer to Buyer or its designee (including the Custodian) Additional Loans or cash, so that the cash and aggregate Securitization Value of such Mortgage Loans, including any such Additional Loans, will thereupon equal or exceed the aggregate Collateral Amount. (b) Notice required pursuant to subsection (a) above may be given by any means of telecopier or telegraphic transmission. A notice for the payment or delivery in respect of a Collateral Deficit received before 9:00 a.m. on a Business Day, local time of the party receiving the notice, must be met not later than 5:00 p.m. on the Business Day on which the notice was given, local time of the party receiving the notice. Any notice given on a Business Day after 9:00 a.m., local time of the party receiving the notice, shall be met not later than 2:00 p.m. (New York time) on the following Business Day. The failure of Buyer, on any one or more occasions, to exercise its rights under subsection (a) of this Section shall not change or alter the terms and conditions to which this Agreement is subject or limit the right of the Buyer to do so at a later date. Buyer and Seller agree that a failure or delay to exercise its rights under subsections (a) of this Section shall not limit Buyer's rights under this Agreement or otherwise existing by law or in any way create additional rights for Seller. (c) In the event that Seller fails to comply with the provisions of this Section 4, Buyer shall not enter into any additional Transactions hereunder after the date of such failure. 5. INCOME PAYMENTS (a) Where a particular Transaction's term extends over an Income payment date on the Purchased Mortgage Loans subject to that Transaction such Income shall be the property of Buyer. Notwithstanding the foregoing, so long as no Event of Default shall have occurred and be continuing, Seller shall be entitled to all Income with respect to Purchased Mortgage Loans subject to Transactions. Upon the occurrence and continuance of an Event of Default, all Income with respect to Purchased Mortgage Loans subject to Transactions shall be held in a segregated account established by the Custodian for the benefit of Buyer and distributed under the Custodial Agreement. (b) Notwithstanding that Buyer and Seller intend that the Transactions hereunder be sales to Buyer of the Purchased Mortgage Loans, Seller shall pay by wire transfer to Buyer the accreted value of the Price Differential (less any amount of such Price Differential previously paid by Seller to Buyer)(each such payment, a "Periodic Payment") on the first Business Day of each month. ---------------- (c) Buyer shall offset against the Repurchase Price of each such Transaction all Income and Periodic Payments actually received by Buyer pursuant to Sections 5(a) and (b), respectively. 6. SECURITY INTEREST (a) Buyer and the Seller intend that the Transactions hereunder be sales to Buyer of the Purchased Mortgage Loans and not loans from Buyer to Seller secured by the Purchased Mortgage Loans. However, in order to preserve Buyer's rights under this Agreement in the event that a court or other forum recharacterizes the Transactions hereunder as loans and as security for the performance by Seller of all of Seller's obligations to Buyer under this Agreement and the Transactions entered into pursuant to this Agreement, Seller grants Buyer a first priority security interest in the Purchased Mortgage Loans, Servicing Records, insurance relating to the Purchased Mortgage Loans, Income, any and all Hedges, any and all custodial accounts and escrow 9 accounts relating to the Purchased Mortgage Loans and any other contract rights, general intangibles and other assets relating to the Purchased Mortgage Loans or any interest in the Purchased Mortgage Loans and the servicing of the Purchased Mortgage Loans and any and all replacements, substitutions, distributions on or proceeds of any and all of the foregoing (collectively, the "Collateral"). ---------- (b) Seller shall pay all fees and expenses associated with perfecting Buyer's security interest in the Collateral, including, without limitation, the cost of filing financing statements under the Uniform Commercial Code and recording assignments of Mortgage, as and when required by Buyer in its sole discretion. (c) Seller covenants to take such further actions as are necessary in order to perfect Buyer's first priority security interest in the Hedges. 7. PAYMENT, TRANSFER AND CUSTODY (a) Unless otherwise mutually agreed in writing, all transfers of funds hereunder shall be in immediately available funds. (b) On or before each Purchase Date, Seller shall deliver or cause to be delivered to Buyer or its designee the Custodial Delivery in the form attached hereto as Exhibit II. (c) On the Purchase Date for each Transaction, ownership of the Purchased Mortgage Loans shall be transferred to the Buyer or its designee (including the Custodian) against the simultaneous transfer of the Purchase Price to an account of Seller specified in the Confirmation. Seller, simultaneously with the delivery to Buyer or its designee (including the Custodian) of the Purchased Mortgage Loans relating to each Transaction hereby sells, transfers, conveys and assigns to Buyer or its designee (including the Custodian) without recourse, but subject to the terms of this Agreement, all the right, title and interest of Seller in and to the Purchased Mortgage Loans together with all right, title and interest in and to the proceeds of any related insurance policies. (d) In connection with each sale, transfer, conveyance and assignment, on or prior to each Purchase Date with respect to each Mortgage Loan which is not a Wet Ink Mortgage Loan (or with respect to item (vii) below within five Business Days after the Purchase Date), the Seller shall deliver or cause to be delivered and released to the Custodian the following original documents (collectively the "Mortgage File"), pertaining to each of the Purchased Mortgage Loans identified ------------- in the Custodial Delivery delivered therewith: (i) the original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of ________ without recourse, and without representation or warranty, express or implied" and signed in the name of the last endorsee (the "Last Endorsee") by an authorized officer (in the ------------- event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[the Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[the Last Endorsee], formerly known as [previous name]"); (ii) the original of any guarantee executed in connection with the Mortgage Note (if any); (iii) the original Mortgage with evidence of recording thereon or copies certified by Seller to have been sent for recording; 10 (iv) the originals of all assumption, modification, consolidation or extension agreements, with evidence of recording thereon or copies certified by Seller to have been sent for recording; (v) the original assignment of Mortgage in blank for each Mortgage Loan, in form and substance acceptable for recording and signed in the name of the Last Endorsee (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[the Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[the Last Endorsee], formerly known as [previous name]"); (vi) the originals of all intervening assignments of mortgage with evidence of recording thereon or copies certified by Seller to have been sent for recording; (vii) the original policy of title insurance or a true copy thereof or, if such policy has not yet been delivered by the insurer, the commitment or binder to issue the same; and (viii) the original of any security agreement, chattel mortgage or equivalent document executed in connection with the Mortgage (if any). (e) In connection with each sale, transfer, conveyance and assignment with respect to each Mortgage Loan which is a Wet Ink Mortgage Loan, on or prior to the fifth Business Day following each Purchase Date, Seller shall deliver or cause to be delivered to the Custodian a complete Mortgage File. Further, if requested by Buyer, on the Purchase Date with respect to each Mortgage Loan which is a Wet Ink Mortgage Loan, Seller shall fax an executed copy of the respective Mortgage Note to the Custodian. On the date on which the Buyer receives a Trust Receipt from the Custodian certifying that a complete Mortgage File with respect to a Wet Ink Mortgage Loan is in the possession of the Custodian, such Wet Ink Mortgage Loan be deemed a standard Mortgage Loan (and no longer a Wet Ink Mortgage Loan) for all purposes hereunder including, without limitation, determination of the Pricing Spread and compliance with subsection (aaa) of Exhibit V. (f) With respect to all of the Mortgage Loans delivered by Seller to Buyer or its designee (including the Custodian), Seller shall execute an omnibus power of attorney substantially in the form of Exhibit III attached hereto irrevocably appointing Buyer its attorney-in-fact with full power to complete and record the assignment of Mortgage, complete the endorsement of the Mortgage Note and take such other steps as may be necessary or desirable to enforce Buyer's rights against such Mortgage Loans, the related Mortgage Files and the Servicing Records. (g) Buyer shall deposit the Mortgage Files representing the Purchased Mortgage Loans, or direct that the Mortgage Files be deposited directly, with the Custodian. The Mortgage Files shall be maintained in accordance with the Custodial Agreement. (h) Any Mortgage Files not delivered to Buyer or its designee (including the Custodian) are and shall be held in trust by Seller or its designee for the benefit of Buyer as the owner thereof. Seller or its designee shall maintain a copy of the Mortgage File and the originals of the Mortgage File not delivered to Buyer or its designee. The possession of the Mortgage File by Seller or its designee is at the will of the Buyer for the sole purpose of servicing the related Purchased Mortgage Loan, and such retention and possession by the Seller or its designee is in a custodial capacity only. The books and records (including, without limitation, any computer records or tapes) of Seller or its designee shall be marked appropriately to reflect clearly the sale of the related Purchased Mortgage Loan to Buyer. Seller or its designee (including the 11 Custodian) shall release its custody of the Mortgage File only in accordance with written instructions from Buyer, unless such release is required as incidental to the servicing of the Purchased Mortgage Loans or is in connection with a repurchase of any Purchased Mortgage Loan by Seller. 8. REHYPOTHECATION OR PLEDGE OF PURCHASED MORTGAGE LOANS Title to all Purchased Mortgage Loans shall pass to Buyer and Buyer shall have free and unrestricted use of all Purchased Mortgage Loans. Nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Mortgage Loans or otherwise pledging, repledging, hypothecating, or rehypothecating the Purchased Mortgage Loans, but no such transaction shall relieve Buyer of its obligations to transfer Purchased Mortgage Loans to Seller pursuant to Section 3. Nothing contained in this Agreement shall obligate Buyer to segregate any Purchased Mortgage Loans delivered to Buyer by Seller. 9. SUBSTITUTION (a) Subject to Section 9(b), Seller may, upon one (1) Business Days' written notice to Buyer, with a copy to Custodian, substitute other Mortgage Loans for any Purchased Mortgage Loans. Such substitution shall be made by transfer to Buyer or its designee (including the Custodian) of the Mortgage Files of such other Mortgage Loans together with a Custodial Delivery and transfer to Seller or its designee of the Purchased Mortgage Loans requested for release. After substitution, the substituted Mortgage Loans, shall be deemed to be Purchased Mortgage Loans subject to the same Transaction as the released Mortgage Loans. (b) Notwithstanding anything to the contrary in this Agreement, Seller may not substitute other Mortgage Loans for any Purchased Mortgage Loans (i) if after taking into account such substitution, a Collateral Deficit would occur or (ii) such substitution would cause a breach of any provision of this Agreement. 10. REPRESENTATIONS AND WARRANTIES (a) Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance; (ii) it will engage in such Transactions as principal; (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf; (iv) this Agreement is legal, valid and binding obligation of it, enforceable against it in accordance with its terms, (v) no approval, consent or authorization of the Transactions contemplated by this Agreement from any federal, state, or local regulatory authority having jurisdiction over it is required or, if required, such approval, consent or authorization has been or will, prior to the Purchase Date, be obtained; (vi) the execution, delivery, and performance of this Agreement and the Transactions hereunder will not violate any law, regulation, order, judgment, decree, ordinance, charter, by-law, or rule applicable to it or its property or constitute a default (or an event which, with notice or lapse of time, or both would constitute a default) under or result in a breach of any agreement or other instrument by which it is bound or by which any of its assets are affected; (vii) it has received approval and authorization to enter into this Agreement and each and every Transaction actually entered into hereunder pursuant to its internal policies and procedures; and 12 (viii) neither this Agreement nor any Transaction pursuant hereto are entered into in contemplation of insolvency or with intent to hinder, delay or defraud any creditor. (b) Seller represents and warrants to Buyer that as of the Purchase Date for the purchase of any Purchased Mortgage Loans by Buyer from Seller and as of the date of this Agreement and any Transaction hereunder and at all times while this Agreement and any Transaction hereunder is in full force and effect: (i) Organization. Seller is duly organized, validly existing and in good ------------ standing under the federal laws of the United States and is duly licensed, qualified, and in good standing in every state where Seller transacts business and in any state where any Mortgaged Property is located if the laws of such state require licensing or qualification in order to conduct business of the type conducted by Seller therein. (ii) No Litigation. There is no action, suit, proceeding, arbitration or ------------- investigation pending or threatened against Seller which, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of Seller, or in any material impairment of the right or ability of Seller to carry on its business substantially as now conducted, or in any material liability on the part of Seller, or which if adversely determined would affect the validity of this Agreement or any of the Purchased Mortgage Loans or of any action taken or to be taken in connection with the obligations of Seller contemplated herein, or which would be likely to impair materially the ability of Seller to perform under the terms of this Agreement; (iii) No Broker. Seller has not dealt with any broker, investment banker, --------- agent, or other person, except for Buyer, who may be entitled to any commission or compensation in connection with the sale of Purchased Mortgage Loans pursuant to this Agreement; (iv) Good Title to Collateral. Purchased Mortgage Loans shall be free and ------------------------ clear of any lien, encumbrance or impediment to transfer (other than the lien of the related First Mortgage with respect to any Purchased Mortgage Loans secured by a Second Mortgage), and Seller has good, valid and marketable title and the right to sell and transfer such Purchased Mortgage Loans to Buyer. (v) Delivery of Mortgage File. With respect to each Purchased Mortgage Loans ------------------------- which is not a Wet Ink Mortgage Loan, the Mortgage Note, the Mortgage, the assignment of Mortgage and any other documents required to be delivered under this Agreement and the Custodial Agreement for such Mortgage Loan has been delivered to the Custodian. Seller or its designee is in possession of a complete, true and accurate Mortgage File with respect to each Mortgage Loan, except for such documents the originals of which have been delivered to the Custodian. (vi) [Reserved]. (vii) [Reserved]. 13 (viii) No Untrue Statements. Neither this Agreement nor any written statement -------------------- made, or any report or other document issued or delivered or to be issued or delivered by Seller pursuant to this Agreement or in connection with the transactions contemplated hereby contains any untrue statement of fact or omits to state a fact necessary to make the statements contained herein or therein not misleading; (ix) Origination Practices. The origination practices used by Seller with --------------------- respect to each Mortgage Loan (i) have been and are in all respects legal and proper in the mortgage origination business and (ii) are in accordance with the underwriting guidelines attached hereto as Exhibit VI; ---------- (x) Performance of Agreement. Seller does not believe, nor does it have any ------------------------ reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement on its part to be performed; (xi) Seller Not Insolvent. Seller is not, and with the passage of time does -------------------- not expect to become, insolvent; and (xii) No Event of Default. No Event of Default has occurred and is continuing ------------------- hereunder. (c) Seller represents and warrants to the Buyer that each Purchased Mortgage Loan sold hereunder and each pool of Purchased Mortgage Loans sold in a Transaction hereunder, as of the related Purchase Date conform to the representations and warranties set forth in Exhibit V attached hereto and that each Mortgage Loan delivered hereunder as Additional Loans or Substituted Mortgage Loans, as of the date of such delivery, conforms to the representations and warranties set forth in Exhibit V hereto. Seller further represents and warrants to the Buyer that, as of the date of its delivery, the Collateral Information with respect to each Purchased Mortgage Loan is complete, true and correct. It is understood and agreed that the representations and warranties set forth in Exhibit V hereto, if any, shall survive delivery of the respective Mortgage File to Buyer or its designee (including the Custodian). (d) On the Purchase Date for any Transaction, Buyer and Seller shall each be deemed to have made all the foregoing representations with respect to itself as of such Purchase Date. 11. NEGATIVE COVENANTS OF THE SELLER On and as of the date of this Agreement and each Purchase Date and until this Agreement is no longer in force with respect to any Transaction, Seller covenants that it will not: (a) take any action which would directly or indirectly impair or adversely affect Buyer's title to or the value of the Purchased Mortgage Loans; (b) pledge, assign, convey, grant, bargain, sell, set over, deliver or otherwise transfer any interest in the Purchased Mortgage Loans to any person not a party to this Agreement nor will the Seller create, incur or permit to exist any lien, encumbrance or security interest in or on the Purchased Mortgage Loans except as described in Section 6 of this Agreement; or (c) create, incur or permit to exist any lien, encumbrance or security interest in or on any of the Collateral without the prior express written consent of Buyer. 14 12. AFFIRMATIVE COVENANTS OF THE SELLER For so long as this Agreement is in effect: (a) Seller covenants that it will promptly notify Buyer of any material adverse change in its business operations and/or financial condition; (b) Seller shall provide Buyer with copies of such documentation as Buyer may reasonably request evidencing the truthfulness of the representations set forth in Section 10, including but not limited to resolutions evidencing the approval of this Agreement by Seller's board of directors or loan committee, copies of the minutes of the meetings of Seller's board of directors or loan committee at which this Agreement and the Transactions contemplated by this Agreement were approved; (c) Seller shall, at Buyer's request, take all action necessary to ensure that Buyer will have a first priority security interest in the Collateral, including, among other things, filing such Uniform Commercial Code financing statements as Buyer may reasonably request; (d) Seller shall notify Buyer no later than one (1) Business Day after obtaining actual knowledge thereof, if any event has occurred that constitutes an Event of Default with respect to Seller or any event that with the giving of notice or lapse of time, or both, would become an Event of Default with respect to Seller; (e) Seller covenants to deliver Buyer, at the beginning of each month, a report listing all present commitments obtained by Seller from credit worthy third- party investors to purchase the Mortgage Loans within the following sixty days. Seller must demonstrate based upon such report that it has a whole loan sale take-out capability to repurchase the Mortgage Loans on the applicable Repurchase Date; 15 (f) Seller covenants to provide Buyer with a copy of any material changes to Seller's underwriting guidelines prior to the effectiveness of any such change; (g) Seller covenants, upon request of Buyer after the occurrence of a Collateral Deficit, to enter into hedging transactions with respect to fixed rate Purchased Mortgage Loans in order to protect adequately, in the reasonable judgment against interest rate risks; (h) Seller covenants to provide Buyer on the first Business Day of each month, either by direct modem electronic transmission or via a computer diskette, the Collateral Information in computer readable format with respect to all Purchased Mortgage Loans then subject to Transactions; (i) Seller covenants to provide Buyer or its designee with the option and right (but not the obligation) of acting as a lead managing underwriter or placement agent for any securities of the Seller or its subsidiaries collateralized by, or representing interests in, the Purchased Mortgage Loans (each such transaction, a "Securitization"). Each Securitization shall contain -------------- terms mutually acceptable to Buyer and Seller (including, without limitation, customary provisions regarding representations and warranties, covenants, delivery terms, conditions, indemnification, contribution and termination). If Buyer or its affiliate declines to participate in any Securitization, Seller or its subsidiaries may cause such transaction to be executed by others without prejudice to Buyer's rights as to future transactions; and (j) Seller covenants to provide Buyer with the following financial and reporting information: (i) Within 90 days after the last day of its fiscal year, Seller's audited combined and combining statements of income and statements of changes in cash flow for such year and balance sheets as of the end of such year in each case presented fairly in accordance with GAAP, and accompanied, in all cases, by an unqualified report of a "Big Six" nationally recognized independent certified public accounting firm consented to by Buyer (which consent shall not be unreasonably withheld). (ii) Within 60 days after the last day of the first three fiscal quarters in any fiscal year, Seller's combined and combining statements of income and statements of changes in cash flow for such quarter and balance sheets as of the end of such quarter presented fairly in accordance with GAAP. (iii) Within 30 days after the last day of each calendar month an officer's certificate from a senior officer of the Seller addressed to Buyer certifying that, as of such calendar month, (x) Seller is in compliance with all of the terms, conditions and requirements of this Agreement, and (y) no Event of Default exists. 13. EVENTS OF DEFAULT (a) If any of the following events (each an "Event of Default") occur, Seller ---------------- and Buyer shall have the rights set forth in Section 14, as applicable: (i) Seller or Buyer fails to satisfy or perform any material obligation or covenant under this Agreement; 16 (ii) an Act of Insolvency occurs with respect to Buyer or Seller, Seller's corporate parent or United PanAm Mortgage Corporation; (iii) any representation made by Seller shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated; (iv) Seller or Buyer shall admit its inability to, or its intention not to, perform any of its obligations hereunder; (v) any governmental, regulatory, or self-regulatory authority, including, but not limited to, the Agencies, takes any action to remove, limit, restrict, suspend or terminate the rights, privileges, or operations of the Seller or any of its Affiliates, including suspension as an issuer, lender or seller/servicer of mortgage loans, which suspension has a material adverse effect on the ordinary business operations of Seller or Seller's Affiliate, and which continues for more than 24 hours; (vi) Seller dissolves, merges or consolidates with another entity (unless (A) it is the surviving party or (B) the entity into which it mergers has equity and a market value of at least that of the Seller immediately prior to such merger and such entity expressly assumes the obligations of the Seller at the time of such merger), or sells, transfers, or otherwise disposes of a material portion of its business or assets; (vii) Buyer, in its good faith judgment, believes that there has been a material adverse change in the business, operations, corporate structure or financial condition of Seller or that Seller will not meet any of its obligations under any Transaction pursuant to this Agreement, this Agreement or any other agreement between the parties; (viii)Seller is in default under any other agreement to which it is a party, provided, however, such a default shall not constitute an Event of Default if the exercise of such remedies as are available to Seller's counterparty with respect to such default would not result in a material adverse change in the business operations or financial condition of the Seller; (ix) A final judgment by any competent court in the United States of America for the payment of money in an amount of at least $25,000 is rendered against the Seller, and the same remains undischarged or unpaid for a period of sixty (60) days during which execution of such judgment is not effectively stayed; (x) This Agreement shall for any reason cease to create a valid, first priority security interest in any of the Purchased Mortgage Loans purported to be covered hereby; (xi) A Market Value Collateral Deficit or Securitization Value Collateral Deficit occurs with respect to Seller or Buyer, as applicable, and is not eliminated within the time period specified in Section 4(b); or (xii) An "event of default" has occurred pursuant to a Hedge. 17 (b) In making a determination as to whether an Event of Default has occurred, the parties hereto shall be entitled to rely on reports published or broadcast by media sources believed by such party to be generally reliable and on information provided to it by any other sources believed by it to be generally reliable, provided that such party reasonably and in good faith believes such information to be accurate and has taken such steps as may be reasonable in the circumstances to attempt to verify such information. 14. REMEDIES (a) If an Event of Default occurs with respect to Seller, the following rights and remedies are available to Buyer: (i) At the option of Buyer, exercised by written notice to Seller (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur, (ii) If Buyer exercises or is deemed to have exercised the option referred to in subsection (a)(i) of this Section, (A) Seller's obligations hereunder to repurchase all Purchased Mortgage Loans in such Transactions shall thereupon become immediately due and payable, (B) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of, on a 360 day per year basis for the actual number of days during the period from and including the date of the exercise or deemed exercise of such option to but excluding the date of payment of the Repurchase Price as so increased, (x) the greater of the Prime Rate or the Pricing Rate for each such Transaction to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined pursuant to subsection (a)(i) of this Section (decreased as of any day by (I) any amounts actually in the possession of Buyer pursuant to clause (C) of this subsection, (II) any proceeds from the sale of Purchased Mortgage Loans applied to the Repurchase Price pursuant to subsection (a)(xii) of this Section, and (III) any amounts applied to the Repurchase Price pursuant to subsection (a)(iii) of this Section), and (C) all Income actually received by the Buyer or its designee (including the Custodian) pursuant to Section 5 shall be applied to the aggregate unpaid Repurchase Price owed by Seller. (iii) After one Business Day's notice to Seller (which notice need not be given if an Act of Insolvency shall have occurred, and which may be the notice given under subsection (a)(i) of this Section), Buyer may (A) immediately sell, without notice or demand of any kind, at a public or private sale and at such price or prices Buyer may reasonably deem satisfactory any or all Purchased Mortgage Loans subject to a Transaction hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Mortgage Loans, to give Seller credit for such Purchased Mortgage Loans in an amount equal to the Market Value of the Purchased Mortgage Loans against the aggregate unpaid Repurchase Price and any other amounts owing by Seller hereunder. The proceeds of any disposition of Purchased Mortgage Loans shall be 18 applied first to the costs and expenses incurred by Buyer in connection with Seller's default; second to consequential damages, including but not limited to costs of cover and/or related hedging transactions; third to the Repurchase Price; and fourth to any other outstanding obligation of Seller to Buyer or its Affiliates. (iv) The parties recognize that it may not be possible to purchase or sell all of the Purchased Mortgage Loans on a particular Business Day, or in a transaction with the same purchaser, or in the same manner because the market for such Purchased Mortgage Loans may not be liquid. In view of the nature of the Purchased Mortgage Loans, the parties agree that liquidation of a Transaction or the underlying Purchased Mortgage Loans does not require a public purchase or sale and that a good faith private purchase or sale shall be deemed to have been made in a commercially reasonable manner. Accordingly, Buyer may elect, in its sole discretion, the time and manner of liquidating any Purchased Mortgage Loan and nothing contained herein shall (A) obligate Buyer to liquidate any Purchased Mortgage Loan on the occurrence of an Event of Default or to liquidate all Purchased Mortgage Loans in the same manner or on the same Business Day or (B) constitute a waiver of any right or remedy of Buyer. However, in recognition of the parties' agreement that the Transactions hereunder have been entered into in consideration of and in reliance upon the fact that all Transactions hereunder constitute a single business and contractual relationship and that each Transaction has been entered into in consideration of the other Transactions, the parties further agree that Buyer shall use its best efforts to liquidate all Transactions hereunder upon the occurrence of an Event of Default as quickly as is prudently possible in the reasonable judgment of Buyer. (v) Buyer shall, without regard to the adequacy of the security for the Seller's obligations under this Agreement, be entitled to the appointment of a receiver by any court having jurisdiction, without notice, to take possession of and protect, collect, manage, liquidate, and sell the Collateral or any portion thereof, and collect the payments due with respect to the Collateral or any portion thereof. Seller shall pay all costs and expenses incurred by Buyer in connection with the appointment and activities of such receiver. (vi) Seller agrees that Buyer may obtain an injunction or an order of specific performance to compel Seller to fulfill its obligations as set forth in Section 25, if Seller fails or refuses to perform its obligations as set forth therein. (vii) Seller shall be liable to Buyer for the amount of all expenses, reasonably incurred by Buyer in connection with or as a consequence of an Event of Default, including, without limitation, reasonable legal fees and expenses and reasonable costs incurred in connection with hedging or covering transactions. (viii)Buyer shall have all the rights and remedies provided herein, provided by applicable federal, state, foreign, and local laws (including, without limitation, the rights and remedies of a secured party under the Uniform Commercial Code of the State of New York, to the extent that the 19 Uniform Commercial Code is applicable, and the right to offset any mutual debt and claim), in equity, and under any other agreement between Buyer and Seller. (ix) Buyer may exercise one or more of the remedies available to Buyer immediately upon the occurrence of an Event of Default and, except to the extent provided in subsections (a)(i) and (iii) of this Section, at any time thereafter without notice to Seller. All rights and remedies arising under this Agreement as amended from time-to-time hereunder are cumulative and not exclusive of any other rights or remedies which Buyer may have. (x) In addition to its rights hereunder, Buyer shall have the right to proceed against any assets of Seller which may be in the possession of Buyer or its designee (including the Custodian) including the right to liquidate such assets and to set off the proceeds against monies owed by Seller to Buyer pursuant to this Agreement. Buyer may set off cash, the proceeds of the liquidation of the Purchased Mortgage Loans, any Collateral or its proceeds, and all other sums or obligations owed by Seller to Buyer against all of Seller's obligations to Buyer, whether under this Agreement, under a Transaction, or under any other agreement between the parties, or otherwise, whether or not such obligations are then due, without prejudice to Buyer's right to recover any deficiency. Any cash, proceeds, or property in excess of any amounts due, or which Buyer reasonably believes may become due, to it from Seller shall be returned to Seller after satisfaction of all obligations of Seller to Buyer. (xi) Buyer may enforce its rights and remedies hereunder without prior judicial process or hearing, and Seller hereby expressly waives any defenses Seller might otherwise have to require Buyer to enforce its rights by judicial process. Seller also waives any defense Seller might otherwise have arising from the use of nonjudicial process, enforcement and sale of all or any portion of the Collateral, or from any other election of remedies. Seller recognizes that nonjudicial remedies are consistent with the usages of the trade, are responsive to commercial necessity and are the result of a bargain at arm's length. (xii) Buyer and Seller hereby agree that sales of the Purchased Mortgage Loans shall be deemed to include and permit the sales of Purchased Mortgaged Loans pursuant to a securities offering. (xiii)Notwithstanding the foregoing remedies, if the Event of Default (other than an Event of Default under Section 13(a)(xi)) arises from a breach of any representation or warranty set forth in Sections 10(b)(iii), (v) or (ix) or in Exhibit V attached hereto with respect to a Purchased Mortgage Loan, then Seller may elect, subject to Buyer's written consent (which consent shall not be unreasonably withheld or delayed), to cure such default by repurchasing such Mortgage Loan or substituting for such Mortgage Loan within two (2) Business Days of such Event of Default, provided, however, that Seller shall not have the right to make the foregoing election if such breach causes a default with respect to Mortgage Loans that in the aggregate represent ten percent (10%) or more of the aggregate Purchase Price of all Purchased Mortgage Loans subject 20 to then outstanding Transactions. The repurchase price for any such repurchase shall be the outstanding Repurchase Price of such Mortgage Loan, as the case may be. Any such substitution shall be performed in accordance with Section 9 of this Agreement. (b) If an Event of Default occurs with respect to Buyer, the following rights and remedies are available to Seller: (i) Upon tender by Seller of payment of the aggregate Repurchase Price for all such Transactions, Buyer's right, title and interest in all Purchased Mortgage Loans subject to such Transactions shall be deemed transferred to Seller, and Buyer shall deliver or cause to be transferred all such Purchased Mortgage Loans to Seller or its designee at Buyer's expense. (ii) If Seller exercises the option referred to in subsection (b)(i) of this Section and Buyer fails to deliver or cause to be delivered the Purchased Mortgage Loans to Seller or its designee, after one Business Day's notice to Buyer, Seller may (A) purchase Mortgage Loans ("Replacement Loans") that are as similar as is reasonably ----------------- practicable in characteristics, outstanding principal amounts (as a pool) and interest rate to any Purchased Mortgage Loans that are not delivered by Buyer to Seller or its designee as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Loans, to be deemed to have purchased Replacement Loans at a price therefor on such date, equal to the Market Value of the Purchased Mortgage Loans. (iii) Buyer shall be liable to the Seller, and Buyer shall pay to the Seller on demand, (A) with respect to Purchased Mortgage Loans (other than Additional Loans), for any excess of the price paid (or deemed paid) by Seller for Replacement Loans therefor over the Repurchase Price for such Purchased Mortgage Loans and (B) with respect to Additional Loans, for the price paid (or deemed paid) by Seller for the Replacement Loans therefor. In addition, Buyer shall be liable to Seller for interest on such remaining liability with respect to each such purchase (or deemed purchase) of Replacement Loans calculated on a 360-day year basis for the actual number of days during the period from and including the date of such purchase (or deemed purchase) until paid in full by Buyer. Such interest shall be at the greater of the Pricing Rate or the Prime Rate. (iv) Buyer shall be liable to Seller for the amount of all expenses reasonably incurred by Seller in connection with or as a consequence of an Event of Default, including, without limitation, reasonable legal expenses and reasonable expenses incurred in connection with covering existing hedging transactions with respect to the Purchased Mortgage Loans. (v) Seller shall have all the rights and remedies provided herein, provided by applicable federal, state, foreign, and local laws, in equity, and under any other agreement between Buyer and Seller, including, without limitation, the right to offset any debt or claim. (vi) Seller may exercise one or more of the remedies available to Seller immediately upon the occurrence of an Event of Default and at any time thereafter without notice to Buyer. All rights and remedies arising under 21 this Agreement as amended from time-to-time hereunder are cumulative and not exclusive of any other rights or remedies which Seller may have. 15. ADDITIONAL CONDITION Seller shall, on the date of the initial Transaction hereunder and, upon the request of Buyer, on the date of any subsequent Transaction, cause to be delivered to Buyer, with reliance thereon permitted as to any Person that purchases the Purchased Mortgage Loan from Buyer in a repurchase transaction, a favorable opinion or opinions of counsel with respect to the matters set forth in Exhibit IV attached hereto. 16. SINGLE AGREEMENT Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and that each has been entered into in consideration of the other Transactions. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries, and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries, and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries, and other transfers may be applied against each other and netted; provided, however, that the parties hereto acknowledge and agree that each Purchased Mortgage Loan is identified and unique and nothing in this Agreement should limit or reduce Buyer's obligation to deliver the Purchased Mortgage Loans to Seller as and when provided herein. 17. NOTICES AND OTHER COMMUNICATIONS Unless another address is specified in writing by the respective party to whom any written notice or other communication is to be given hereunder, all such notices or communications shall be in writing or confirmed in writing and delivered at the respective addresses set forth in the Confirmation. 18. ENTIRE AGREEMENT; SEVERABILITY This Agreement together with the applicable Confirmation constitutes the entire understanding between Buyer and Seller with respect to the subject matter it covers and shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions involving Purchased Mortgage Loans. By acceptance of this Agreement, Buyer and Seller acknowledge that they have not made, and are not relying upon, any statements, representations, promises or undertakings not contained in this Agreement. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 19. NON-ASSIGNABILITY The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by Seller without the prior written consent of Buyer. Subject to the foregoing, 22 this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their respective successors and assigns. Nothing in this Agreement express or implied, shall give to any person, other than the parties to this Agreement and their successors hereunder, any benefit or any legal or equitable right, power, remedy or claim under this Agreement. 20. TERMINABILITY This Agreement shall terminate upon the written notice from Seller to Buyer to such effect, except that this Agreement shall, notwithstanding the clause above, remain applicable to any Transaction then outstanding. Notwithstanding any such termination or the occurrence of an Event of Default, (i) all of the representations and warranties hereunder (including those made in Exhibit V) and the covenant of Seller made in subsection (i) of Section 12 shall each continue and survive. 21. GOVERNING LAW THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES THEREOF. 22. CONSENT TO JURISDICTION AND ARBITRATION The parties irrevocably agree to submit to the personal jurisdiction of the United States District Court for the Southern District of New York, the parties irrevocably waiving any objection thereto. If, for any reason, federal jurisdiction is not available, and only if federal jurisdiction is not available, the parties irrevocably agree to submit to the personal jurisdiction of the Supreme Court of the State of New York, the parties irrevocably waiving any objection thereto. Notwithstanding the foregoing two sentences, at either party's sole option exercisable at any time not later than thirty (30) days after an action or proceeding has been commenced, the parties agree that the matter may be submitted to binding arbitration in accordance with the commercial rules of the American Arbitration Association then in effect in the State of New York and judgment upon any award rendered by the arbitrator may be entered in any court having jurisdiction thereof within the City, County and State of New York; provided, however, that the arbitrator shall not amend, supplement, or reform in any regard this Agreement or the terms of any Confirmation, the rights or obligations of any party hereunder or thereunder, or the enforceability of any of the terms hereof or thereof. Any arbitration shall be conducted before a single arbitrator who shall be reasonably familiar with repurchase transactions and the secondary mortgage market in the City, County, and State of New York. 23. NO WAIVERS, ETC. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Any such waiver or modification shall be effective only in the specific instance and for the specific purpose for which it was given. 24. INTENT 23 The parties understand and intend that this Agreement and each Transaction hereunder constitute a "repurchase agreement" and a "securities contract" as those terms are defined under the relevant provisions of Title 11 of the United States Code, as amended. 25. SERVICING (a) Notwithstanding the purchase and sale of the Purchased Mortgage Loans hereby, Seller shall continue to service the Purchased Mortgage Loans for the benefit of Buyer and, if Buyer shall exercise its rights to pledge or hypothecate the Purchased Mortgage Loan prior to the related Repurchase Date pursuant to Section 8, Buyer's assigns; provided, however, that the obligations of Seller to service the Purchased Mortgage Loans shall cease, at Seller's option, upon the payment by Seller to Buyer of the Repurchase Price therefor. Seller shall service the Purchased Mortgage Loans in accordance with the servicing standards maintained by other prudent mortgage lenders with respect to mortgage loans similar to the Purchased Mortgage Loans. (b) Seller agrees that Buyer is the owner of all servicing records, including but not limited to any and all servicing agreements, files, documents, records, data bases, computer tapes, copies of computer tapes, proof of insurance coverage, insurance policies, appraisals, other closing documentation, payment history records, and any other records relating to or evidencing the servicing of Purchased Mortgage Loans (the "Servicing Records"). Seller grants Buyer a ----------------- security interest in all servicing fees and rights relating to the Purchased Mortgage Loans and all Servicing Records to secure the obligation of the Seller or its designee to service in conformity with this Section and any other obligation of Seller to Buyer. Seller covenants to safeguard such Servicing Records and to deliver them promptly to Buyer or its designee (including the Custodian) at Buyer's request. (c) Upon the occurrence and continuance of an Event of Default, Buyer may, in its sole discretion, (i) sell its right to the Purchased Mortgage Loans on a servicing released basis or (ii) terminate the Seller as servicer of the Purchased Mortgage Loans with or without cause, in each case without payment of any termination fee. (d) Seller shall not employ sub-servicers to service the Purchased Mortgage Loans without the prior written approval of Buyer, which approval shall not be unreasonably withheld. (e) Seller shall cause any sub-servicers engaged by Seller to execute a letter agreement with Buyer acknowledging Buyer's security interest and agreeing that, upon notice from Buyer (or the Custodian on its behalf) that an Event of Default has occurred and in continuing hereunder, it shall deposit all Income with respect to the Purchased Mortgage Loans in the account specified in the third sentence of Section 5(a). 26. DISCLOSURE RELATING TO CERTAIN FEDERAL PROTECTIONS The parties acknowledge that they have been advised that in the case of Transactions in which one of the parties is an "insured depository institution" as that term is defined in Section 1831(a) of Title 12 of the United States Code, as amended, funds held by the financial institution pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Savings Association Insurance Fund or the Bank Insurance Fund, as applicable. 24 27. NETTING If Buyer and Seller are "financial institutions" as now or hereinafter defined in Section 4402 of Title 12 of the United States Code ("Section 4402") and any ------------ rules or regulations promulgated thereunder: (a) All amounts to be paid or advanced by one party to or on behalf of the other under this Agreement or any Transaction hereunder shall be deemed to be "payment obligations" and all amounts to be received by or on behalf of one party from the other under this Agreement or any Transaction hereunder shall be deemed to be "payment entitlements" within the meaning of Section 4402, and this Agreement shall be deemed to be a "netting contract" as defined in Section 4402. (b) The payment obligations and the payment entitlements of the parties hereto pursuant to this Agreement and any Transaction hereunder shall be netted as follows. In the event that either party (the "Defaulting Party") shall fail to ---------------- honor any payment obligation under this Agreement or any Transaction hereunder, the other party (the "Nondefaulting Party") shall be entitled to reduce the ------------------- amount of any payment to be made by the Nondefaulting Party to the Defaulting Party by the amount of the payment obligation that the Defaulting Party failed to honor. 28. MISCELLANEOUS (a) Time is of the essence under this agreement and all Transactions and all references to a time shall mean New York time in effect on the date of the action unless otherwise expressly stated in this Agreement. (b) Buyer shall be authorized to accept orders and take any other action affecting any accounts of the Seller in response to instructions given in writing or orally by telephone or otherwise by any person with apparent authority to act on behalf of the Seller, and the Seller shall indemnify Buyer, defend, and hold Buyer harmless from and against any and all liabilities, losses, damages, costs, and expenses of any nature arising out of or in connection with any action taken by Buyer in response to such instructions received or reasonably believed to have been received from the Seller. (c) If there is any conflict between the terms of this Agreement or any Transaction entered into hereunder and the Custodial Agreement, this Agreement shall prevail. (d) If there is any conflict between the terms of a Confirmation or a corrected Confirmation issued by the Buyer and this Agreement, the Confirmation shall prevail. (e) This Agreement may be executed in counterparts, each of which so executed shall be deemed to be an original, but all of such counterparts shall together constitute but one and the same instrument. (f) The headings in this Agreement are for convenience of reference only and shall not affect the interpretation or construction of this Agreement. [Signature page follows.] 25 IN WITNESS WHEREOF, the parties have entered into this Agreement as of the date set forth above. LEHMAN COMMERCIAL PAPER INC., Buyer By: /s/ [SIGNATURE ILLEGIBLE] ---------------------------------- Title: Authorized Signatory ------------------------------- Date: October 31, 1997 -------------------------------- PAN AMERICAN BANK, FSB, Seller By: /s/ LAWRENCE J. GRILL ---------------------------------- Title: President ------------------------------- Date: October 31, 1997 -------------------------------- 26 EXHIBITS -------- EXHIBIT I Confirmation EXHIBIT II Form of Custodial Delivery EXHIBIT III Form of Power of Attorney EXHIBIT IV Opinion of Counsel to Seller EXHIBIT V Representations and Warranties Regarding Mortgage Loan EXHIBIT VI Seller's Underwriting Guidelines 27 EXHIBIT I Form of Confirmation Letter (date) Pan American Bank, FSB 1300 South El Camino Real P.O. Box 2079 San Mateo, California 94401 Attention: Confirmation No.: ------------------------------ Ladies/Gentlemen: This letter confirms our oral agreement to purchase from you the Mortgage Loans listed in Appendix I hereto, pursuant to the Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans between us, dated as of October 31, 1997 (the "Agreement"), as follows: Purchase Date: Mortgage Loans to be Purchased: See Appendix I hereto. [Appendix I to Confirmation Letter will list Mortgage Loans] Aggregate Principal Amount of Purchased Mortgage Loans: Purchase Price: Pricing Rate: Repurchase Date: Repurchase Price: Collateral Amount Percentage with respect to Market Value: Collateral Amount Percentage with respect to Securitization Value: 28 Names and addresses for communications: Buyer: Lehman Commercial Paper Inc. 200 Vesey Street 9th Floor New York, New York 10285-0900 Attention: Central Funding Department Seller: Pan American Bank, FSB 1300 South El Camino Real P.O. Box 2079 San Mateo, California 94401 Attention: LEHMAN COMMERCIAL PAPER INC. By: ------------------------------- Name: ----------------------------- Title: ---------------------------- Agreed and Acknowledged: PAN AMERICAN BANK, FSB, Seller By: ------------------------------- Name: ----------------------------- Title: ---------------------------- 29 EXHIBIT II Form of Custodial Delivery On this ___ day of ______, 199__, Pan American Bank, FSB ("Seller"), as the Seller under that certain Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans, dated as of October 31, 1997 (the "Repurchase Agreement") between the Seller and Lehman Commercial Paper Inc. ("Buyer"), does hereby deliver to ______ ("Custodian"), as custodian under that certain Custodial Agreement, dated as of November 6, 1997, among Buyer, Seller and Custodian the Mortgage Files with respect to the Mortgage Loans to be purchased by Buyer pursuant to the Repurchase Agreement, which Mortgage Loans are listed on the Mortgage Loan Schedule attached hereto and which Mortgage Loans shall be subject to the terms of the Custodial Agreement on the date hereof. With respect to the Mortgage Files delivered hereby, for the purposes of issuing the Trust Receipt, the Custodian shall review the Mortgage Files to ascertain delivery of the documents listed in Annex A attached to the Custodial Agreement. [The Mortgage Loans delivered hereby constitute Additional Collateral delivered pursuant to Section 7 of the Custodial Agreement].][The Mortgage Loans delivered hereby constitute Substituted Collateral pursuant to Section 6 of the Custodial Agreement and are intended to be substituted for the Purchased Mortgage Loans listed on the [schedule attached hereto][Request for Release of Documents and receipt delivered herewith]. The Purchased Mortgage Loans to be released shall be delivered to _______________.] Capitalized terms used herein and not otherwise defined shall have the meanings set forth in the Custodial Agreement. 30 IN WITNESS WHEREOF, the Seller has caused its name to be signed hereto by its officer thereunto duly authorized as of the day and year first above written. PAN AMERICAN BANK, FSB, Seller By: ----------------------------- Title: -------------------------- Name: --------------------------- 31 EXHIBIT III Form of Power of Attorney "Know All Men by These Presents, that Pan American Bank, FSB ("Seller"), does hereby appoint Lehman Commercial Paper Inc. ("Buyer"), its attorney-in-fact to act in Seller's name, place and stead in any way which Seller could do with respect to (i) the completion of the endorsements of the Mortgage Notes and the Assignments of Mortgages, (ii) the recordation of the assignments of Mortgages and (iii) the enforcement of the Seller's rights under the Mortgage Loans purchased by Buyer pursuant to a Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of October 31, 1997 between Seller and Buyer and to take such other steps as may be necessary or desirable to enforce Buyer's rights against such Mortgage Loans, the related Mortgage Files and the Servicing Records to the extent that Seller is permitted by law to act through an agent. TO INDUCE ANY THIRD PARTY TO ACT HEREUNDER, SELLER HEREBY AGREES THAT ANY THIRD PARTY RECEIVING A DULY EXECUTED COPY OR FACSIMILE OF THIS INSTRUMENT MAY ACT HEREUNDER, AND THAT REVOCATION OR TERMINATION HEREOF SHALL BE INEFFECTIVE AS TO SUCH THIRD PARTY UNLESS AND UNTIL ACTUAL NOTICE OR KNOWLEDGE OF SUCH REVOCATION OR TERMINATION SHALL HAVE BEEN RECEIVED BY SUCH THIRD PARTY, AND SELLER ON ITS OWN BEHALF AND ON BEHALF OF SELLER'S ASSIGNS, HEREBY AGREES TO INDEMNIFY AND HOLD HARMLESS ANY SUCH THIRD PARTY FROM AND AGAINST ANY AND ALL CLAIMS THAT MAY ARISE AGAINST SUCH THIRD PARTY BY REASON OF SUCH THIRD PARTY HAVING RELIED ON THE PROVISIONS OF THIS INSTRUMENT. 32 IN WITNESS WHEREOF Seller has caused this Power of Attorney to be executed and the Seller's seal to be affixed this __ day of November, 1997. PAN AMERICAN BANK, FSB (Seal) By: --------------------------- Name: ---------------------- Title: ------------------------ 33 EXHIBIT IV OPINION OF SELLER'S COUNSEL 34 EXHIBIT V Representations and Warranties Regarding Mortgage Loans. The Seller represents and warrants to the Buyer that, with respect to each Mortgage Loan sold in a Transaction hereunder, as of the related Purchase Date: (a) Mortgage Loans as Described. The information set forth in the Mortgage --------------------------- Loan Schedule is complete, true and correct; (b) Payments Current Within 59 Days. The Mortgage Loan (i) together with the ------------------------------- other Purchased Mortgage Loans subject to Transactions, would not cause the 30+ Delinquency Percentage to exceed 3%, and (ii) is not more than 59 days Delinquent; (c) No Outstanding Charges. There are no defaults in complying with the terms ---------------------- of the Mortgage, and all taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the Mortgagor, directly or indirectly, for the payment of any amount required under the Mortgage Loan, except for interest accruing from the date of the Mortgage Note or date of disbursement of the Mortgage Loan proceeds, whichever is greater, to the day which precedes by one month the due date of the first installment of principal and interest; (d) Original Terms Unmodified. The terms of the Mortgage Note and Mortgage ------------------------- have not been impaired, waived, altered or modified in any respect, except by a written instrument which has been recorded, if necessary to protect the interests of Buyer and which has been delivered to Buyer or its designee (including the Custodian). The substance of any such waiver, alteration or modification has been approved by the issuer of any related primary mortgage guarantee policy (a "PMI Policy") and the title insurer, to the extent required by the policy, and its terms are reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in whole or in part, except in connection with an assumption agreement approved by the issuer of any related PMI Policy and the title insurer, to the extent required by the policy, and which assumption agreement is included in the Mortgage File delivered to Buyer or its designee (including the Custodian) and the terms of which are reflected in the Mortgage Loan Schedule; 35 (e) No Defenses. The Mortgage Loan is not subject to any right of rescission, ----------- set-off, counterclaim or defense, including without limitation the defense of usury, nor will the operation of any of the terms of the Mortgage Note or the Mortgage, or the exercise of any right thereunder, render either the Mortgage Note or the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including without limitation the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; (f) Insurance Policies in Effect. The fire and casualty insurance policy ---------------------------- covering the Mortgaged Property (1) affords (and will afford) sufficient insurance against fire and such other risks as are usually insured against in the broad form of extended coverage insurance from time to time available, as well as insurance against flood hazards if the Mortgaged Property is an area identified by the Federal Emergency Management Agency as having special flood hazards; (2) is a standard policy of insurance for the locale where the Mortgaged Property is located, is in full force and effect, and the amount of the insurance is in the amount of the full insurable value of the Mortgaged Property on a replacement cost basis or the unpaid balance of the Mortgage Loans, whichever is less; (3) names (and will name) the present owner of the Mortgaged Property as the insured; and (4) contains a standard mortgagee loss payable clause in favor of Seller. All individual insurance policies with respect to the Mortgage Loan are the valid and binding obligation of the insurer and contain a standard mortgage clause naming Seller, its successors and assigns, as Mortgagee. All premiums thereon have been paid. The Mortgage obligates the Mortgagor thereunder to maintain all such insurance policies at the Mortgagor's cost and expense, and upon the Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain and maintain such insurance at the Mortgagor's cost and expense and to seek reimbursement therefor from the Mortgagor; (g) Compliance with Applicable Laws. Any and all requirements of any federal, ------------------------------- state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the origination and servicing of the Mortgage Loan have been complied with, and Seller shall maintain in its possession, available for Buyer's inspection, and shall deliver to Buyer upon demand, evidence of compliance with all such requirements; (h) No Satisfaction of Mortgage. The Mortgage has not been satisfied, --------------------------- canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission; (i) Location and Type of Mortgaged Property. The Mortgaged Property is located --------------------------------------- in the state identified in the Mortgage Loan Schedule and consists of one or more parcels of real property with a detached single family residence erected thereon, or a two- to four-family dwelling, or an individual condominium unit in a condominium project, or an individual unit in a planned unit development and no residence or dwelling is a mobile home or a manufactured dwelling which is not permanently affixed to real property. No portion of the Mortgaged Property is used for commercial purposes; 36 (j) Valid First or Second Lien. The Mortgage is a valid, subsisting and -------------------------- enforceable first or second lien on the Mortgaged Property, including all buildings on the Mortgaged Property and all installations and mechanical, electrical, plumbing, heating and air conditioning systems located in or annexed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject only to: (1) the lien of current real property taxes and special assessments not yet due and payable; (2) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Mortgage Loan and (i) referred to or to otherwise considered in the appraisal made for the originator of the Mortgage Loan or (ii) which do not adversely affect the appraised value of the Mortgaged Property set forth in such appraisal; (3) in the case of a Mortgaged Property that is a condominium or an individual unit in a planned unit development, liens for common charges permitted by statute; (4) in the case where the Mortgage Loan is secured by a second mortgage lien on the Mortgaged Property (and represented on the Mortgage Loan Schedule as such), the lien of the First Mortgage; and (5) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Mortgage Loan establishes and creates a valid, subsisting and enforceable first or second lien and first or second priority security interest on the property described therein and Seller has full right to pledge and assign the same to Buyer or its designee (including the Custodian). (k) Validity of Mortgage Documents. The Mortgage Note and the Mortgage are ------------------------------ genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms, except as such enforcement may be limited by bankruptcy, insolvency, reorganization, receivership, moratorium or other similar laws relating to or affecting the rights of creditor's generally, and by general equity principles (regardless of whether such enforcement is considered in a proceeding in equity or at law.) All parties to the Mortgage Note and the Mortgage had legal capacity to enter into the Mortgage 37 Loan and to execute and deliver the Mortgage Note and the Mortgage, and the Mortgage Note and the Mortgage have been duly and properly executed by such parties. The Mortgagor is a natural person who is a party to the Mortgage Note and the Mortgage in an individual capacity, and not in the capacity of a trustee or otherwise; (l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan have been ----------------------------- fully disbursed and there is no requirement for future advances thereunder, and any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Mortgage were paid, and the Mortgagor is not entitled to any refund of any amounts paid or due under the Mortgage Note or Mortgage; (m) Ownership. Seller is the sole owner of record and holder of the Mortgage --------- Loan. The Mortgage Loan is not assigned or pledged except as provided in this Agreement, and Seller has good and marketable title thereto, and has full right to pledge and assign the Mortgage Loan to Buyer or its designee (including the Custodian) free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other party, to sell and assign each Mortgage Loan pursuant to this Agreement; (n) Doing Business. All parties which have had any interest in the Mortgage -------------- Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located, and (2) organized under the laws of such state, or (3) qualified to do business in such state, or (4) federal savings and loan associations or national banks having principal offices in such state, or (5) not doing business in such state; (o) LTV. No Mortgage Loan has a Loan-to-Value Ratio of more than 90%. The --- Mortgage Loan, together with the other Purchased Mortgage Loans subject to Transactions, does not have a weighted average cumulative Loan-to-Value Ratio in excess of 80%; (p) Title Insurance. The Mortgage Loan is covered by an ALTA mortgage title --------------- insurance policy or such other form of policy acceptable to FNMA or FHLMC, issued by and constituting the valid and binding obligation of a title insurer generally acceptable to prudent mortgage lenders that regularly originate or purchase mortgage loans comparable to the Mortgage Loans for sale to prudent investors in the secondary market that invest in mortgage loans such as the Mortgage Loans and qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring Seller, its successors and assigns, as to the first priority lien of the Mortgage in the case of a First Mortgage Loan secured by a First Mortgage and the second priority lien of the Mortgage in the case of a Mortgage Loan secured by a second lien on the related Mortgaged Property, in the original principal amount of the Mortgage Loan. Seller is the sole named insured of such mortgage title insurance policy, the assignment to Buyer or the Custodian as assignee of Buyer of Seller's interest in such mortgage title insurance policy does not require the consent of or notification to the insurer or the same has been obtained, and such mortgage title insurance policy is in full 38 force and effect and will be in full force and effect and inure to the benefit of Buyer upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such mortgage title insurance policy and no prior holder of the related Mortgage, including Seller, has done, by act or omission, anything that would impair the coverage of such mortgage title insurance policy; (q) No Defaults. There is no default, breach, violation or event of ----------- acceleration existing under the Mortgage or the Mortgage Note and no event which, with the passage of time or with notice and the expiration of any grace or cure period, other than the failure to make, prior to expiration of the applicable grace period, the monthly payment due immediately prior to the related Purchase Date if such Purchase Date occurs prior to the expiration of such grace period, would constitute a default, breach, violation or event of acceleration, and neither Seller nor its predecessors have waived any default, breach, violation or event of acceleration; (r) No Mechanics' Liens. There are no mechanics' or similar liens or claims ------------------- which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the Mortgage except those that are stated in the title insurance policy and for which related losses are affirmatively insured against by such title insurance policy; (s) Location of Improvements; No Encroachments. All improvements which were ------------------------------------------ considered in determining the appraised value of the Mortgaged Property lay wholly within the boundaries and building restriction lines of the Mortgaged Property and no improvements on adjoining properties encroach upon the Mortgaged Property except those that are stated in the title insurance policy and for which related losses are affirmatively insured against by such title insurance policy. No improvement located on or being part of the mortgaged property is in violation of any applicable zoning law or regulation; (t) Origination. The Mortgage Loan was originated either by (x) Seller or (y) ----------- another mortgage originator that is, if required by applicable law, licensed, supervised and examined by a Federal or State authority. The documents, instruments and agreements submitted for loan underwriting were not falsified and contain no untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the information and statements therein not misleading. (u) Customary Provisions. The Mortgage contains customary and enforceable -------------------- provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial foreclosure. There is no homestead or other exemption available to a Mortgagor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage; 39 (v) Occupancy of the Mortgaged Property. As of the related Purchase Date the ----------------------------------- Mortgaged Property is capable of being lawfully occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. Either that the Mortgagor represented at the time of origination of the Mortgage Loan that the Mortgagor would occupy the Mortgaged Property as the Mortgagor's primary residence or second home or the Mortgaged Property is capable of being occupied pursuant to terms that approximate current standard market rental terms and rates; (w) No Additional Collateral. The Mortgage Note is not and has not been ------------------------ secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in (j) above; (x) Deeds of Trust. In the event the Mortgage constitutes a deed of trust, a -------------- trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by Buyer to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Mortgagor; (y) Acceptable Investment. Seller has no knowledge of any circumstances or --------------------- conditions with respect to the Mortgage, the Mortgaged Property, the Mortgagor or the Mortgagor's credit standing that can reasonably be expected to cause private institutional investors to regard the Mortgage Loan as an unacceptable investment, cause the Mortgage Loan to become delinquent, or adversely affect the value or marketability of the Mortgage Loan; (z) Purchase of Mortgage Documents. The Mortgage File and any other documents ------------------------------ required by Buyer to be delivered for the Mortgage Loan by Seller under this Agreement have been delivered to the Custodian. Seller is in possession of a complete, true and accurate Mortgage File except for such documents the originals of which have been delivered to the Buyer or its designee (including the Custodian). Each of the documents and instruments included in the Mortgage File is duly executed and in due and proper form and each such document or instrument is in a form generally acceptable to prudent institutional mortgage lenders that regularly originate and purchase mortgage loans; (aa) Condominiums/Planned Unit Developments. If the Mortgaged Property is a -------------------------------------- condominium unit or a planned unit development (other than a de minimus planned unit development) such condominium or planned unit development project would materially meet FNMA eligibility requirements for sale to FNMA or is located in a condominium or planned unit development project which has received FNMA project approval and the representations and warranties required by FNMA with respect to such condominium or planned unit development have been made and remain true and correct in all respects; (bb) Transfer of Mortgage Loans. The assignment of Mortgage is in recordable -------------------------- form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located; 40 (cc) Due on Sale. The Mortgage contains an enforceable provision for the ----------- acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the Mortgagee thereunder; (dd) No Buydown Provisions; No Graduated Payments or Contingent Interests. The -------------------------------------------------------------------- Mortgage Loan does not contain provisions pursuant to which monthly payments are paid or partially paid with funds deposited in any separate account established by Seller, the Mortgagor or anyone on behalf of the Mortgagor, or paid by any source other than the Mortgagor nor does it contain any other similar provisions currently in effect which may constitute a "buydown" provision. The Mortgage Loan is not a graduated payment mortgage loan and the Mortgage Loan does not have a shared appreciation or other contingent interest feature; (ee) Consolidation of Future Advances. Any future advances made prior to the -------------------------------- Purchase Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having first or second lien priority, as applicable, by a title insurance policy or an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to FNMA or FHLMC. The consolidated principal amount does not exceed the original principal amount of the Mortgage Loan; (ff) Mortgaged Property Undamaged. There is no proceeding pending or threatened ---------------------------- for the total or partial condemnation of the Mortgaged Property. The Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty so as to affect adversely the value of the Mortgaged Property as security for the Mortgage Loan or the use for which the premises were intended; (gg) Collection Practices; Escrow Deposits; Interest Rate Adjustments. The ---------------------------------------------------------------- origination and collection practices used with respect to the Mortgage Loan have been in all respects in accordance with industry custom and practice, and have been in all respects legal and proper. With respect to escrow deposits and escrow payments, all such payments are in the possession of Seller and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All escrow payments have been collected in full compliance with state and federal law. If an escrow of funds has been established, it is not prohibited by applicable law and has been established in an amount sufficient to pay for every item that remains unpaid and has been assessed but is not yet due and payable. No escrow deposits or escrow payments or other charges or payments due Seller have been capitalized under the Mortgage or the Mortgage Note. All mortgage interest rate adjustments have been made in strict compliance with state and federal law and the terms of the related Mortgage Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited; (hh) Conversion to Fixed Interest Rate. With respect to the aggregate --------------------------------- outstanding principal balance of the Mortgage Loans on the related Purchase Date, no more than 50% of the Mortgage Notes contain a provision allowing the Mortgagor to convert the Mortgage 41 Note from an adjustable interest rate Mortgage Note to a fixed interest rate Mortgage Note for the remaining term thereof all in accordance with the terms of a rider to the related Mortgage Note; (ii) Appraisal. The Servicing Records contains an appraisal of the related --------- Mortgaged Property signed prior to the approval of the Mortgage Loan application by a qualified appraiser, duly appointed by the originator of the Mortgage Loan, who had no interest, direct or indirect in the Mortgaged Property or in any loan made on the security thereof, other than as an employee of the lender, and whose compensation is not affected by the approval or disapproval of the Mortgage Loan, and the appraisal and appraiser both satisfy the requirements of Title XI of the Federal Institutions Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated thereunder, all as in effect on the date the Mortgage Loan was originated; (jj) Soldiers' and Sailors' Relief Act. The Mortgagor has not notified Seller, --------------------------------- and Seller has no knowledge of any relief requested or allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of 1940; (kk) Environmental Matters. To the best of Seller's knowledge based on --------------------- customary residential mortgage industry practices the Mortgaged Property is free from any and all toxic or hazardous substances and there exists no violation of any local, state or federal environmental law, rule or regulation; (ll) "C" and "D" Loans. In the event such Mortgage Loan is a "C" Loan or "D" ----------------- Loan, the aggregate Repurchase Price of such Mortgage Loan, together with the other Purchased Mortgage Loans subject to then outstanding Transactions, does not cause the aggregate Purchase Price of all Purchased Mortgage Loans which are "C" Loans and "D" Loans to exceed 20% of the aggregate Purchase Price for all Purchased Mortgage Loans which are subject to then outstanding Transactions; (mm) Seller Origination. The Mortgage Loan was originated or purchased and ------------------- reunderwritten by Seller; (nn) First Lien Consent. If the Mortgage Loan is a second lien Mortgage Loan, ------------------ (i) if the related first lien provides for negative amortization, the Loan- to-Value was calculated at the maximum principal balance of such first lien that could result upon application of such negative amortization feature, and (ii) either no consent for the Mortgage Loan is required by the holder of the first lien or such consent has been obtained and is contained in the Mortgage File; (oo) No Construction Loans. No Mortgage Loan is a construction loan or relates ---------------------- to manufactured housing that is not permanently affixed to real property subject to the mortgage (i.e. not a mobile home); 42 (pp) Selection by Seller. No Mortgage Loan was selected for inclusion under ------------------- this Agreement on any basis which was intended to have a material adverse effect on Buyer; (qq) Second Mortgages. With respect to each Mortgage Loan secured by a second ---------------- lien on the related Mortgaged Property: (1) if the LTV is higher than 70%, either the related First Mortgage does not provide for a balloon payment or the maturity date of each Mortgage Loan with respect to which a First Mortgage on the related Mortgaged Property provides for a balloon payment is prior to the maturity date of the mortgage loan relating to such first lien; (2) the related first lien on any Mortgaged Property with respect to which the related Mortgage Loan secured by a second lien does not provide for negative amortization; (3) either no consent for the Mortgage Loan secured by a second lien on the related Mortgaged Property is required by the holder of the related first lien or such consent has been obtained and is contained in the Mortgage File; and (4) the related first lien is not held by an individual. (rr) CERCLA To the best of the Seller's knowledge, no Mortgaged Property was, ------ as of the Purchase Date or, with respect to Additional Loans or Substitute Mortgage Loans, as of the related date of addition or substitution, located within a one-mile radius of any site listed in the National Priorities List as defined under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or on any similar state list of hazardous waste sites which are known to contain any hazardous substance or hazardous waste; (ss) No Bankruptcy of Mortgagor. None of the Mortgage Loans are subject to a -------------------------- bankruptcy plan; (tt) Conformance to Underwriting Standards. Each Mortgage Loan conforms to the ------------------------------------- Seller's underwriting guidelines supplied to Buyer by Seller; (uu) Qualified Mortgage. Each Mortgage Loan constitutes a "qualified mortgage" ------------------ within the meaning of Section 860G(a)(3) of the Code; (vv) Balloon Loan Concentration. In the event that such Mortgage Loan is a -------------------------- Balloon Loan, then the aggregate Repurchase Price of such Mortgage Loan, together with the other Purchased Mortgage Loans which are Balloon Loans subject to Transactions, constitutes less than 10% of the aggregate outstanding Repurchase Price of all Purchased Mortgage Loans subject to Transactions; 43 (ww) No Short Maturity Balloon Loans. The Mortgage Loan is not a Balloon Loan ------------------------------- with a maturity date occurring within five years from its date of the related Purchase Date; (xx) Owner Occupied. In the event such Mortgage Loan relates to a Mortgaged -------------- Property which is non-owner occupied, then such Mortgage Loan, together with the other Purchased Mortgage Loans subject to Transactions relating to Mortgaged Properties which are non-owner occupied, does not exceed 15% of the aggregate outstanding Repurchase Price of all Purchased Mortgage Loans subject to Transactions; (yy) Payment Terms. With respect to adjustable rate Mortgage Loans, the ------------- mortgage interest rate is adjusted annually or semi-annually on each interest rate adjustment date to equal the index plus the gross margin, rounded up or down to the nearest 1/8%, subject to the mortgage interest rate cap. With respect to fixed rate Mortgage Loans, the Mortgage Note is payable each month in equal monthly installments of principal and interest sufficient to amortize the Mortgage Loans (other than Balloon Loans) fully by the stated maturity date, over an original term of not more than thirty years from commencement of amortization. With respect to adjustable rate Mortgage Loans, (x) installments of interest are subject to change due to the adjustments to the mortgage interest rate on each interest rate adjustment date, with interest calculated and payable in arrears and (y) installments of principal sufficient to amortize the Mortgage Loans (other than Balloon Loans) fully by the stated maturity date, over an original term of not more than thirty years from commencement of amortization; and (zz) Securitization Standards. Each of the Mortgage Loans conforms to the ------------------------ then current standards of securitization as determined in the reasonable judgment of Buyer. (aaa) Wet Ink Mortgage Loans. In the event such Mortgage Loan is a Wet Ink ---------------------- Mortgage Loan, the Mortgage Loan, together with the other Purchased Mortgage Loans subject to then outstanding Transactions does not cause the aggregate Purchase Price of all Purchased Mortgage Loans which are Wet Ink Mortgage Loans to exceed the lesser of (x) $15,000,000 and (y) 15% of the aggregate Purchase Price of all Purchased Mortgage Loans subject to outstanding Transactions. It is understood and agreed that the representations and warranties set forth in this Exhibit V shall survive delivery of the respective Mortgage Files to the Custodian on behalf of Buyer. 44 EX-10.69 37 CUSTODIAL AGREEMENT EXHIBIT 10.69 ================================================================================ LEHMAN COMMERCIAL PAPER INC., Buyer and PAN AMERICAN BANK, FSB, Seller and BANKERS TRUST COMPANY OF CALIFORNIA, N.A., Custodian ------------------------- CUSTODIAL AGREEMENT As of November 6, 1997 ================================================================================ TABLE OF CONTENTS
Page ---- Section 1 Definitions.......................................... 1 Section 2 Deposit of Purchased Mortgage Loans; Effecting a Transaction.............................. 4 Section 3 Repurchase Date...................................... 4 Section 4 Trust Receipt........................................ 5 Section 5 Obligations of the Custodian......................... 6 Section 6 Substitution......................................... 7 Section 7 Additional Collateral................................ 7 Section 8 Future Defects....................................... 8 Section 9 Release for Servicing................................ 8 Section 10 Limitation on Release................................ 9 Section 11 Release for Payment.................................. 9 Section 12 Fees of Custodian.................................... 9 Section 13 Removal of Custodian With Respect to some or all of the Purchased Mortgage Loans....... 9 Section 14 Examination and Copies of Mortgage Files....................................... 10 Section 15 Insurance of Custodian............................... 10 Section 16 Covenants of Seller.................................. 11 Section 17 Periodic Statements.................................. 11 Section 18 Governing Law; Counterparts.......................... 11 Section 19 No Adverse Interest of Custodian..................... 12 Section 20 Custodian Representations............................ 12 Section 21 Termination by Custodian............................. 12 Section 22 Transfer of Purchased Mortgage Loans Upon Termination of a Transaction.................... 12 Section 23 Notices.............................................. 13
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Page ---- Section 24 Successor and Assigns................................ 13 Section 25 Concerning the Custodian............................. 13 Section 26 Indemnification...................................... 14 Section 27 Obligations of the Custodian With Respect to the Trust Receipts................................ 14 Section 28 Authorized Representatives........................... 15 Section 29 Reproduction of Documents............................ 15 Section 30 Entire Agreement..................................... 16
ANNEXES ------- ANNEX A ADDITIONAL DEFINITIONS EXHIBITS -------- EXHIBIT 1 FORM OF TRUST RECEIPT EXHIBIT 2 FORM OF REQUEST FOR RELEASE OF DOCUMENTS AND RECEIPTS EXHIBIT 3 AUTHORIZED REPRESENTATIVES OF THE CUSTODIAN EXHIBIT 4 AUTHORIZED REPRESENTATIVES OF THE SELLER EXHIBIT 5 AUTHORIZED REPRESENTATIVES OF THE BUYER EXHIBIT 6 FORM OF MORTGAGE LOAN SCHEDULE EXHIBIT 7 FORM OF CUSTODIAL DELIVERY EXHIBIT 8 FORM OF NOTICE TO CUSTODIAN EXHIBIT 9 FORM OF REPURCHASE RELEASE EXHIBIT 10 FORM OF LOST NOTE AFFIDAVIT THIS CUSTODIAL AGREEMENT, dated as of November 6, 1997 (this "Agreement"), is made by and between Lehman Commercial Paper Inc. (the "Buyer"), - ---------- ----- having an address at 200 Vesey Street, 9th floor, New York, New York 10285-0900, Pan American Bank, FSB (the "Seller"), having an address at 1300 South El Camino ------ Real, P.O. Box 2079, San Mateo, California 94401 Attention: Blair Kenny, and Bankers Trust Company of California, N.A. (the "Custodian"), having an address --------- at 3 Park Plaza, 16th Floor, Irvine, California 92614. W I T N E S S E T H - - - - - - - - - - WHEREAS, the Buyer and the Seller may, from time to time, enter into transactions (each, a "Transaction") in which the Buyer shall purchase from the ----------- Seller certain Purchased Mortgage Loans, with a simultaneous agreement by the Seller to repurchase such Purchased Mortgage Loans as provided in that certain Master Repurchase Agreement Governing Purchases and Sales of Mortgage Loans dated as of October 31, 1997 between the Seller and the Buyer (the "Master ------ Repurchase Agreement") and a Confirmation between the Seller and the Buyer (the - -------------------- "Confirmation"; as to each Transaction, the related Confirmation and the Master ------------ Repurchase Agreement are referred to collectively as, the "Repurchase ---------- Agreement"). The Seller shall deliver to the Custodian upon execution of this - --------- Agreement a true and correct copy of the Master Repurchase Agreement. WHEREAS, Buyer has requested Custodian to act as custodian on behalf of the Registered Holder(s) (as defined herein) for purposes of holding the Purchased Mortgage Loans purchased pursuant to the Repurchase Agreement; WHEREAS, the Custodian is a national banking association, is otherwise authorized to act as Custodian pursuant to this Agreement, and has agreed to act as custodian/bailee for hire for the Registered Holder(s), all as more particularly set forth herein; and WHEREAS, the Seller shall from time to time deliver Purchased Mortgage Loans to the Custodian that are subject to a Transaction, and has agreed to deliver or cause to be delivered to the Custodian certain documents with respect to the Purchased Mortgage Loans subject to each Transaction in accordance with the terms and conditions hereof; NOW, THEREFORE, in consideration of the mutual undertakings herein expressed, the parties hereto hereby agree as follows: Section 1. Definitions. ----------- Capitalized terms used but not defined herein shall have the meanings assigned to them in the Master Repurchase Agreement. Additional Collateral: Shall have the meaning set forth in Section 7 --------------------- hereof. Agreement: This Custodial Agreement and all amendments and --------- attachments hereto and supplements hereof. Assignment of Mortgage: An assignment of the Mortgage, notice of ---------------------- transfer or equivalent instrument in recordable form, sufficient under the laws of the jurisdiction wherein the related Mortgaged Property is located to reflect the transfer of the Mortgage to the party indicated therein, which assignment, notice of transfer or equivalent instrument may be in the form of one or more blanket assignments covering the Mortgage Loans secured by Mortgaged Properties located in the same jurisdiction, if permitted by law. Authorized Representative: Shall have the meaning set forth in ------------------------- Section 28 hereof. Business Day: Any day excluding Saturday or Sunday and any day on ------------ which banks located in the States of New York or California are authorized or permitted to close for business. Buyer: Lehman Commercial Paper Inc., or its successor in interest or ----- assigns. Custodial Delivery: The letter executed by the Seller in order to ------------------- deliver the Mortgage Files to the Custodian pursuant to this Agreement prior to the related Purchase Date, a form of which is attached as Exhibit II to the Master Repurchase Agreement. Custodian: Bankers Trust Company of California, N.A., or any --------- successor in interest or assigns, or any successor to the Custodian under this Agreement as herein provided. Mortgage: The mortgage, deed of trust or other instrument securing a -------- Mortgage Note, which creates a first or second lien on a first or second priority ownership interest in an unsubordinated estate in fee simple in real property securing the Mortgage Note. Mortgage File: Shall have the meaning set forth in Annex A attached ------------- hereto. Mortgage Loans: Non-securitized whole loans, namely: (i) -------------- conventional residential mortgage loans, (ii) Wet Ink Mortgage Loans and (iii) such other types of non-securitized whole loans as may be agreed upon by the parties hereto in writing from time to time. Mortgage Loan Schedule: A schedule in written and computer readable ---------------------- formats of Purchased Mortgage Loans, containing the information set forth in Exhibit 6 hereto and otherwise acceptable to Buyer and Custodian, attached to each Custodial Delivery. Mortgage Note: The note or other evidence of the indebtedness of a ------------- Mortgagor secured by a Mortgage. Mortgaged Property: The real property securing repayment of the debt ------------------ evidenced by a Mortgage Note. 2 Notice of Default: Written notice delivered by Buyer to Custodian and ----------------- Seller, or by Seller to Custodian and Buyer, identifying the defaulting party and the Event of Default. Person: Any individual, corporation, partnership, joint venture, ------ association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof. Purchase Date: With respect to each Purchased Mortgage Loan, the date -------------- on which such Purchased Mortgage Loan is purchased by the Buyer pursuant to the Repurchase Agreement. The Purchase Date shall be specified in the Custodial Delivery. Purchased Mortgage Loans: Each Mortgage Loan, and/or any other ------------------------ evidence of ownership of a Mortgage Loan mutually agreed upon by the Buyer and the Seller and identified to the Custodian, transferred or caused to be transferred by the Seller to the Buyer or its designee (including the Custodian) in a Transaction under the Master Repurchase Agreement, any Additional Collateral and any Substituted Collateral delivered pursuant to this Agreement. Registered Holder: Shall have the meaning set forth in Section 27 ----------------- hereof. Request for Release: Shall have the meaning set forth in Section 9 ------------------- hereof. Seller: Pan American Bank, FSB, or its successors in interest or ------ assigns. Substituted Collateral: Shall have the meaning set forth in Section 6 ---------------------- hereof. Trust Receipt: A trust receipt issued by the Custodian evidencing the ------------- Purchased Mortgage Loans it holds, in the form attached hereto as Exhibit 1, and delivered to Buyer by the Custodian in accordance with Section 4 hereof. Wet Ink Mortgage Loan: A non-securitized whole loan, namely a --------------------- conventional mortgage loans secured by a first or second lien on a one to four family residential property for which a Mortgage File has not been delivered to the Custodian. Written Instructions: Written communications received by the -------------------- Custodian from an Authorized Representative of the Buyer or the Seller, including communications received by telex or other telecommunications device capable of transmitting or creating a written record. 3 Section 2. Deposit of Mortgage Loans; Effecting a Transaction -------------------------------------------------- (a) For delivery of no more than 100 Mortgage Files, no later than 9:30 a.m. (California time) on the Business Day prior to each Purchase Date and for delivery of more than 100 Mortgage Files, no later than 9:30 a.m. (California time) on the third (3) Business Day prior to each Purchase Date, Seller shall deliver or cause to be delivered to the Custodian (i) the Mortgage Files with respect to the related Purchased Mortgage Loans (other than those relating to Wet Ink Mortgage Loans), (ii) the Custodial Delivery and (iii) the related Mortgage Loan Schedule. (b) On each Purchase Date upon receipt of the Trust Receipt and the Mortgage Loan Schedule from the Custodian, the Buyer shall transfer to Seller cash in an amount equal to the related Purchase Price. (c) Buyer and Seller agree that in effecting each Transaction, the transfer of the cash and the Purchased Mortgage Loans between Buyer and Seller is intended to be, and shall be deemed to be, simultaneous. During any period that cash and/or the Purchased Mortgage Loans are held by or for Buyer or Seller, until such transfer has been completed, the party holding such cash and/or Purchased Mortgage Loans shall be deemed to be holding such cash and/or Purchased Mortgage Loans in trust for the benefit of the delivering party and shall be obligated to return such cash and/or Purchased Mortgage Loans upon the delivering party's request. (d) With respect to any Wet Ink Mortgage Loans that become Purchased Mortgage Loans under the Repurchase Agreement, Seller shall deliver or shall cause to be delivered to the Custodian (i) a Mortgage Loan Schedule in computer readable format on the Purchase Date and (ii) a complete Mortgage File within five Business Days following the related Purchase Date. (e) On and after the date on which each Transaction is consummated until the Repurchase Date or as extended by written notice signed by both Buyer and Seller and delivered to Custodian, or until Custodian shall receive a Notice of Default, Custodian shall hold the Purchased Mortgage Loans related to such Transaction in trust for the exclusive benefit of the Registered Holder and shall not act upon Written Instructions of Buyer or Seller to deliver the Purchased Mortgage Loans other than as expressly provided in this Agreement. Section 3. Repurchase Date --------------- Seller shall notify Buyer and the Custodian at least one day prior to each Repurchase Date. Buyer shall send a Repurchase Release in the form of Exhibit 9 to the Custodian by 12:00 noon (New York time) on each Repurchase Date listing the Purchased Mortgage Loans to be released thereon. On the Repurchase Date for each Transaction, unless the Custodian receives on the Business Day prior to such Repurchase Date a Notice of Default or Written Instructions from both the Buyer and the Seller that the Repurchase Date has been extended, and provided that Buyer has notified Custodian by telephone that it or the Registered Holder has received the Repurchase Price specified in the Repurchase Release for the related Transaction, the Buyer and the Registered Holder hereby irrevocably instruct the Custodian to release to 4 the Seller or its designee the Purchased Mortgage Loans with respect to such Transaction. Upon surrender to the Custodian of the related Trust Receipt in connection therewith the Custodian shall issue a new Trust Receipt and Mortgage Loan Schedule indicating any Mortgage Loans relating to the surrendered Trust Receipt that were not repurchased by Seller. Section 4. Trust Receipt. ------------- No later than 1 p.m. (New York City time) on each Purchase Date (provided Custodian has timely received the items required pursuant to Section 2(a) herein), the Custodian shall issue to Buyer (via fax with original to follow the next Business Day) a Trust Receipt relating to the Purchased Mortgage Loans which are not Wet Ink Mortgage Loans (with a Mortgage Loan Schedule and exception report attached thereto) to the effect that with respect to such Purchased Mortgage Loans, (i) all of the documents in paragraphs (a), (c), (e) and, to the extent provided, (b), (d), (f), (g), (h) and (i) of the definition of "Mortgage File" are in its possession; (ii) such documents have been reviewed by it and appear regular on their face and relate to such Mortgage Loan; (iii) based on its examination and only as to the foregoing documents, the information set forth in the Mortgage Loan Schedule respecting such Mortgage Loan accurately reflects the information contained in the documents in the Mortgage File as to (A) the name of the mortgagor, (B) the address of the Mortgaged Property, (C) the original interest rate on the Mortgage Note, (D) the original principal amount of the Mortgage Note, and (E) the maturity date of the Mortgage Note; (iv) the Mortgage Note and the Mortgage each bears an original signature or signatures purporting to be the signature or signatures of the person or persons named as the maker and mortgagor or grantor or, in the case of certified copies of the Mortgage, that such copies bear a reproduction of such signature or signatures; (v) the original principal amount of the indebtedness secured by the Mortgage is identical to the original principal amount of the Mortgage Note; (vi) if the Mortgage Note does not name "Seller" as the holder or payee, the Mortgage Note bears original endorsements that complete the chain of ownership from the original holder or payee to the last endorsee (the "Last Endorsee"); ------------- (vii) if the Mortgage does not name "Seller" as the mortgagee or beneficiary, the original of the Assignment of Mortgage from the named mortgagee or beneficiary bears the original signature purporting to be the signature of the named mortgagee or beneficiary (and any other necessary party including subsequent assignors) or in the case of copies certified by the Seller, that such copies bear a reproduction of such signature or signatures and that the Assignment of Mortgage and any intervening assignments of mortgage complete the chain of title from the originator to the Last Endorsee; and (viii) each Mortgage Note in its possession has been endorsed as provided in the definition of "Mortgage File"; and (ix) each Assignment of Mortgage has been executed as provided in the definition of "Mortgage File". With respect to each Purchased Mortgage Loan which is a Wet Ink Mortgage Loan, the Custodian shall deliver a Trust Receipt to Buyer with respect thereto (meeting the above requirements) no later than the second Business Day following receipt by the Custodian of the related Mortgage File. The Custodian shall notify Buyer in writing in the event that the Custodian does not receive a Mortgage File relating to a Wet Ink Mortgage Loan within five Business Days from the related Purchase Date. Notwithstanding the foregoing, the Custodian shall not be responsible for ensuring that the Mortgage Loan Schedule attached to any Trust Receipt in the possession of a Registered 5 Holder as a result of a substitution pursuant to Section 6 hereof is the most current Mortgage Loan Schedule. Each Registered Holder may request the Custodian to provide such Registered Holder with a copy of the current Mortgage Loan Schedule with respect to a related Trust Receipt. The Seller shall be solely responsible for providing each and every document required for each Mortgage File to the Custodian in a timely manner and for completing or correcting any missing, incomplete or inconsistent documents, and the Custodian shall not be responsible or liable for taking any such action, causing the Seller or any other Person or entity to do so or notifying any Person (other than Buyer to the extent specifically required in this Agreement) that any such action has or has not been taken. The Custodian makes no representations as to and shall not be responsible to verify (i) the validity, legality, enforceability, sufficiency, due authorization, recordability, or genuineness of any document in any Mortgage File or any of the Purchased Mortgage Loans identified on the Mortgage Loan Schedule or (ii) the collectability, insurability, effectiveness or suitability of any such Mortgage Loan. Section 5. Obligations of the Custodian; Certain Representations and --------------------------------------------------------- Warranties. ---------- (a) With respect to the Mortgage Files delivered to the Custodian or which come into the possession of the Custodian, the Custodian is, following the related transfer pursuant to Section 2(b) above, the custodian for the Registered Holder, exclusively. The Custodian shall, following the related transfer pursuant to Section 2(b) above, hold all documents received by it for the exclusive use and benefit of the related Registered Holder, and shall make disposition thereof only in accordance with this Agreement and the instructions furnished by such Registered Holder. The Custodian shall segregate and maintain continuous custody of the Mortgage Files in secure and fire-resistant facilities in accordance with customary standards for such custody. To the extent that the Custodian is unable to locate or produce any document contained in the Mortgage File as required under this Agreement, Custodian shall, upon the request of the Registered Holder of the related Purchased Mortgage Loan, promptly exercise its best efforts to locate or replace, at its own expense, such documents (or in the case of a Mortgage Note, deliver a Lost Note Affidavit in the form of Exhibit 10 attached hereto); provided, that (i) Custodian previously delivered to such Registered Holder a Trust Receipt with respect to such document; (ii) such document is not outstanding pursuant to a Request for Release; and (iii) such document is still subject to this Agreement. (b) The Custodian shall promptly notify the Registered Holder(s) if (i) Seller fails to pay any amount due to the Custodian under this Agreement; (ii) the Custodian has actual knowledge that any mortgage, pledge, lien, security interest or other charge or encumbrance has been placed on the Mortgage Files other than in the ordinary course of business; or (iii) the representation, warranty and covenant contained in Section 5(c) below were to become untrue or incorrect at any time during the term of this Agreement. (c) The Custodian hereby represents, warrants and covenants to the Buyer or Seller that, as of the date hereof, it is not controlled by, under common control with or otherwise affiliated with or related to Seller or Buyer. 6 (d) The Custodian, the Buyer and the Seller each hereby represents and warrants to each other party that this Agreement has been duly authorized, executed and delivered by such party and constitutes the legal, valid and binding obligation of such party enforceable in accordance with its terms. Section 6. Substitution. ------------ (a) Within 5 Business Days of the Custodian's receipt of a Request for Release of Documents and Receipt in the form of Exhibit 2 attached hereto, the Custodian will transfer, or cause to be transferred, the Purchased Mortgage Loans specified in such Request to the Seller or its designee in exchange for the simultaneous transfer by the Seller to the Custodian of Mortgage Loans ("Substituted Collateral"). One Business Day prior to the date of substitution, ---------------------- Seller must deliver or cause to be delivered to Custodian, the Mortgage Files for the Substituted Collateral together with a Custodial Delivery and Mortgage Loan Schedule. It is expressly understood and agreed that the Custodian shall have no duty to perform any valuation of collateral and shall have no responsibility to ascertain the adequacy of any Substituted Collateral. (b) The Custodian shall deliver to the related Registered Holder (via fax with the original to follow the next Business Day), no later than 2 p.m. (New York City time) one (1) Business Day after such substitution by the Seller, (i) a Trust Receipt and Mortgage Loan Schedule that reflects the applicable Purchased Mortgage Loans; provided that in the event the Custodian has not received the items required to be delivered pursuant to Section 6(a) above prior to 9:30 a.m. (California time) on the date of substitution or the number delivered is, in the reasonable judgment of the Custodian, excessive, then the Custodian shall deliver such Trust Receipt and Mortgage Loan Schedule within two (2) Business Days after the date of substitution. Upon receipt from the Custodian, Buyer shall cancel and return the old Trust Receipt to the Custodian the next Business Day. In issuing such Mortgage Loan Schedule and Trust Receipt, the Custodian shall employ the same procedures as set forth in Section 4 in reviewing the Mortgage Files. Section 7. Additional Collateral. --------------------- (a) The Seller may, from time to time, deliver to the Custodian, additional Mortgage Loans (the "Additional Collateral") as an addition to the --------------------- Purchased Mortgage Loans already held by the Custodian with respect to a Transaction. In such event, the Seller shall deliver to the Custodian the Mortgage Files for the Additional Collateral together with a Custodial Delivery and Mortgage Loan Schedule, with a copy to the Registered Holder(s) and, if Buyer is not the applicable Registered Holder at such time, the Buyer, stating that the Additional Collateral is being delivered with respect to an identified Transaction. It is expressly understood and agreed that the Custodian shall have no duty to perform any valuation of collateral and shall have no responsibility to ascertain the adequacy of any Additional Collateral. (b) The Custodian shall deliver to the related Registered Holder (via fax with the original to follow the next Business Day) no later than 1 p.m. (New York City time) one (1) Business Day after receipt of such Additional 7 Collateral from the Seller, a Trust Receipt and Mortgage Loan Schedule and exception report that reflects the delivery of the Additional Collateral; provided that, in the event that the Custodian does not receive the items required to be delivered pursuant to Section 7(a) above by no later than 9:30 a.m. (California time) on the date of delivery, then the Custodian shall deliver such a Trust Receipt and Mortgage Loan Schedule within two (2) Business Days after the date of delivery. In issuing such Mortgage Loan Schedule and Trust Receipt, the Custodian shall employ the same procedures as set forth in Section 4 in reviewing the Mortgage Files. Section 8. Future Defects. -------------- During the term of this Agreement, if the Custodian discovers any defect with respect to the Mortgage Files, the Custodian shall give written specification of such defect to the Seller, the Registered Holder(s) and, if Buyer is not a Registered Holder, Buyer. For purposes of this Section, "defect" shall mean a failure of a document to correspond to the information set forth in the applicable Mortgage Loan Schedule or the absence of a Mortgage File or any other document required pursuant to this Agreement. The Seller shall be solely responsible for completing or correcting any missing, incomplete or inconsistent documents, and the Custodian shall not be responsible or liable for taking any such action, causing the Seller or any other person or entity to do so or notifying any Person that any such action has or has not been taken. Section 9. Release for Servicing. --------------------- (a) From time to time and as appropriate for the foreclosure or servicing of any of the Purchased Mortgage Loans, the Custodian is hereby authorized, upon receipt of a Request for Release of Documents and Receipt in the form of Exhibit 2 attached hereto ("Request for Release"), with a copy to ------------------- the applicable Registered Holder and, if Buyer is not the applicable Registered Holder at such time, Buyer, to release or cause to be released to the Seller or the Seller's Authorized Representative the related Mortgage File or the documents of the related Mortgage File set forth in such Request for Release; provided, that any document released to Seller or Seller's Authorized Representative pursuant to a Request for Release shall be returned to Custodian no later than thirty (30) days from the date on such Request for Release. (b) All Mortgage Files or documents of Mortgage Files released by the Custodian to the Seller or, at the Seller's written direction, the Seller's Authorized Representative pursuant to this Section 9 shall be held by the Seller or the Seller's Authorized Representative, as applicable, in trust for the benefit of the related Registered Holder. The Seller or the Seller's Authorized Representative, as applicable, shall return to the Custodian, the Mortgage File or other such documents of Mortgage Files when the need therefor in connection with such foreclosure or servicing no longer exists (but in any event no later than thirty (30) days from the date on such Request for Release), unless the Mortgage Loan shall be liquidated, in which case, the Seller or, if the Mortgage File or documents were released to the Seller's Authorized Representative, the Seller's Authorized Representative shall deliver to Custodian an additional Request for Release that has been acknowledged and agreed by Buyer, with a copy to the Registered Holder, certifying such 8 liquidation. Upon receipt of the related Mortgage File or other such documents from the Seller, Custodian shall return the related Request for Release to Seller, with a copy to Buyer and the related Registered Holder, acknowledging receipt of such Mortgage File or other such documents. Section 10. Limitation on Release. --------------------- The foregoing Section 9 shall be operative only to the extent that at any time the Seller or the Seller's Authorized Representative shall not have requested to have released to the Seller or the Seller's Authorized Representative in total active Mortgage Files or documents (including those requested) pertaining to five (5) Mortgage Loans at the time being held by the Custodian under this Agreement. The Mortgage Note and/or Assignment of Mortgage or any additional Mortgage Files or documents requested to be released by the Seller or the Seller's Authorized Representative may be released only upon the written acknowledgment of the Request for Release by the Registered Holder(s). The limitations of this paragraph shall not apply to the release of Mortgage Files to the Seller or, at Seller's written direction, the Seller's Authorized Representative under Section 11 below. Section 11. Release for Payment. ------------------- Upon the payment in full of any Mortgage Loan, and upon receipt by the Custodian of a Request for Release certifying that such payment in full has been received, (with a copy to the applicable Registered Holder and, if Buyer is not the applicable Registered Holder at such time, Buyer), the Custodian shall promptly release the related Mortgage File to the Seller or, at Seller's written direction, the Seller's subservicer. After such release the Custodian shall amend the Mortgage Loan Schedule attached to the related Trust Receipt to reflect the release of the applicable Mortgage Loan and shall deliver to the related Registered Holder such amended Mortgage Loan Schedule. Buyer's lien on any such Mortgage Loans shall not be deemed to be released until Buyer receives the proportionate amount of the Repurchase Price relating to such Mortgage Loans from Seller in accordance with the Repurchase Agreement. Section 12. Fees of Custodian. ----------------- The Custodian shall charge such fees for its services under this Agreement as are set forth in a separate agreement between the Custodian and the Seller, the payment of which fees, together with the Custodian's expenses in connection herewith, shall be solely the obligation of the Seller. Section 13. Removal of Custodian With Respect to Some or All of the Purchased ----------------------------------------------------------------- Mortgage Loans. -------------- Buyer may (i) require the Custodian to complete the endorsements on the Mortgage Notes in the name of the applicable Registered Holder and to complete the Assignments of Mortgage in the name of the applicable Registered Holder and/or (ii) remove and discharge the Custodian from the performance of its duties under this Agreement with respect to some or all of the Mortgage Loans by 60 days' written notice from Buyer to the Custodian and Seller. In the event that Buyer removes the Custodian from the performance of its duties 9 under this Agreement with respect to all of the Mortgage Loans, Buyer may, in its sole discretion, either appoint a successor Custodian to act on behalf of Buyer by written instrument, or terminate this Agreement. In the event of any such new appointment, the Custodian shall promptly transfer to the successor Custodian or the applicable Registered Holder, as directed by Buyer, the applicable Mortgage Loan documents being administered under this Agreement. In the event of any such appointment, Buyer shall be responsible for the fees of the successor Custodian and all reasonable out-of-pocket expenses in connection with such transfer. In the event of termination of this Agreement, the Custodian shall follow the reasonable instructions of the Registered Holder(s) with respect to the disposition of the respective Mortgage Loan documents. Concurrently with the transfer and release of all of the Mortgage Files by the Custodian, the Registered Holder(s) shall submit the related Trust Receipts to the Custodian for cancellation. Notwithstanding the foregoing, in the event that Buyer terminates this Agreement with respect to some, but not all, of the Mortgage Loans, this Agreement shall remain in full force and effect with respect to any Purchased Mortgage Loans for which this Agreement is not terminated hereunder. In addition, Buyer and Custodian may, at the sole option of Buyer, enter into a separate custodial agreement which shall be mutually acceptable to the parties with respect to any or all of the Mortgage Loans with respect to which this Agreement is terminated. Section 14. Examination and Copies of Mortgage Files. ---------------------------------------- (a) Upon the written request by a Registered Holder or Buyer, such Registered Holder or Buyer, as applicable, and its respective agents, accountants, attorneys, auditors and prospective purchasers will be permitted, upon three Business Days' prior notice, during normal business hours to examine the Mortgage Files and any other documents, records and papers in the possession of or under the control of the Custodian relating to any or all of the Purchased Mortgage Loans. The Seller shall be responsible for any expenses in connection with such examinations. (b) Upon the written request of the Buyer or a Registered Holder, the Custodian shall provide the Seller, the Buyer or such Registered Holder, as the case may be, at such party's expense, with copies of the Mortgage Notes, Mortgages, Assignment of Mortgages and other documents relating to one or more of the Mortgage Loans. Section 15. Insurance of Custodian. ---------------------- At its own expense, the Custodian shall maintain at all times during the existence of this Agreement and keep in full force and effect a fidelity bond and document hazard insurance. All such insurance shall be in amounts, with standard coverage and subject to standard deductibles, all as is customary for insurance typically maintained by institutions which act as custodian. The minimum coverage under any such bond and insurance policies shall be at least equal to the corresponding amounts required by FNMA in the FNMA Mortgaged-Backed Securities Selling Guide and the FNMA Servicing Guide or by FHLMC in the FHLMC Seller's & Servicer's Guide. A certificate of an Authorized Representative of the Custodian shall be furnished 10 to the Seller and the Registered Holder(s), upon request, stating that such insurance is in full force and effect. Section 16. Covenants of Seller. ------------------- Seller covenants to Buyer as of the date that any Mortgage File documents are released to the Seller or the Seller's subservicer pursuant to a Request for Release that: (a) if the Request for Release has been submitted for the release of a Purchased Mortgage Loan that has been paid in full, all amounts received in connection with the payment in full of the Purchased Mortgage Loan have been credited to the Buyer as provided in the Repurchase Agreement; (b) if item No. 1 has been checked on the Request for Release, the Repurchase Price for the applicable Purchased Mortgage Loan has been credited to the Buyer as provided in the Repurchase Agreement; (c) if item No. 2 has been checked on the Request for Release, a Custodial Delivery has been delivered simultaneously therewith listing the Purchased Mortgage Loan to be delivered in lieu of the Substituted Collateral; and (d) if item No. 3 has been checked on the Request for Release, all proceeds of foreclosure, insurance, condemnation or other liquidation have been finally received and credited to the Buyer pursuant to the Repurchase Agreement. Section 17. Periodic Statements. ------------------- Within ten (10) days of each anniversary of the date of this Agreement, or upon the reasonable request of the Buyer, the Seller or a Registered Holder at any other time, the Custodian shall provide to the Buyer, the Seller or such Registered Holder, as the case may be, a list of all the Purchased Mortgage Loans for which the Custodian holds a Mortgage File. Such list may be in the form of a copy of a Mortgage Loan Schedule, if applicable, with manual deletions to specifically denote any Purchased Mortgage Loans paid off, repurchased, substituted or added since the date of this Agreement. Section 18. Governing Law; Counterparts. --------------------------- This Agreement shall be governed by the internal laws of the State of New York, without giving effect to the conflict of laws principles thereof. For the purpose of facilitating the execution of this Agreement as herein provided and for other purposes, this Agreement may be executed simultaneously in any number of counterparts, each of which counterparts shall be deemed to be an original, and such counterparts shall constitute and be one and the same instrument. 11 Section 19. No Adverse Interest of Custodian. -------------------------------- By execution of this Agreement, the Custodian represents and warrants that it currently holds, and during the existence of this Agreement shall hold, no adverse interest, by way of security or otherwise, in any Purchased Mortgage Loan, and hereby waives and releases any such interest which it may have in any Purchased Mortgage Loan as of the date hereof. The Purchased Mortgage Loans shall not be subject to any security interest, lien or right of set-off by Custodian or any third party claiming through Custodian (other than in the ordinary course of business), and Custodian shall not pledge, encumber, hypothecate, transfer, dispose of, or otherwise grant any third party interest in, the Purchased Mortgage Loans. Section 20. Custodian Representations. ------------------------- Custodian (and any successor custodian as of the appointment of such custodian) hereby represents and warrants as of the date hereof and as of each date it delivers an executed Trust Receipt that: (a) it is duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has all licenses necessary to carry on its business as it is now being conducted; (b) it is qualified to act as a custodian; (c) it is not an Affiliate of Seller or Buyer and covenants and agrees with Buyer and Seller that prior to any such affiliation in the future, it shall notify Buyer and Seller; Section 21. Termination by Custodian. ------------------------ Custodian may terminate its obligations hereunder upon 30 days' prior written notice to Buyer, the Registered Holder(s) and Seller. Such resignation shall take effect upon (i) the appointment of a successor custodian acceptable to Buyer within such 30 day period; and (ii) delivery of all Mortgage Loan Files to the successor custodian, and if no successor has been appointed within such 30 day period, the Custodian may petition a court of competent jurisdiction to appoint a successor custodian. Upon such termination and appointment of successor Custodian and receipt of all outstanding Trust Receipts, the Custodian shall (i) promptly transfer to the successor Custodian, as directed in writing by the Registered Holder(s), all Mortgage Files being administered under this Agreement, and (ii) if the endorsements on the Mortgage Notes and the Assignments of Mortgage have been completed in the name of the Custodian, assign the Mortgages and endorse without recourse the Mortgage Notes to the successor Custodian or as otherwise directed in writing by the Registered Holder(s). Section 22. Transfer of Purchased Mortgage Loans Upon Termination of a ---------------------------------------------------------- Transaction. ----------- If the Custodian is furnished with written notice in the form of Exhibit 8 attached hereto (i) from the Buyer and the Seller that a Transaction 12 with respect to the Repurchase Agreement has been terminated, or (ii) from the Buyer that an Event of Default under the Repurchase Agreement has occurred as to any or all of the Purchased Mortgage Loans, the Custodian shall release to such Persons as designated in such notice, the Mortgage Files relating to the Purchased Mortgage Loans that are no longer subject to the Transaction, and shall deliver to the related Registered Holder an amended Trust Receipt with a Mortgage Loan Schedule attached thereto, listing all of the Purchased Mortgage Loans still subject to a Transaction. Section 23. Notices. ------- All demands, notices and communications hereunder (including, without limitation, Trust Receipts) shall be in writing and shall be deemed to have been duly given if mailed, by registered or certified mail, return receipt requested, or, if by other means, including telex or other telecommunication device capable of transmitting or creating a written record directly to the office of the recipient, when received by the recipient party at the address shown on the first page hereof, or at such other addresses as may hereafter be furnished to the other parties by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee (as evidenced, in the case of registered or certified mail, by the date noted on the return receipt, or in the case of telex or other telecommunication device, the date noted on the confirmation of such transmission). Section 24. Successors and Assigns. ---------------------- This Agreement shall inure to the benefit of the successors and assigns of the parties hereto. Buyer may assign its rights hereunder as provided in the Repurchase Agreement. Section 25. Concerning the Custodian. ------------------------ Custodian shall have no duties or responsibilities except those that are specifically set forth herein. Custodian shall have no responsibility nor duty with respect to any Mortgage Loan Files while not in its possession. If Custodian requests instructions from the Registered Holder(s) with respect to any act, action or failure to act in connection with this Agreement, Custodian shall be entitled to refrain from taking such action and continue to refrain from acting unless and until Custodian shall have received written instructions from the related Registered Holder with respect to a Mortgage File without incurring any liability therefor to Buyer, Seller or any other Person. Custodian shall not be liable for any action or omission to act hereunder except for its own negligence or lack of good faith or willful misconduct. In no event shall Custodian have any responsibility to ascertain or take action except as expressly provided herein. Without limiting the generality of the foregoing, Custodian may rely upon and shall be protected in acting in good faith upon any notice or other communication received by it and which it reasonably believes to be genuine and duly authorized with respect to all matters pertaining to this Agreement and its duties hereunder. 13 Section 26. Indemnification. ---------------- Seller agrees to reimburse, indemnify and hold harmless the Custodian and its directors, officers, employees, or agents from and against any and all liability, loss, cost and expense, including reasonable fees and expenses of counsel arising from or connected with Custodian's execution and performance of this Agreement, including but not limited to the claims of any third parties, including Buyer, except in the case of loss, liability or expense resulting from negligence or willful misconduct on the part of Custodian. Such indemnification shall survive the termination of this Agreement and the resignation or removal of the Custodian hereunder. Section 27. Obligations of the Custodian With Respect to the Trust Receipts. --------------------------------------------------------------- (a) The Custodian shall keep a register in which the Custodian shall provide for the registration of transfers of Trust Receipts as provided herein and in which it shall record the name and address of the Person to whom such Trust Receipt is issued (the "Registered Holder"). Buyer shall be the ----------------- initial Registered Holder for all Purchased Mortgage Loans. Each Trust Receipt, upon initial issuance or reissuance, shall be dated the date of such issuance or reissuance and shall evidence the receipt and possession by the Custodian on behalf of the Registered Holder of the Trust Receipt of the Mortgage Files and the Registered Holder's right to possess those Mortgage Files. The Custodian shall treat the person or entity in whose name the Trust Receipt is registered as the person or entity entitled to possession of the Mortgage Files evidenced by such Trust Receipt for all purposes whatsoever, subject to the terms of this Agreement, and the Custodian shall not be affected by notice of any facts to the contrary. No Trust Receipt shall be valid for any purpose unless substantially in the form set forth in Exhibit 1 to this Agreement and executed by manual signature of an Authorized Representative of the Custodian. Such signature upon any Trust Receipt shall be conclusive evidence, and the only evidence, that such Trust Receipt has been duly delivered under this Agreement. Trust Receipts bearing the manual signatures of individuals who were, at the time when such signatures were affixed, Authorized Representatives of the Custodian shall bind the Custodian, notwithstanding that such individuals have ceased to be so authorized prior to the delivery of those Trust Receipts. Each Trust Receipt shall have attached thereto a Mortgage Loan Schedule with an exception report with respect to the applicable Purchased Mortgage Loans. Any transferee or assignee of the Trust Receipt shall succeed to all the rights of the transferring Registered Holder under this Agreement with respect to such Trust Receipt and the related Purchased Mortgage Loans upon notice to the Custodian and delivery to the Custodian of the appropriate evidence of such transfer and assignment. (b) The Registered Holder may transfer its interest in the Mortgage Files covered by any Trust Receipt by delivering to the transferee (the "Transferee") such Trust Receipt, together with an appropriate notice to the - ----------- Custodian in the form of Exhibit 8 hereto (the "Notice to the Custodian"). ----------------------- Within five (5) Business Days of receipt of the Notice to the Custodian and the Trust Receipt from the Transferee, the Custodian shall deliver, in accordance with the written instructions of the Transferee, a Trust Receipt issued in the name of the Transferee and to the place indicated in any such written direction from the Transferee. Upon receipt of the Notice to the Custodian from the 14 Registered Holder, the Custodian shall change its records to reflect that such Transferee is the Registered Holder of the Mortgage Files. (c) In the event that (i) any mutilated Trust Receipt is surrendered to the Custodian, or the Custodian receives evidence to its satisfaction of the destruction, loss or theft of any Trust Receipt and (ii) there is delivered to the Custodian such security or indemnity as may be required by it to save it harmless, then, in the absence of notice to the Custodian that such Trust Receipt has been acquired by a bona fide purchaser, the Custodian shall execute and deliver a new Trust Receipt to such Registered Holder in exchange for or in lieu of any such mutilated, lost or stolen Trust Receipt. (d) Simultaneously with the relinquishment of a Trust Receipt to the Custodian by the Registered Holder thereof and the delivery by the Custodian of the related Mortgage Files to the Seller or its designee pursuant to Section 3 above or to such Registered Holder or a designee of the Registered Holder, the Trust Receipt shall be canceled and the related Mortgage Files will no longer be subject to this Agreement. Section 28. Authorized Representatives. -------------------------- Each individual designated as an authorized representative of the Custodian, the Seller and the Buyer (each, an "Authorized Representative"), is ------------------------- authorized to give and receive notices, requests and instructions and to deliver certificates and documents in connection with this Agreement on behalf of the Custodian, the Seller and the Buyer, respectively, and the specimen signature for each such Authorized Representative of the Custodian, the Seller and the Buyer initially authorized hereunder is set forth on Exhibits 3, 4 and 5, respectively. From time to time, Custodian, the Seller and the Buyer may, by delivering to the others a revised exhibit, change the information previously given pursuant to this Section, but each of the parties hereto shall be entitled to rely conclusively on the then current exhibit until receipt of a superseding exhibit. The Seller shall deliver or cause to be delivered to Custodian an Authorized Representatives exhibit for each subservicer designated by the Seller in connection with Sections 9, 10 and 11 of this Agreement; provided, that the Custodian shall not recognize any request from Seller's subservicer unless and until the Seller has given the Custodian written notice identifying such subservicer and such Authorized Representatives exhibit is received by the Custodian. The Custodian shall be entitled to rely conclusively upon (i) written notice from the Seller identifying a subservicer authorized to give instructions under Sections 9, 10 and 11 of this Agreement until receipt of written notice from the Seller revoking such authority and (ii) the most recent Authorized Representatives exhibit delivered to it by a subservicer of the Seller until receipt of a superseding exhibit. If the Custodian shall at any time receive conflicting instructions from the Seller and a subservicer of the Seller, the Custodian shall be entitled to rely on the instructions of the Seller. Section 29. Reproduction of Documents. ------------------------- This Agreement and all documents relating thereto, including, without limitation, (i) consents, waivers and modifications which may hereafter be executed, and (ii) certificates and other information previously or hereafter furnished, may be reproduced by any photographic, photostatic, microfilm, 15 microcard, miniature photographic or other similar process. The parties agree that any such reproduction shall be admissible in evidence as the original itself in any judicial or administrative proceeding, whether or not the original is in existence and whether or not such reproduction was made by a party in the regular course of business, and that any enlargement, facsimile or further reproduction of such reproduction shall likewise be admissible in evidence. Section 30. Entire Agreement. ---------------- No amendment or waiver of any provision of this Agreement nor consent to any departure herefrom shall in any event be effective unless the same shall be in writing and signed by all the parties hereto, and then such amendment, waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. This Agreement, together with the Exhibits, Annexes and other writings referred to herein or delivered pursuant hereto, constitute the entire agreement and understanding of the parties with respect to the matters and transactions contemplated by this Agreement and supersede any prior agreement and understandings with respect to those matters and transactions. Section 31. Transmission of Custodial Files. ------------------------------- Written instructions as to the method of shipment and shipper(s) that the Custodian is directed to utilize in connection with the transmission of Mortgage Files in the performance of Custodian's duties hereunder shall be delivered to the Custodian by Seller prior to any shipment of any Mortgage Files hereunder. In the event the Custodian does not receive written instructions as provided for in the preceding sentence, the Custodian is hereby authorized and shall be indemnified as provided herein by Seller to utilize a national recognized securities courier service provided that the Custodian employs prudent care in arranging for such courier service in accordance with industry standards. Seller will arrange for the provision of such services at its sole cost and expense (or, at the Custodian's option, reimburse the Custodian for all costs and expenses incurred by the Custodian consistent with such instructions) and will maintain such insurance against such loss or damage to the Mortgage Files during shipment as the Seller deems appropriate. 16 IN WITNESS WHEREOF, the Buyer, the Seller and the Custodian have caused their names to be duly signed hereto by their respective officers thereunto duly authorized, all as of the date first above written. LEHMAN COMMERCIAL PAPER INC., Buyer By: /s/ [SIGNATURE ILLEGIBLE] --------------------------------- Name: Authorized Signatory --------------------------------- Title: --------------------------------- PAN AMERICAN BANK, FSB, Seller By: /s/ LAWRENCE J. GRILL --------------------------------- Name: Lawrence J. Grill --------------------------------- Title: President --------------------------------- BANKERS TRUST COMPANY OF CALIFORNIA, N.A., Custodian By: /s/ MELANIE ANBARCI --------------------------------- Name: Melanie Anbarci --------------------------------- Title: Assistant Secretary --------------------------------- 17 ANNEX A ADDITIONAL DEFINITIONS In addition to the Definitions set forth in Section 1, the following words and phrases, unless the context otherwise requires, shall have the following meaning: Mortgage File: With respect to each Mortgage Loan, the following ------------- original documents constituting an original mortgage file: (a) the original Mortgage Note bearing all intervening endorsements, endorsed "Pay to the order of _______, without recourse" and signed in the name of the last endorsee (the "Last Endorsee") by an authorized officer (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[the Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[the Last Endorsee], formerly known as [previous name]"; (b) the original of any guarantee executed in connection with the Mortgage Note (if any); (c) the original Mortgage with evidence of recording thereon or copies certified by Seller to have been sent for recording; (d) the originals of all assumption, modification, consolidation or extension agreements, with evidence of recording thereon or copies certified by Seller to have been sent for recording; (e) the original Assignment of Mortgage in blank for each Mortgage Loan, in form and substance acceptable for recording and signed in the name of the Last Endorsee (in the event that the Mortgage Loan was acquired by the Last Endorsee in a merger, the signature must be in the following form: "[the Last Endorsee], successor by merger to [name of predecessor]"; in the event that the Mortgage Loan was acquired or originated while doing business under another name, the signature must be in the following form: "[the Last Endorsee], formerly known as [previous name]"; (f) the originals of all intervening assignments of mortgage with evidence of recording thereon or copies certified by Seller to be true and correct and to have been sent for recording; (g) the original of any security agreement, chattel mortgage or equivalent document executed in connection with the Mortgage (if any); 1 (h) the original policy of title insurance or a true copy thereof or if such policy has not yet been delivered by the insurer, the commitment or binder to issue the same; and (i) the original power of attorney, if any, or a copy thereof certified by an authorized officer of the Seller, for any document described above. From time to time, the Seller shall forward to the Custodian additional original documents or additional documents evidencing an assumption, modification, consolidation or extension of a Mortgage Loan. With respect to any documents which have been delivered or are being delivered to recording offices for recording and have not been returned to the Seller in time to permit their delivery hereunder at the time of such transfer, in lieu of delivering such original documents, Seller shall deliver to Custodian a true copy thereof with a certification by the Seller on the face of such copy substantially as follows: "I [name and title of signatory] of Seller do hereby certify that this is a true, correct and complete copy of the original, which has been transmitted for recordation." The Seller shall deliver such original documents to the Custodian promptly after they are received. In the event that item (h) is missing from the Mortgage File with respect to a Custodial Delivery, notwithstanding such missing item, such Mortgage File shall be deemed complete provided that such item is delivered to the Custodian within 5 Business Days of such Custodial Delivery. 2 EXHIBIT 1 FORM OF TRUST RECEIPT (date) [To be addressed to the Registered Holder] Re: The Custodial Agreement, dated as of November 6, 1997 (the "Custodial Agreement"), among Lehman Commercial Paper Inc. ("Buyer"), Pan American Bank, FSB ("Seller"), and Bankers Trust Company of California, N.A.("Custodian") Ladies and Gentlemen: The Custodian hereby acknowledges that the above named person has been identified to it as the Registered Holder of this Trust Receipt and has the rights of a "Registered Holder" under the Custodial Agreement with respect to the Purchased Mortgage Loans identified in the Mortgage Loan Schedule attached hereto. Pursuant to the Custodial Agreement, the Custodian shall hold the Purchased Mortgage Loans, identified in the Mortgage Loan Schedule attached hereto (other than any Mortgage Loan listed on the attachment hereto which has been paid in full and released in accordance with the provisions of the Custodial Agreement) for the exclusive benefit of the above addressee. In accordance with the provisions of Section 4 of the Custodial Agreement, the undersigned, as the Custodian, hereby certifies that as to each Purchased Mortgage Loan identified in the Mortgage Loan Schedule attached hereto (other than any Mortgage Loan paid in full or any Mortgage Loan listed on the attachment hereto) it has received the Mortgage Files and, it has reviewed the Mortgage Files and has determined that, except as noted in the exception report attached hereto (i) all documents in paragraphs (a), (c), (e), and, to the extent provided in the Mortgage Files, (b), (d), (f), (g), (h and (i) of the definition of "Mortgage File" are in its possession; (ii) such documents have been reviewed by it and appear regular on their face and relate to such Mortgage Loan; (iii) based on its examination and only as to the foregoing documents, the information set forth in the Mortgage Loan Schedule respecting such Mortgage Loan accurately reflects the information contained in the documents in the Mortgage File as to (A) the name of the mortgagor, (B) the address of the Mortgaged Property, (C) the original interest rate on the Mortgage Note, (D) the original principal amount of the Mortgage Note, and (E) the maturity date of the Mortgage Note; (iv) the Mortgage Note and the Mortgage each bears an original signature or signatures purporting to be the signature or signatures of the person or persons named as the maker and mortgagor or grantor or, in the case of certified copies of the Mortgage, that such copies bear a reproduction of such signature or signatures; (v) the original principal amount of the indebtedness secured by the Mortgage is identical to the original principal amount of the Mortgage Note; (vi) if the Mortgage Note does not name "Seller" as the holder or payee, the Mortgage Note bears original endorsements that complete the chain of ownership from the original holder or payee to the Last Endorsee; (vii) if the Mortgage does not name "Seller" as the 1 mortgagee or beneficiary, the original of the Assignment of Mortgage from the named mortgagee or beneficiary bears the original signature purporting to be the signature of the named mortgagee or beneficiary (and any other necessary party including subsequent assignors) or in the case of copies certified by the Seller, that such copies bear a reproduction of such signature or signatures and that the Assignment of Mortgage and any intervening assignments of mortgage complete the chain of title from the originator to the Last Endorsee; and (viii) each Mortgage Note in its possession has been endorsed as provided in the definition of "Mortgage File"; and (ix) each Assignment of Mortgage has been executed as provided in the definition of "Mortgage File". Notwithstanding the foregoing, the Custodian shall not be responsible for ensuring that the Mortgage Loan Schedule attached hereto in the possession of a Registered Holder as a result of a substitution pursuant to Section 6 of the Custodial Agreement is the most current Mortgage Loan Schedule. The Registered Holder hereof may request the Custodian to provide it with a copy of the current Mortgage Loan Schedule with respect to this Trust Receipt. The Custodian makes no representations as to and shall not be responsible to verify (i) the validity, legality, enforceability, sufficiency, due authorization, recordability, or genuineness of any document in any Mortgage File or any of the Purchased Mortgage Loans identified on the Mortgage Loan Schedule or (ii) the collectability, insurability, effectiveness or suitability of any such Mortgage Loan. Capitalized terms used but not otherwise defined herein shall have the meanings set forth in the above-referenced Custodial Agreement. BANKERS TRUST COMPANY OF CALIFORNIA, N.A., Custodian By: ---------------------------------- Name: ---------------------------------- Title: ---------------------------------- 2 EX-10.70 38 LOAN PURCHASE & SALE AGREEMENT Exhibit 10.70 LOAN PURCHASE AND SALE AGREEMENT This Loan Purchase and Sale Agreement (this "Agreement") by and between AAMES CAPITAL CORPORATION, a California corporation and AAMES FUNDING CORPORATION, a California corporation on the one hand (each, a "Purchaser"), and PAN AMERICAN BANK, F.S.B., a federal savings bank, on the other hand ("Seller"), is made and executed as of April 1, 1997 with reference to the following facts: R E C I T A L S - - - - - - - - A. Seller desires to sell to Purchaser, and Purchaser desires to purchase from Seller, on the terms and subject to the conditions set forth herein, adjustable and fixed rate loans secured by residential real estate ("Loans" and individually a "Loan"). B. From time to time, Seller will deliver to Purchaser a schedule of Loans ("Loan Schedule") to be included in a portfolio of Loans ("Portfolio") for possible sale to Purchaser. C. As part of this Agreement, Seller and Purchaser have entered into a Purchase Price Addendum (a Forward Agreement) (the "Addendum") which is attached hereto and made a part hereof. NOW, THEREFORE, in reference to the aforementioned facts, and in consideration of the covenants and agreements herein set forth, Purchaser and Seller hereby agree as follows: A G R E E M E N T - - - - - - - - - Section 1. Due Diligence Review. (A) On or prior to the purchase date of the Portfolio (the "Closing Date"), Seller shall deliver to Purchaser at 3731 Wilshire Boulevard, 2nd Floor, Los Angeles, CA 90010, Attention: Raymond Callahan, for each Loan in the Portfolio, all of the loan documents with respect to such Loan (collectively, the "Loan File"). Each Loan File shall contain, at a minimum, the following executed original documents in form and substance satisfactory to Purchaser: (1) the promissory note (the "Note") and applicable riders thereto evidencing the borrower's obligation to repay the Loan, endorsed by an authorized representative of Seller as follows: "Pay to the order of Aames Capital Corporation, without recourse", together with any agreements affecting the terms of the Note: (2) Allonge (if applicable): (3) the security instrument (deed of trust or mortgage, including all riders and legal description) (each, a "Mortgage") securing the Loan, properly evidencing recordation in the county in which the Mortgaged Property is located, together with any agreements affecting the Mortgage. When Seller cannot deliver the originals of the recorded Mortgage creating a lien on the related Mortgaged Property because of a delay associated with recording (provided such delay is not caused by Seller), Seller may deliver certified true copies of the Mortgage with an affidavit of recording. Seller shall deliver to Purchaser the original Mortgage within one hundred twenty (120) days after the Closing Date; however where the Seller has not received the original Mortgage from the recorder within the 120 day period, then Seller shall so notify Purchaser and shall deliver the original Mortgage promptly upon receipt of same. If Seller fails to deliver to Purchaser said original Mortgage within such period, Seller shall repurchase the related Loan within ten (10) calendar days after Purchaser's written request therefor at the Repurchase Price (as defined in Section 7 hereof). (4) the assignment of the Mortgage in recordable form (certified copy if the original is being recorded) and any intervening assignments if applicable; (5) all title documents including the original mortgagee policy of title insurance, the preliminary title report, the escrow/closing instructions and the purchase contract (if the Loan is a purchase money loan). Where Seller cannot deliver the original mortgagee policy of title insurance because of a delay not caused by Seller, Seller may deliver a certified true copy of the mortgagee title insurance binder. Seller shall deliver to Purchaser the original mortgagee title insurance policy promptly upon recept of same, but not later than one hundred twenty (120) days after the Closing Date. If Seller fails to deliver to Purchaser said original mortgagee policy of title insurance within such 120-day period, Seller shall repurchase the related Loan within ten (10) calendar days after Purchaser's written request therefor at the Repurchase Price (as defined in Section 7 hereof). (6) hazard insurance documents, a flood determination certificate, flood insurance policy, if applicable, and tax service contract; (7) all disclosures required by all applicable federal, state and local laws including, without limitation the federal Equal Credit Opportunity Act and Regulation B thereunder, the federal Truth in Lending Act and Regulation Z thereunder, the federal Real Estate Settlement Procedures Act of 1974 and Regulation X thereunder and the federal Fair Credit Reporting Act, in each case as amended; (8) the borrower's original application for the Loan, the HUD-1 Settlement statement issued in connection with the Loan, and all of the original documents executed by the borrower in connection with the origination of the Loan; (9) all credit information on the borrower including a credit report dated not earlier than 90 days prior to the date of the Note, verifications of employment and of deposits of the borrower, or alternative evidence of employment, income and assets acceptable to Purchaser; (10) a signed appraisal of the Mortgaged Property setting forth the appraised value of the Mortgaged Property, dated not earlier than 90 days prior to the date of the Note, including a statement of the census tract number; and (11) a survey of the Mortgaged Property where applicable. (B) Within 30 days after the Closing Date (the "Diligence Review Period"), Purchaser shall review each Loan File delivered by Seller to determine that all required documents set forth above have been executed and received, and that such documents relate to the Loans identified on the Loan Schedule and otherwise comply with the requirements of this Agreement. Purchaser shall, within the Diligence Review Period, identify and notify Seller of each Loan which does not meet the terms and conditions of this Agreement (a "Deficient Loan") due to the following: (1) the terms of the Note or the Mortgage differ from the information set forth on the Loan Schedule with respect to such Loan; (2) any required document set forth above constituting a part of a Loan File has not been properly executed or delivered to Purchaser, is unrelated to the Loans identified on the Loan Schedule, is legally insufficient or is otherwise unacceptable to Purchaser; (3) Purchaser determines that the Loan does not conform to the underwriting guidelines of Seller as provided to Purchaser; (4) Purchaser determines upon inspection of the real property collateral for the Loan (the "Mortgaged Property") or review of the Loan File that the Mortgaged Property is unacceptable to Purchaser; (5) as of the Closing Date any required payment of principal or interest for the Loan is thirty (30) days or more past due; or (6) as of the Closing Date, the Loan is one as to which foreclosure proceedings have commenced or for which a notice of default has been recorded by any holder of a mortgage or other lien on the Mortgaged Property, or as to which any legal proceeding concerning Seller is pending, or as to which bankruptcy has been filed by the mortgagor. Seller shall have ten (10) days (the "Cure Period") to correct or cure any deficiency identified by Purchaser. Seller hereby covenants and agrees that if any such deficiency is not corrected or cured, Seller will, within 15 days after Purchaser's notice to Seller of such deficiency either (1) repurchase the Deficient Loan at the Repurchase Price set forth in Section 7 hereto or (2) substitute for any Deficient Loan a different loan or loans (a "Substitute Loan") with the following characteristics: (a) a principal balance equal to or no more than 10% greater than or less than the principal balance of the Deficient Loan, (b) a remaining term to maturity equal to or no more than 12 months later than or 12 months earlier than the Deficient Loan, (c) an interest rate not less than that of the Deficient Loan and if the Deficient Loan is an adjustable rate loan, an identical index, adjustment period, and annual interest rate caps, and a margin, lifetime interest rate cap and lifetime interest rate floor not less than the margin, lifetime interest rate cap and lifetime interest rate floor of the Deficient Loan, (d) a loan-to- value ratio equal to or lower than the Deficient Loan, (e) the same or greater lien priority than the Deficient Loan, (f) the Mortgaged Property is the same or better property type than the Mortgaged Property of the Deficient Loan, (g) the same or better occupancy status as the Deficient Loan, and (h) otherwise having such characteristics so that the representations an warranties of Seller set forth in Section 5 herein would have been correct had such Substitute Loan originally been a Loan. In the case of a Substitute Loan, (i) where the Purchase Price (as defined in Section 2(A) hereof) of the Deficient Loan exceeds the Purchase Price of the Substitute Loan, Seller shall pay the difference between the Purchase Price of the Deficient Loan and the Substitute Loan to Purchaser, and (ii) where the Purchase Price of the Deficient Loan is less than the Purchase Price of the Substitute Loan, Purchaser shall pay the difference between the Purchase Price of the Substitute Loan and the Deficient Loan to Seller. Forty-five (45) days after the Closing Date, Purchaser shall prepare and deliver to Seller a Substitute Loan Balance setting forth the adjustment to the Purchase Price for each Substitute Loan, and the aggregate adjustment to the Purchase Price for the Portfolio netting amounts owed each party by the other. Seller shall review the Substitute Loan Balance within five days and shall promptly notify Purchaser of any discrepancies. Seller and Buyer shall confer until they are in agreement on the aggregate adjustment to the Purchase Price of the Portfolio. If there is an aggregate adjustment to the Purchase Price of the Portfolio, the party that owes the other party money shall pay the owed party by wire transfer of immediately available funds. Section 2. Loan Purchases. (A) Subject to the terms and conditions set forth herein and in the Addendum, Seller shall sell, assign, and transfer to Purchaser, and Purchase shall buy, on the Closing Date, for the Purchase price for the Portfolio set forth in the related bid letter of intent (the "Purchase Price"), all Seller's right, title and interest in and to each Loan and the Loan File with respect to such Loan. (B) It is the intention of Purchaser and Seller that the sale of each Loan hereunder shall be made on a servicing-released basis. Simultaneously with the purchase of each Loan hereunder and in consideration of Purchaser's payment of the Purchase Price, Seller shall transfer all servicing rights and benefits to Purchaser. Seller shall deliver within five (5) days of the Closing Date such notices to the related borrowers concerning the transfer of the servicing of the Loans as may then be required by applicable state and federal law. Seller shall within twenty (20) days of the Closing Date (the "Servicing Transfer Date") deliver to Purchaser documentation sufficient to enable Purchaser or its designated representative to service such Loan in compliance with all rules, orders and regulations of federal and state governments and other duly appointed authorities with jurisdiction over such Loan. Seller shall on or prior to the Servicing Transfer Date take any and all action necessary to transfer to Purchaser all interest of Seller in, and to make Purchaser the loss payee of, each mortgage title insurance policy, hazard insurance policy and each other insurance policy constituting a portion of the Loan File. (C) Nothing contained in this Agreement, or in any document executed in connection herewith, shall be deemed to transfer any of Seller's right, title, and interest in any Deficient Loan to Purchaser. Seller expressly disclaims any intention to sell to Purchaser, and Purchaser expressly disclaims any intention to acquire from Seller, any interest in any Deficient Loan whose deficiencies are not cured prior to the termination of the Diligence Review. Period and the related Loan Documents and servicing rights with respect to such Deficient Loan. Any Loan Documents with respect to any Deficient Loan whose deficiencies are not cured prior to the termination of the Diligence Review Period delivered by Seller to Purchaser shall be held in trust by Purchaser and shall be returned to Seller immediately after the termination of the Diligence Review Period. (D) Purchaser shall not be deemed to have assumed any liability or obligation of Seller except as expressly set forth herein. Section 3. Payment of Purchase Price. On the Closing Date, subject to Seller's satisfaction of the conditions set forth in Section 4 hereof, Purchaser shall pay by wire transfer of immediately available funds the Purchase Price for the Portfolio, as of the applicable cut-off date (the "Cut Off Date"), plus the aggregate accrued but unpaid interest on the Loans at the contractual interest rates for the Loans, as calculated as of the close of business on the last day prior to the Closing Date. Purchaser shall be entitled to all payments of principal and interest on the Loans collected on and after the Closing Date. Any payments received by Seller after the Cut Off Date shall be forwarded to Purchaser by overnight mail within one Business Day of receipt. Section 4. Conditions Precedent to Purchase. Purchaser's obligation to purchase and pay for a Loan is subject to the following conditions: (A) Due Diligence Review. Purchaser completes its due diligence review of -------------------- each Loan File pursuant to Section 1 hereof, and determines in its sole discretion that each Loan complies with the requirements of this Agreement and is not an Deficient Loan. Purchaser will not purchase any Deficient Loan; provided, however, that Purchaser shall promptly deliver notice of its - -------- ------- determination to Seller. (B) Representations and Warranties. All of the representations and ------------------------------ warranties of Seller under this Agreement shall be true as of the Closing Date and shall not be affected or limited in any way as a result of Purchaser's review or verification at any time of any Loan Files in the Portfolio. (C) Other Conditions. All other terms and conditions of this Agreement ---------------- shall have been complied with. Section 5. Seller's Representations, Warranties and Obligations. Each representation, warranty and covenant made by Seller hereunder is for the express benefit of Purchaser (and each investor, if any, which ultimately purchases a Loan from Purchaser). It is understood and agreed that (i) the representations and warranties set forth in this Agreement are being relied upon by Purchaser for its own decision to purchase a Loan and in any subsequent decision of Purchaser to sell, transfer and/or assign the Loan to any investor, (ii) shall survive the sale and delivery of the Loans to Purchaser and subsequent sale, transfer and/or assignment to any investor and (iii) will continue in full force and effect for the remaining life of each Loan purchased hereunder. Upon discovery by either Seller or Purchaser of a breach of any of the representations and warranties of Seller, the party discovering such breach shall give prompt written notice to the other party. A. General Representations. Seller represents and warrants to Purchaser ----------------------- that, as of the Closing Date: 1. Organization. Seller is a savings bank duly organized, validly ------------ existing and in good standing under the laws of the United States and is licensed and qualified to transact business in every jurisdiction where a Mortgaged Property is located and such license and qualification are required. 2. Power and Authority. Seller has the full corporate power and authority ------------------- to execute and deliver this Agreement and to perform in accordance herewith. The execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by Seller and the consummation of the transactions contemplated hereby have been duly and validly authorized and none of the foregoing conflicts with or will conflict with, or results in or will result in, a breach of any term, condition or provision of Seller's articles of incorporation or by-laws or any agreement to which Seller is a party or by which Seller is bound, or constitutes or will constitute a material default or result in an acceleration under any such agreement. This Agreement evidences the valid, binding and enforceable obligation of Seller. All requisite corporate action has been taken by Seller to make this Agreement valid and binding upon Seller in accordance with its terms. 3. No Consent. No consent, approval, authorization or order of any court, ---------- governmental body or any other person or entity is required for the execution and delivery by Seller of this Agreement and the performance of its obligations hereunder including, but not limited to, the sale of the loans to Purchaser. 4. No Litigation. Neither Seller nor any of its properties is subject to ------------- or bound by any pending or, to its knowledge, threatened suit, action, arbitration or legal or administrative or other proceeding which might have a material adverse affect on its ability to perform its obligations under this Agreement or which might have a material adverse effect on Seller's financial condition or business prospects. 5. Compliance with Laws. Seller is in compliance in all material respects -------------------- with all applicable federal, state and local laws and regulations and has all federal, state and local licenses, permits and other authorizations of governmental authorities used or required in the conduct of its business (collectively, "Licenses") except those the absence of which would not have a material adverse impact on the operations of Seller, and Seller has not received any notice that revocation, termination or suspension is being considered with respect to any of its Licenses, nor do any grounds for such revocation, termination or suspension exist. No employee, officer, director or 25% shareholder of Seller (either individually or in their capacity as an employee, officer, director or shareholder of Seller or another entity) and no entity in which any such person has acted as an employee, officer, director or shareholder has been the subject of any action (whether or not successful) for the revocation, termination or suspension of any such License. Seller further covenants to notify Purchaser immediately upon the suspension, revocation, expiration or other termination of any License or of the taking of any action against Seller which could adversely affect the Licenses. 6. No Untrue Information. No untrue statement of material fact about --------------------- Seller, its business or financial condition is contained in this Agreement or in any statement, report or other document furnished or to be furnished by Seller pursuant to this Agreement or in connection with the transactions contemplated hereby and none of the foregoing omits to state a fact necessary to make the statements contained herein or therein in light of the circumstances under which they were made not misleading. 7. No Bulk Transfer, Etc. The transfer, assignment and conveyance of the ---------------------- Loans by Seller pursuant to this Agreement are in the ordinary course of Seller's business and are not subject to the bulk transfer laws or any similar statutory provisions in effect in any applicable jurisdiction. Seller is not transferring the Loans with the intent to hinder, delay or defraud any of its creditors. Seller is solvent and will not be rendered insolvent by the sale of any of the Loans. The purchase price paid by Purchaser constitutes fair consideration and reasonably equivalent value for the Loans. No fraud or illegality on the part of the Seller affecting any Loan or otherwise in connection with any transaction contemplated by the Agreement has occurred. 8. Ability to Perform. Seller does not believe, nor does it have any ------------------ reason or cause to believe, that it cannot perform in all material respects each and every covenant and obligation contained in this Agreement. 9. Fictitious Name. Seller does not do business under a fictitious name --------------- or, if it does so, a fictitious business name or assumed name statement has been filed, recorded and/or published in each jurisdiction in which the Loans were originated in accordance with all applicable laws, rules and regulations. 10. No Accrued Liabilities. There are no accrued liabilities of Seller ---------------------- with respect to the Loans or circumstances under which such accrued liabilities will arise against Seller, or Purchaser as assignee of the Loans, with respect to actions or events occurring on or prior to the Closing Date, or due to actions or omissions of Seller. B. Representations and Warranties with Respect to Each Loan. As of the -------------------------------------------------------- Closing Date, Seller represents and warrants to Purchaser as follows: 1. Payments Current. All payments required to be made up to the Closing ---------------- Date for the Loan under the terms of the Note have been made and credited. No payment required under the Loan is more than 29 days past due; 2. No Outstanding Charges. All taxes, governmental assessments, ---------------------- insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid. Seller has not advanced funds, or induced, solicited or knowingly received any advance of funds by a party other than the borrower, directly or indirectly, for the payment of any amount required under the Loan, except for interest accruing from the date of the Note or date of disbursement of the Loan proceeds, whichever is later, to the day which precedes by one month the due date of the first installment of principal and interest; 3. Original Terms Unmodified. The terms of the Note and the Mortgage ------------------------- have not been impaired, waived, altered or modified in any respect, except by a written instrument a copy of which has been delivered to Purchaser and which has been recorded, if necessary, to protect the interests of Purchaser and the substance of any such waiver, alteration or modification has been approved by the issuer of any mortgagee title incurance policy, to the extent required by the policy. No instrument of release or waiver has been executed in connection with any Loan and no borrower or any guarantor of any Loan has been released, in whole or in part. The borrower named in the Loan was the borrower at the closing of such Loan, and no such borrower has assigned, transferred, pledged or delegated any of his rights or obligations under the Note or the Mortgage; 4. No Defense. The Loan is not subject to any right of rescission, ---------- set-off, counterclaim or defense, including, without limitation, the defense of usury, nor will the operation of any of the terms of the Note or the Mortgage, or the exercise of any right thereunder, render either the Note or the Mortgage unenforceable, in whole or in part, or subject to any right of rescission, set- off, counterclaim or defense, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto; 5. Hazard and Flood Insurance. Pursuant to the terms of the related -------------------------- Mortgage, all buildings or other improvements upon the Mortgaged Property are insured by a generally acceptable insurer against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the Mortgaged Property is located in an amount which is at the least equal to the lesser of (i) the maximum insurable value of such improvements and (ii) the combined principal balance of the Loan and the principal balance of each mortgage loan senior in priority to the Loan; provided, however, that such -------- ------- hazard insurance shall be in an amount not less than such amount as is necessary to avoid the application of any co-insurance clause contained in the related hazard insurance policy. If the Mortgaged Property is in an area identified by the Federal Emergency Management Agency as having special flood hazards, a flood insurance policy in a form meeting the requirements of the current guidelines of the Federal Insurance Administration is in effect with respect to such Mortgaged Property with a generally acceptable carrier in an amount representing coverage not less than the least of (A) the combined principal balance of the Loan and the principal balance of each mortgage senior in priority to the lien of the Loan, (B) the minimum amount required to compensate for damage or loss on a replacement cost basis or (C) the maximum amount of insurance that is available under the Flood Disaster Protection Act of 1973. All individual insurance policies contain a standard mortgagee clause naming Seller and its successors and assigns as mortgagee, and all premiums thereon have been paid. The Mortgage obligates the related borrower to maintain the hazard and, if applicable, flood insurance policy at such borrower's cost and expense, and on such borrower's failure to do so, authorizes the holder of the Mortgage to obtain and maintain such insurance at such related borrower's cost and expense, and to seek reimbursement therefor from such borrower. Each of the hazard and, if applicable, the flood insurance policy has been issued by a carrier meeting the requirements of the Seller's Guide, is the valid and binding obligation of the insurer, is in full force and effect, and will be in full force and effect and inure to the benefit of Purchaser upon the consummation of the transactions contemplated by the Agreement. Seller has not engaged in, and has no knowledge of the related borrower's having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for therein, or the validity and binding effect thereof. In addition, each policy provides for ten (10) days' advance notice in writing to the mortgagee, its successors and/or assigns, in the event the policy is to be canceled. Seller has furnished proof of such coverage and delivered the same to Purchaser. 6. Compliance with Applicable Laws. The Loan and all activities ------------------------------- performed in connection with the Loan by seller and each other person involved in the origination of the Loan comply and complied in all respects with any and all requirements of all applicable federal, state and local laws and regulations including, without limitation the federal Equal Credit Opportunity Act and Regulation B thereunder, the federal Truth in Lending Act and Regulation Z thereunder, the federal Real Estate Settlement Procedures Act of 1974 and Regulation X thereunder and the federal fair Credit Reporting Act, in each act as amended. Seller shall deliver to Purchaser evidence of compliance with all such requirements. Any applicable period within which the related borrower may rescind the Loan has expired. The related Borrower was not required by the Seller to pay any fees, charges or other amounts which have been excluded from the calculation of the finance charge by the Seller except to he extent such fees may properly be excluded under, and were bona fide and reasonable in amount for purposes of, the federal Truth in Lending Act. All fees imposed by any affiliate of the seller upon the related borrower in connection with the Loan have been properly disclosed to such borrower under the requirements of the federal Truth in Lending Act and any other state or federal law, rule or regulation. Any provision of the documents included in the Loan file purporting to require the payment of a prepayment fee or penalty complies with all applicable state and federal laws and is enforceable in accordance with is terms against the related borrower; 7. Type of Mortgaged Property. The Mortgaged Property consists of a -------------------------- single parcel of real property with a single family residence erected thereon, or a two- to four-family dwelling, or an individual unit in a planned unit development or condominium project, none of which is a mobile home, a boat, a cooperative apartment or manufactured dwelling. No portion of the Mortgaged Property is used for commercial purposes; 8. Valid Lien; No Satisfaction of Mortgage. The Mortgage evidences a --------------------------------------- valid, subsisting and enforceable first or junior lien on the Mortgaged Property, including all buildings on the Mortgaged Property and all installations and mechanical, electrical, plumbing, heating and air conditioning systems located in or affixed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject, in the case of a Loan secured by a junior lien, only to the lien of any senior mortgage referred to in the title policy contained in the related Loan File and subject, in all cases only to: the lien of current real property taxes and assessments not yet due and payable; covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording acceptable to mortgage lending institutions generally and specifically referred to in the mortgagee title insurance policy delivered to the originator of the Loan and (A) referred to or otherwise considered in the appraisal made for the originator of the Loan or (B) which do not materially adversely affect the appraised value of the Mortgaged Property set forth in such appraisal; and other matters to which like properties are commonly subject and which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of such Mortgaged Property. The Mortgage was duly and properly recorded in the recorder's office for the county wherein the Mortgaged Property is located. The Mortgage has not been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not nor has any instrument been executed or recorded that would effect any such release, cancelation, subordinated or rescission; 9. Validity of Mortgage Documents. The Note and the Mortgage are ------------------------------ genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms. The Note and Mortgage delivered to Purchaser are the only executed copies thereof. All parties to the Note and the Mortgage had legal capacity to enter into the Loan and to execute and deliver the Note and the Mortgage, and the Note and the Mortgage have been duly and properly executed by such parties; 10. Full Disbursement of Proceeds. The proceeds of the Loan have been ----------------------------- fully disbursed and there is no requirement for future advances thereunder, and any and all requirements as to completion of any on-site or off-site improvements and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Loan and the recording of the Mortgage were paid, and the related borrower is not entitled to any refund of any amounts paid or due under the Note or the Mortgage; 11. Ownership. Seller is the sole owner of record and holder of the Loan. --------- The Loan has not been assigned or pledged, and Seller has good and marketable title thereto, and has full right to transfer, sell and assign the Loan and the related servicing rights to Purchaser free and clear of any encumbrance, equity, participation interest, lien, pledge, charge, claim, interest or participation of, or agreement with, any other party, pursuant to the Agreement. Upon the sale of each Loan to Purchaser, Purchaser will acquire all right, title and interest in and to such Loan, free and clear of any pledges, liens, security interests, claims, participations, interests or other equities or encumbrances of any type, kind or nature; 12. Doing Business. All parties which have had any interest in the Loan, -------------- whether as mortgagee, assignee, pledgee or otherwise are (or during the period in which they held and disposed of such interest, were) (i) in compliance in all material respects with any and all applicable licensing requirements of the laws of the state wherein the Mortgaged Property is located and (ii) organized under the laws of such state, or (iii) qualified to do business in such state, or (iv) federal savings and loan associations or national banks having principal offices in such state or (v) not deemed to be doing business in such state; 13. LTV. At origination, the loan-to-value ratio ("LTV") of the Loan, --- based on the original principal balance of the Loan and the value of the related Mortgaged Property set forth in the appraisal contained in the related Loan File, did not exceed the maximum LTV amount set forth in the Seller's Guide for such Loan; and if the Loan is a junior priority lien, the principal balances of all related senior liens outstanding at the origination of the Loan were added to the original principal balance of the Loan to determine the LTV for such Loan and, if such senior liens provide for negative amortization, deferred interest or an open-end feature which permits additional borrowings, the balances of such related senior liens used to calculate the LTV are based on the maximum amount of negative amortization, deferred interest or maximum amount of borrowings permitted under such senior liens; 14. Title Insurance. The Loan is covered by either an ALTA mortgagee --------------- title insurance policy, or the equivalent thereof if an ALTA policy is not available in a specific geographic location, issued by a title insurer reasonably acceptable to Purchaser. The title insurance policy has been issued by a title insurer licensed to do business in the jurisdiction where the Mortgaged Property is located, insuring Seller, its successors and assigns, as to the first- or junior-priority lien of the Mortgage in the original principal amount of the Loan. Seller is the sole insured of such mortgagee title insurance policy, and such mortgage title insurance policy is in full force and effect and will be in force and effect upon the consummation of the transactions contemplated by this Agreement. No claims have been made under such mortgagee title insurance policy, the accuracy of any attorney's opinion of title has never been disputed, and no prior holder of the Mortgage, including Seller, has done, by act or omission, anything which could impair the coverage or enforceability of such mortgagee title insurance policy or the accuracy of such attorney's opinion of title. Each such mortgage title insurance policy includes all endorsements which are customary for loans similar to the Loans or which may be required by Purchaser in the exercise of its reasonable discretion; 15. No Defaults. there is no default, breach, violation or event of ----------- acceleration existing under the Note or the Mortgage and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and neither Seller nor its predecessors has waived any default, breach, violation or event of acceleration; 16. No Mechanic's Liens. There are no mechanic's, materialman's or similar ------------------- liens or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the related Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the related Mortgage; 17. Location of Improvements; No Encroachments. All improvements which ------------------------------------------ were considered in determining the appraised value of the Mortgaged Property lay wholly within the boundaries and building restriction lines of the Mortgaged Property and no improvements on adjoining properties encroach upon the Mortgaged Property (except such encroachments as have been affirmatively insured over by the title insurer). No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning law, rule or regulation; 18. Customary Provisions. The Mortgage contains customary and -------------------- enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed or trust, by trustee's sale and (ii) otherwise by judicial foreclosure. There is no homestead or other exemption available to the related borrower which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage; 19. Occupancy Certificates. The Mortgaged Property is lawfully ---------------------- occupied under applicable law. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities; 20. No Additional Collateral. The Note is not and has not been secured by ------------------------ any collateral except the lien of the related Mortgage; 21. Deeds of Trust. In the event the Mortgage constitutes a deed of -------------- trust, a trustee, duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by Purchaser to the trustee under the deed of trust, except in connection with a trustee's sale after default by the related borrower; 22. Acceptable Investment. To the best knowledge of Seller, there are --------------------- no facts or circumstances or conditions with respect to the Mortgage, the Mortgaged Property or the related borrower that can reasonably be expected to cause mortgage lending institutions to regard the Loan as an unacceptable investment, cause the Loan to become delinquent or adversely affect the value or marketability of the Loan; 23. Condominium Units. If the Loan is secured by a Mortgage on a ----------------- condominium unit located in a condominium project, the condominium project and the Loan conform in all material respects to the requirements set forth in the Seller's Guide with respect to condominium projects and Loans secured by a Mortgage on a condominium unit located in a condominium project; 24. Transfer of Loans. Each Note has been properly endorsed in a ----------------- manner that satisfies any requirement of endorsement in order to transfer to the Purchaser all right, title and interest of the Seller to that Note. Each Assignment of Mortgage is in recordable form, is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located and is sufficient to effect the assignment and transfer to the Purchaser of the benefits of the Seller, as original mortgagee or assignee thereof, under each Mortgage to which such assignment relates; 25. Due-on-Sale. The Mortgage contains an enforceable provision for ----------- the acceleration of the payment of the unpaid principal balance of the Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder; 26. No Buydown Provisions; No Graduated Payments or Contingent ---------------------------------------------------------- Interest. The Loan does not contain provisions pursuant to which monthly - -------- payments are paid or partially paid with funds deposited in any separate account established by the mortgagee, the seller of the Mortgaged Property, the related borrower or anyone on behalf of the related borrower,or paid by any source other than such borrower, nor does it contain any other similar provision which may constitute a "buydown" provision. The Loan is not a graduated payment mortgage loan. The Loan does not have a shared appreciation or other contingent interest feature; 27. Mortgaged Property Undamaged. Except as set forth in the appraisal ---------------------------- which forms part of the related Loan File, the Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty so as to affect materially and adversely the value of the Mortgaged Property as security for the Loan or the use for which the premises were intended. To the best of Seller's knowledge the related borrower is not in and has not been in violation of, no prior owner of the Mortgaged Property was in violation of, and the Mortgaged Property does not violate any standards under, applicable federal, state or local statutes, ordinances, rules, regulations, orders or decisions with regard to pollutants or hazardous or toxic substances as amended and supplemented from time to time; 28. Demand Statements. Seller has not received any requests for a ----------------- demand statement with respect to the Loan; 29. Loan File. Seller has delivered to Purchaser a true, complete and --------- accurate Loan File which contains the Note, the Mortgage and Seller's Assignment of Mortgage, the application and all information obtained by Seller as a result of its credit investigations, together with each of the other documents and instruments specified to be included therein by the Agreement or the Seller's Guide, each in due and proper form, and each such document or instrument complies in all material respects with the requirements of the Seller's Guide. The credit information contained in each such Loan File was compiled by the use of generally accepted lawful credit investigation procedures, including inquiry to national credit investigation agencies; 30. Appraisal. The appraisal meets the requirements of all applicable --------- state and federal laws, rules and regulations in all respects and was performed by a qualified appraiser who is duly licensed under all applicable state and federal laws and who has no interest, direct or indirect, in the Mortgaged Property or in any loan encumbering the Mortgaged Property, and who does not receive compensation which is affected by the approval or denial of the Loan; 31. Adjustable Rate Loans. Each Loan that has an adjustable rate of --------------------- interest has an interest rate not less than the floor rate specified in the related Note. With respect to each adjustable rate Loan, all adjustments have been made strictly in accordance with the terms of the related Note and the Mortgage. No adjustable rate loan is subject to negative amortization or permits the conversion of the Loan to a fixed interest rate. Each adjustable rate Loan was underwritten as though such Loan would initially have borne interest at a rate equal to the applicable index plus the related margin at the time of origination; 32. Condition of Borrower. The Seller is not aware of any --------------------- circumstances existing at or prior to the Closing Date that would lead it to believe the related borrower is unable to repay the Loan in accordance with the terms of the Note. No event or circumstance has occurred or has arisen which, with or without notice, passage of time or both, could result in the seizure of the Mortgaged Property by state or federal agents acting under any state or federal law, rule or regulation including, without limitation, the Controlled Substances Act or the Internal Revenue Code or the regulations promulgated pursuant to either of the foregoing; 33. Servicing Practices. The origination and collection practices ------------------- used with respect to each Loan have in all material respects complied with standards generally required by institutional lenders and with applicable law, and have been in all respects legal and proper. The information contained in and appearing upon the Seller's servicing records with respect to the Loan is accurate in all material respects and adequately reflects the true status of the Loan to which said records relate; 34. No Escrow Deposits. There are no escrow deposits or accounts ------------------ maintained in connection with the Loan; 35. Junior Liens - Maturity Date; No consent of Senior Holder. If the --------------------------------------------------------- Loan is a junior lien, the maturity date of the loan is at least twelve (12) months prior to the maturity date of any related senior mortgage loan if such senior mortgage loan provides for a balloon payment. With respect to each Loan which is a Junior Lien, either (A) no consent for such loan was required by the holder of the related senior lien prior to the making of such Loan or (B) such consent has been obtained and written evidence thereof is contained in the related Loan File; 36. Soldiers' and Sailors' Relief Act. The borrower is not entitled to --------------------------------- relief under the Solders' and Sailors' Civil Relief Act of 1940. Section 6. Seller's Repurchase Obligations. Seller shall repurchases any Loan sold to Purchaser pursuant to this Agreement within ten (10) business days after receipt of written notice from Purchaser of any of the following circumstances; (a) Failure by Seller to deliver to Purchaser the contents of the Loan File for any Loan within one hundred twenty (120) days after the related Closing Date. (b) Discovery of any evidence of fraud or falsity in the origination of the Loan or in the sale of the Loan to Purchaser which has a material adverse effect on the value or marketability of the Loan. (c) Seller fails to observe or perform, or is or becomes in breach of, any of the representations, warranties or agreements contained in this Agreement; provided, however that such failure or breach has a material adverse effect on the value of the Loan or Loans to which such failure or breach pertains; and provided, further, that if Seller is or becomes in breach of any representation or warranty contained in Section 5 A hereof, Purchaser may require Seller to repurchase Loans which are materially and adversely affected by such breach sold by Seller to Purchaser under this Agreement which are materially and adversely affected by such breach at the "Repurchase Price" (as defined in Section 7 of this Agreement). It is understood that Seller's obligation to repurchase any Loan is binding and enforceable against it without regard to an limitation set forth in such representation or warranty concerning the knowledge of Seller as to the facts stated therein. (d) A borrower exercises his statutory right to rescind a Loan and Purchaser determines in its sole discretion that such exercise is valid. Section 7. Repurchase Price. The repurchase price (the "Repurchase Price") of any Loan to be paid by Seller for any repurchase of such Loan required pursuant to Section 6 hereof shall be calculated as follows: (a) The Purchase Price of such Loan, (b) less any principal reduction occurring subsequent to the related Closing Date. (c) plus all interest accrued but unpaid on the outstanding principal balance of the Loan from the Closing Date through and including the next payment due date following the date on which the repurchase is made, (d) plus all expenses, including, but not limited to reasonable fees and expenses of counsel incurred by Purchaser in enforcing Seller's obligations to repurchase such Loan. Seller shall pay the Repurchase Price for the repurchased Deficient Loan to Purchaser by wire transfer of immediately available funds to an account designated by Purchaser. Promptly following its receipt of the full amount of the Repurchase Price for such Loan, Purchaser shall endorse the related Note (without recourse) and shall execute an assignment of the related Mortgage (without recourse), in recordable form, and deliver same, together with the related Loan File, to Seller, all at Seller's sole cost and expense. As additional consideration, Purchaser shall release all servicing rights with respect to such Loan and shall cooperate with Seller in effecting, at Seller's expense, the transfer or servicing of such Loan. Section 8 Indemnification. In addition to the repurchase obligations of Seller, and all other remedies available to Purchaser under this Agreement, at law or in equity, and regardless of any investigation conducted by Purchaser with respect to any Loan at any time, Seller shall indemnify Purchaser and its agents, affiliates, assigns, officers, directors and employees (each a "Purchaser Indemnitee") from and hold them harmless against all losses, claims, demands, liabilities, damages, penalties, fines, forfeitures, costs (including court costs and reasonable attorney's fees), judgments, and any other costs, fees and expenses (collectively, "Damages") resulting or arising from: (i) any material breach of any representation, warranty or obligation of Seller set forth in, or made pursuant to, this Agreement; (ii) any act or failure to act or any breach of any representation, warranty or obligation made by any Purchaser Indemnitee in reliance upon any representation, warranty or obligation of Seller contained in or made pursuant to this Agreement; (iii) claims made by borrowers or third parties against any Purchaser Indemnitee arising from negligence, fraud or a material omission on the part of Seller in receiving, processing or funding any Loan sold to Purchaser; (iv) all Damages arising out of or in connection with any one or more of the items set forth in Section 6(a) through (d), inclusive, of this Agreement; (v) any Damages arising due to any act or omission of Seller prior to the date of this Agreement or, with respect to any particular Loan, any Damages due to acts or omissions of Seller or any other party involved in such Loan transaction on or prior to the Closing Date and/or any Damages relating to any defect or deficiency in any Loan existing as of the Closing Date (including, without limitation, a defect in the documentation of any Loan or defects which would cause the loan to fail to be in strict compliance with the representations and warranties set forth in Section 5 B. at all times since the date the related borrower applied for such loan); and (vi) any undertaking of an investigation of the facts relating to any claim or demand to which this indemnity relates, and reasonable costs or expenses incurred to consultants and investigators in connection with such investigation or in the defense of any claims related to a Loan which may give rise to Damages. Section 9. No Partnership, Agency or Other Relationship; Power of Attorney. Nothing contained in this Agreement shall be deemed or construed by any person to create a partnership or joint venture between Purchaser and Seller, or to constitute either of Purchaser or Seller the agent, nominee or representative of the other. Seller shall not represent itself to any person as the Purchaser's agent, loan agent, nominee or otherwise. Seller shall not name Purchaser in its advertisements, stationery, business cards, loan applications or related documents or forms. Without limitation on or expansion of the foregoing, Seller hereby appoints Purchaser, its agents, employees, successors and assigns, the true and lawful attorney-in-fact of Seller without right of revocation and with the full power of substitution for and in the place and stead of Seller and on behalf and for the benefit of Purchaser, to demand, control and collect all sums due on the Loans purchased under this Agreement, and to enforce any and all rights with respect thereto, and to endorse the name of Seller where Seller's name is designated as the payee upon any notes, collateral, security, acceptances, checks, drafts, money orders or other evidences of payment coming into the hands of Purchaser in full or partial payment of any Loan, and to satisfy or release, or cause to be satisfied or released, all liens and security interests related thereto, when and if Purchaser may determine to do so. Section 10. Expenses. Each party shall be responsible for its own expenses incurred in connection with this Agreement; provided, however, that -------- ------- Seller shall bear any expenses arising as a result of (a) any changes or modifications required to be made to any documents underlying the Loan for whatever reason (so long as such change or modification relates to the origination of such Loan or the period prior to the related Closing Date); (b) the preparation and delivery of all notices relating to the transfer of servicing required by applicable state and federal law, including, without limitation, notices required by RESPA, in connection with any repurchase pursuant to Section 6 hereof; and (c) the preparation and delivery of all notices to the hazard insurance companies in order to designate Purchaser as payee under the lender loss payable clause. Seller acknowledges that, in connection with Purchaser's purchase of Loans from Seller, Purchaser may reasonably conclude that Seller is required to comply with various federal and state laws. In this connection, Seller expressly understands and acknowledges that Purchaser may from time to time require Seller to deliver such notices to borrowers as Purchaser reasonably concludes are required by law to be delivered by the Seller, all at Seller's sole cost and expense. Section 11. Maintenance of Fidelity Bond and Errors and Omissions Insurance. Seller shall maintain, with a company reasonably acceptable to Purchaser, a blanket fidelity bond and an errors and omissions insurance policy, with broad coverage on all officers, employees or other persons acting in any capacity with regard to the Loans, who handle funds, money, documents and papers relating to the Loans ("Employees"). Any such fidelity bond and errors and omissions insurance policy shall protect and insure the Seller against losses, including forgery, theft, embezzlement, fraud, errors and omissions and negligent acts of such Employees. Such policy shall also protect against any erroneous release or satisfaction of each lien created by the Security Instruments before the related Note has been fully paid and satisfied. No provisions of this Section 11 requiring a fidelity bond and errors and omissions insurance policy shall diminish or relieve the Seller from its duties and obligations as set forth in this Agreement. The minimum coverage under any such fidelity bond and errors and omissions insurance policy shall be at least equal to the corresponding amounts required by the Seller from its duties and obligations as set forth in this Agreement. The minimum coverage under any such fidelity bond and errors and omissions insurance policy shall be at least equal to the corresponding amounts required by the Seller's Guide. Upon the request of Purchaser, Seller shall cause to be delivered to Purchaser a certified true copy of such fidelity bond and errors and omissions insurance policy. Section 12. Miscellaneous. (a) No Solicitation. Seller shall not specifically target for ---------------- refinancing any borrower or co-borrower under any Loan sold by Seller to Purchaser during the period of twelve (12) months immediately following the Closing Date for such Loan. Any Borrower seeking to refinance a Loan directly with Seller within such 12-month period must be referred to Purchaser. In the event Seller breaches this covenant and a loan is refinanced, Seller shall pay to Purchaser, within two (2) business days after Seller's receipt of notice from Purchaser demanding payment, an amount equal to 2% of the principal balance of such Loan outstanding immediately prior to such refinance. Such payment shall be in addition to the amounts that may be owed under Section 12(b) hereof. (b) Exhibits. All exhibits attached hereto or referred to in this -------- Agreement are incorporated by reference into this Agreement. (c) Entire Agreement. The entire agreement between the parties is ---------------- contained in this Agreement and cannot be modified in any respect except by an amendment in writing signed by both parties. (d) Assignment. Neither Seller nor Purchaser may assign its rights or ---------- obligations under this Agreement without the prior written consent of the other. This Agreement shall be binding and inure to the benefit of the permitted successors and assigns of the parties hereto. (e) Attorneys' Fees and Expenses: Choice of Law and Forum. If any party ---------------------------------------------------- hereto shall bring suit or other proceeding against the other as a result of any alleged breach or failure by the other party to fulfill or perform any covenants or obligations under this Agreement, then the prevailing party obtaining final judgment in such action shall be entitled to receive from the non-prevailing party reasonable attorneys' fees incurred by reason of such action and all costs of suit and preparation therefor at both trial and appellate levels. In addition, any such suit or proceeding shall be brought in the federal or state courts located in Los Angeles County, California, which courts shall have sole and exclusive in personam, subject matter and other jurisdiction in connection with such suit or proceedings and venue shall be appropriate for all purposes in such courts. This Agreement shall be governed by, and construed in accordance with, the laws of the State of california. (f) No Remedy Exclusive; Waiver. No remedy under this Agreement is --------------------------- exclusive of any other available remedy, but each remedy shall be cumulative and shall be in addition to other remedies given under this Agreement or existing at law or in equity. Any forbearance by a party to this Agreement in exercising any right or remedy under this Agreement or otherwise afforded by applicable law shall not be a waiver or preclude the exercise of that or any other right or remedy. Seller hereby waives any statute of limitations or other defense that might otherwise be raised in any action to enforce Seller's indemnification and repurchase obligations hereunder. (g) Termination. Either Purchaser or Seller may terminate this Agreement ----------- at any time upon ten (10) days' prior written notice to the other party; provided, however, that Sections 5, 6, 7, 8, and 12 (a), (b) and (f) of this Agreement shall survive any such termination. (h) Severability. Whenever possible, each provision of this Agreement ------------ shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be or become prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or the remaining provision of this Agreement. (i) Financial Statements; Other Information. Seller shall furnish to --------------------------------------- Purchaser ninety (90) days after the close of its fiscal year, a copy of its audited annual financial statements and supporting schedules, prepared in accordance with generally accepted accounting principles, consistently applied. Seller agrees to make available to Purchaser a knowledgeable financial or accounting officer for the purpose of answering questions regarding the financial statements and any developments affecting the financial or other condition of Seller. During the term of this Agreement, Seller shall furnish Purchaser such periodic, special or other reports or information, whether or not provided for herein, as shall be necessary, reasonable or appropriate to Purchaser. (j) Notice. All notices, communications, documents, correspondence and ------ other materials received by Seller from any person whatsoever after the Closing Date relating to a Loan shall be forwarded to Purchaser by overnight courier, at Seller's expense, within two (2) business days following receipt thereof by Seller. All notices under this Agreement shall be in writing, deemed effective upon receipt and shall be delivered to the addresses set below: If to Purchaser: If to Seller: AAMES CAPITAL CORPORATION PAN AMERICAN BANK, F.S.B. P.O. Box 76930 1300 South El Camino Real, Suite 320 Los Angeles, California 90010 San Mateo, California 94402 Attn: Mark E. Costello Attn: Blair Kenny Executive Vice President - Loan Production IN WITNESS WHEREOF, the parties hereto have duly executed this Master Loan Purchase Agreement as of the 1st day of April, 1997. AAMES CAPITAL CORPORATION PAN AMERICAN BANK, F.S.B. AAMES FUNDING CORPORATION By: /s/ SHANNON THURMOND, V.P. By: /s/ LAWRENCE J. GILL --------------------------- ---------------------- For: Mark E. Costello Name: Lawrence J. Gill Executive Vice President - ------------------------ Loan Production Title: President ("Purchaser") ----------------------- ("Seller") EX-10.71 39 CONTINUING LOAN PURCHASE AGREEMENT EXHIBIT 10.71 ================================================================================ Pan American Bank, F.S.B. Seller and AMRESCO Residential Capital Markets, Inc. Buyer CONTINUING LOAN PURCHASE AGREEMENT February 27, 1997 Fixed and Adjustable First Lien Residential Mortgage Loans ================================================================================ TABLE OF CONTENTS
Page No. -------- SECTION 1 DEFINITIONS ............................................... 1 Section 1.1 Defined Terms ...................................... 1 ------------- Section 1.2 Other Terms ........................................ 7 ----------- SECTION 2 PURCHASE OF LOANS AND TRANSFER OF SERVICING ............... 7 Section 2.1 Notice of Availability ............................. 7 ---------------------- Section 2.2 Buyer's Offer and Seller's Acceptance .............. 8 ------------------------------------- Section 2.3 Purchase of Loans and Transfer of Servicing Rights . 9 -------------------------------------------------- Section 2.4 Purchase Price ..................................... 9 -------------- Section 2.5 Transfer of Servicing .............................. 9 --------------------- Section 2.6 Sale Treatment ..................................... 9 -------------- SECTION 3 SETTLEMENT ................................................ 10 Section 3.1 Place and Time of Settlement ....................... 10 ---------------------------- Section 3.2 Seller's Deliveries on Settlement Date ............. 10 -------------------------------------- Section 3.3 Buyer's Deliveries at Settlement ................... 10 -------------------------------- SECTION 4 REPRESENTATIONS AND WARRANTIES ............................ 10 Section 4.1 General Representations and Warranties of Seller ... 10 ------------------------------------------------ Section 4.2 Representations and Warranties of Seller Regarding -------------------------------------------------- the Offered Loans .................................. 13 ----------------- Section 4.3 Representations and Warranties of Seller Regarding -------------------------------------------------- the Loans .......................................... 14 --------- Section 4.4 General Representations and Warranties of Buyer .... 23 ----------------------------------------------- SECTION 5 PRE-SETTLEMENT COVENANTS .................................. 24 Section 5.1 Continued Servicing ................................ 24 ------------------- Section 5.2 Preparation of Assignments ......................... 25 -------------------------- Section 5.3 IRS Reporting ...................................... 25 ------------- Section 5.4 Compliance with Law ................................ 25 ------------------- Section 5.5 No Sale of Assets .................................. 26 ----------------- Section 5.6 Private Mortgage Insurance ......................... 26 -------------------------- SECTION 6 POST-SETTLEMENT COVENANTS .................................. 26 Section 6.1 Notice of Servicing Transfer ....................... 26 ---------------------------- Section 6.2 IRS Examination .................................... 26 ---------------
-i- Section 6.3 Tax on Sale ........................................ 27 ----------- Section 6.4 Books and Records .................................. 27 ----------------- Section 6.5 On-Site Reviews .................................... 27 --------------- Section 6.6 Financial Statements ............................... 27 -------------------- Section 6.7 Post-Servicing Transfer Date Loan Payments ......... 27 ------------------------------------------ Section 6.8 Transfer of Servicing Rights and PMI ............... 27 ------------------------------------ Section 6.9 Delivery of Original Mortgage ...................... 28 ----------------------------- Section 6.10 Confidentiality .................................... 28 --------------- Section 6.11 Continued Cooperation .............................. 28 --------------------- Section 6.12 Covenant to Cooperate .............................. 28 --------------------- Section 6.13 No Personal Solicitation ........................... 29 ------------------------ SECTION 7 CONDITIONS TO SETTLEMENT .................................. 29 Section 7.1 Conditions to Buyer's Obligations .................. 29 --------------------------------- Section 7.2 Opinion of Counsel ................................. 31 ------------------ Section 7.3 Conditions to Seller's Obligations ................. 31 ---------------------------------- SECTION 8 SURVIVAL OF COVENANTS, REPRESENTATIONS AND WARRANTIES ..... 32 SECTION 9 POST-SETTLEMENT REPURCHASE AND ADJUSTMENTS ................ 32 Section 9.1 Repurchase Obligations ............................. 32 ---------------------- Section 9.2 Repurchase Price ................................... 34 ---------------- Section 9.3 Post-Settlement Adjustments to Purchase Price ...... 35 --------------------------------------------- SECTION 10 INDEMNIFICATION ........................................... 35 Section 10.1 Seller's Indemnification ........................... 35 ------------------------ Section 10.2 Buyer's Indemnification ............................ 35 ----------------------- Section 10.3 Indemnification Procedures ......................... 36 -------------------------- SECTION 11 TERMINATION ............................................... 37 Section 11.1 Termination by Either Party ........................ 37 --------------------------- Section 11.2 Termination by Buyer ............................... 37 -------------------- Section 11.3 Effect of Termination .............................. 38 ---------------------
-ii- SECTION 12 MISCELLANEOUS ............................................. 38 Section 12.1 No Waiver ......................................... 38 --------- Section 12.2 Amendment and Modification ........................ 39 -------------------------- Section 12.3 Notices ........................................... 39 ------- Section 12.4 Expenses .......................................... 40 -------- Section 12.5 No Remedy Exclusive ............................... 40 ------------------- Section 12.6 Independent Contractor ............................ 40 ---------------------- Section 12.7 Severability ...................................... 41 ------------ Section 12.8 Entire Agreement .................................. 41 ---------------- Section 12.9 Assignment ........................................ 41 ---------- Section 12.10 Captions .......................................... 41 -------- Section 12.11 Governing Law ..................................... 41 ------------- Section 12.12 Counterparts ...................................... 41 ------------ Section 12.13 Drafting .......................................... 41 -------- Section 12.14 Choice of Forum ................................... 41 --------------- Section 12.15 WAIVER OF JURY TRIAL .............................. 42 --------------------
EXHIBITS AND SCHEDULES ---------------------- EXHIBIT A - Form of Bill of Sale and Assignment SCHEDULE 1 TO BILL OF SALE AND ASSIGNMENT EXHIBIT B - Form of Offer and Acceptance SCHEDULE 1 TO OFFER AND ACCEPTANCE EXHIBIT C - CONTENTS OF LEGAL FILE EXHIBIT D - CONTENTS OF CREDIT FILE SCHEDULE 2.1 SCHEDULE 4.2(b) (A) EXHIBIT E - OPINION OF COUNSEL EXHIBIT F - OFFICER'S CERTIFICATE ATTACHMENT 1 - COLLECTION ACCOUNT LETTER AGREEMENT -iii- CONTINUING LOAN PURCHASE AGREEMENT ---------------------------------- THIS CONTINUING LOAN PURCHASE AGREEMENT (this "Agreement") is made and --------- entered into this 27th day of February, 1997 by and between AMRESCO Residential Capital Markets, Inc., a Delaware corporation ("Buyer"), and Pan American Bank, ----- F.S.B., a federal savings bank ("Seller"). ------ WHEREAS, Seller is engaged in the business of originating, acquiring and servicing fixed and adjustable rate, closed-end single-family residential mortgage loans, and has proposed to offer to sell portfolios of such loans to Buyer from time to time subject to Buyer's review and acceptance of all or any part of each such portfolio; and WHEREAS, Seller desires from time to time to sell to Buyer, and Buyer desires from time to time to purchase from Seller certain loans due and to become due thereunder. NOW THEREFORE, in consideration of the premises and other covenants contained herein, Buyer and Seller agree as follows: SECTION 1 DEFINITIONS Section 1.1 Defined Terms ------------- "Affiliate": With respect to any Person, any other Person that, directly or --------- indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with the Person specified. "Acceptance": Seller's acceptance of Buyer's Offer. ---------- "Accepted Servicing Practices": With respect to any Loan, written servicing ---------------------------- procedures that Seller would follow in servicing first lien residential mortgage loans held for its own account, giving due consideration to those mortgage servicing practices of prudent mortgage lending institutions that service mortgage loans of the same type as such Loan in the jurisdiction where the related Mortgaged Property is located. "Adjustable Rate Loan": A Loan which provides for the adjustment of the -------------------- Mortgage Interest Rate payable in respect thereto. "Appraised Value": With respect to any Mortgaged Property, the lesser of --------------- (i) the value thereof as determined by an appraisal made for the originator of the Loan at the time of origination of the Loan by an appraiser who met the minimum requirements of FNMA and FHLMC, and (ii) the purchase price paid for the related Mortgaged Property by the Obligor AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 1 with the proceeds of the Loan, provided, however, in the case of a Refinanced Loan, such value of the Mortgaged Property is based solely upon the value determined by an appraisal made for the originator of such Refinanced Loan at the time of origination of such Refinanced Loan by an appraiser who met the minimum requirements of FNMA and FHLMC. "Assignment of Mortgage": An assignment of the Mortgage, notice of transfer ---------------------- or equivalent instrument, in recordable form, which when recorded is sufficient under the laws of the jurisdiction where the related Mortgaged Property is located to reflect of record the sale of the Mortgage to Buyer, or its assignee. "Bid Percentage": A percentage, determined by Buyer in its sole discretion, -------------- on which the Purchase Price is based. "Bill of Sale": Each bill of sale and assignment in the form attached ------------ hereto as Exhibit A, which evidences the sale and acquisition of a portfolio of --------- Loans and to which Seller shall attach, as Schedule 1, the Loan Schedule, ---------- listing the Loans to be purchased pursuant to such Bill of Sale. "Business Day": A day other than Saturday, Sunday, or any other day on ------------ which Seller or Buyer is not regularly open for business. "Buyer": AMRESCO Residential Capital Markets, Inc., a Delaware corporation. ----- "Collection Account": The trust account or accounts which are created and ------------------ maintained by the Seller for collection of principal and interest, insurance proceeds, any Repurchase Price or any other proceeds from the Loan received by the Seller from the Settlement Date until the Servicing Transfer Date. "Credit File": The file containing those items listed in Exhibit D attached ----------- --------- hereto, and any additional documents required to be added thereto pursuant to this Agreement. "Custodial Agreement": The Amended and Restated Master Custodial Agreement ------------------- dated as of November 1, 1995 executed by and between Buyer and Custodian. "Custodian": Bankers Trust Company of California, N.A. --------- "Cut-off Date": The date as of which the Principal Balance and the Pool ------------ Balance are determined for purposes of the Offered Loan Schedule. "Deleted Loan": A Loan which is repurchased or substituted with a Qualified ------------ Substitute Loan by Seller in accordance with the terms of this Agreement. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 2 "Due Date": The day of the month on which each Monthly Payment is due on a -------- Loan, exclusive of any grace period. "Due Diligence Period": The period as proposed in the Notice of -------------------- Availability, or as otherwise agreed to by Buyer and Seller in the Letter of Intent. During such period Seller shall make the Mortgage File and any information, records and files pertaining to the Offered Loans available to Buyer at its offices located in Ontario, California or at any other location mutually agreed upon by Buyer and Seller. "ECOA": The Equal Credit Opportunity Act, 15 U.S.C. (S) 1601. ---- "Escrow Payment": The amounts constituting ground rents, taxes, -------------- assessments, water rates, sewer rents, municipal charges, mortgage insurance premiums, fire and hazard insurance premiums, condominium charges, and any other payments required to be escrowed by the Obligor with the mortgagee pursuant to the Mortgage or any other document. "Excluded Loans": The Offered Loans owned by Seller and offered for sale to -------------- Buyer pursuant to a Notice of Availability, which Offered Loans Buyer elects not to purchase and which Excluded Loans shall be deleted from the Loan Schedule. "FHLMC": The Federal Home Loan Mortgage Corporation, or any successor ----- thereto. "Fixed Rate Loan": A Loan which provides for a fixed Mortgage Interest Rate --------------- payable with respect thereto. "FNMA": The Federal National Mortgage Association, or any successor ---- thereto. "GNMA": The Governmental National Mortgage Association, or any successor ---- thereto. "Interest Rate Adjustment Date": With respect to an Adjustable Rate Loan, ----------------------------- the date on which the Mortgage Interest Rate is adjusted with respect to such Loan. The first Interest Rate Adjustment Date for each Adjustable Rate Loan is the date set forth on the Loan Schedule. "IRS": The Internal Revenue Service, or any successor thereto. --- "Legal Fees": With respect to any indemnified party, any and all fees, ---------- costs, and expenses of any kind reasonably incurred by such party or its counsel in investigating, preparing for, defending against, or providing evidence, producing documents, or taking other action with respect to, any threatened or asserted claim. "Legal File": The file containing those items listed in Exhibit C attached ---------- --------- hereto, and any additional documents required to be added thereto pursuant to this Agreement. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 3 "Letter of Intent": A letter from Buyer to Seller, based solely upon ---------------- information provided in the Notice of Availability, proposing an indicative bid for the Offered Loans, and setting forth the required Due Diligence Period. "Loan": Each loan selected by Buyer for purchase from the Offered Loans ---- owned by Seller, which Loans shall be listed in the Loan Schedule attached as Schedule 1 to each Acceptance and Bill of Sale. - ---------- "Loan Package": Collectively, the Loans listed on a single Loan Schedule. ------------ "Loan Schedule": The schedule of Loans attached to an Acceptance, and shall ------------- be the Offered Loan Schedule revised to delete the Excluded Loans. "Loan-To-Value Ratio" or "LTV": The ratio of the outstanding principal ---------------------------- amount of the Loan as of the origination date to the lesser of (a) the Appraised Value of the related Mortgaged Property or (b) if the Loan was made to finance the acquisition of the related Mortgaged Property, the purchase price of the Mortgaged Property, expressed as a percentage. "Monthly Payment": The scheduled monthly payment of principal and interest --------------- on a Loan. "Mortgage": Any mortgage, deed of trust, security deed, or other similar -------- instrument creating a first lien on residential real property to secure repayment of such Loan, or a certified copy thereof. "Mortgage File": The Credit File and the Legal File for any Loan. ------------- "Mortgage Interest Rate": The current annual rate of interest borne on a ---------------------- Note, net of any primary mortgage guaranty insurance premium. "Mortgage Interest Rate Margin": With respect to Adjustable Rate Loans, the ----------------------------- percentage above the specified index identified in the related Note for the purpose of calculating the applicable Mortgage Interest Rate. "Mortgaged Property": The property subject to such Mortgage. ------------------ "New Servicer": Advanta Mortgage Corp. USA, a Delaware corporation. ------------ "Note": The original promissory note or other original evidence of ---- indebtedness executed by the respective Obligor to evidence such Obligor's indebtedness under such Loan. "Notice of Availability": Each notice from Seller to Buyer that a portfolio ---------------------- of Offered Loans and the right to service each such Offered Loan is available to Buyer pursuant to the AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 4 procedures set forth in Section 2.1, which Notice of Availability may be in the ----------- form of a written or verbal communication or contained on a diskette and shall include, or in the case of a verbal communication be followed by, an Offered Loan Schedule. "Notice Date": The date on which Seller sends such Notice of Availability ----------- to Buyer. "Obligor": Any person obligated for payment of such Offered Loan or who has ------- transferred or assigned any property interest to Seller to secure payment of such Offered Loan. "Offer": A letter from Buyer to Seller identifying the Offered Loans which ----- Buyer proposes to purchase and the applicable Bid Percentage, which Offer shall be in the form attached hereto as Exhibit B. --------- "Offered Loan": A mortgage loan that is secured by a first position lien on ------------ completed, one-to-four family residential real estate, and that Seller owns and offers to Buyer to purchase pursuant to a Notice of Availability. "Offered Loan Schedule": The schedule of Offered Loans related to the --------------------- particular Notice of Availability, which lists to the extent and as available the mapping document information relating to each Offered Loan required to be included with each Notice of Availability, as set forth in Schedule 2.1 attached ------------ to this Agreement, and which shall be in electronic format and, if requested by Buyer, hard copy. "Person": Any individual, corporation, partnership, joint venture, ------ association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. "Pool Balance": With respect to each Offer and each portfolio of Loans to ------------ be purchased pursuant to this Agreement, the aggregate outstanding Principal Balance of the Loans as of the related Cut-off Date. "Principal Balance": With respect to an Offered Loan and a particular ----------------- Offer, the unpaid principal balance of such Loan as of the Cut-off Date, as shown on the books and records of Seller; provided that the Principal Balance shall not include any accrued but unpaid fees or charges. "Purchase Price": With respect to each Bill of Sale, the price paid by -------------- Buyer for the Loans acquired pursuant to such Bill of Sale, which shall be calculated according to the following formula: (a) the product of (i) the Bid Percentage and AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 5 (ii) the Pool Balance minus the aggregate amount of all payments of principal made to Seller on the Loans acquired from the Cut-off Date up to, but not including, the Settlement Date, (b) plus accrued but unpaid interest on each of the Loans acquired at the applicable per annum interest rate, as set forth on the Loan Schedule from the Cut-off Date up to, but not including, the Settlement Date, (c) minus the aggregate amount of all payments of charges and fees in connection with the Loans made to Seller from the Cut-off Date up to, but not including, the Settlement Date. "Qualified Substitute Loan": A mortgage loan eligible to be substituted by ------------------------- the Seller for a Deleted Loan which must, on the date of such substitution, (i) have an outstanding principal balance, after deduction of all scheduled payments due in the month of substitution, equal to or less than the outstanding principal balance of the Deleted Loan; (ii) have a Mortgage Interest Rate (with respect to Fixed Rate Loans) or a Mortgage Interest Rate Margin (with respect to Adjustable Rate Loans) at least equal to the Mortgage Interest Rate or the Mortgage Interest Rate Margin, respectively, of the Deleted Loan; (iii) have a remaining term to maturity not greater than that of the Deleted Loan and not more than one year less than, that of the Deleted Loan; (iv) comply with each representation and warranty set forth in Sections 4.1, 4.2 and 4.3; (v) be the ------------------------- same property type (i.e., one family, condominium, etc.) or be a single family ---- dwelling and the same occupancy status or be a primary residence as the Deleted Loan; (vi) not provide for a "balloon" payment if the Deleted Loan did not provide for a "balloon" payment (and if such Deleted Loan provided for a "balloon" payment, the Qualified Substitute Loan shall have an original maturity of not less than the original maturity of the Deleted Loan); and (vii) satisfy at a minimum the Loan characteristics of the Deleted Loan, including, but not limited to, the credit grade requirements, LTV and qualifications for inclusion in a "real estate mortgage investment conduit". "Repurchase Price": The amount described in Section 9.2 of this Agreement. ---------------- ----------- "Residential Dwelling": Except as excluded below, any one of the following: -------------------- (i) a one family dwelling, either attached or detached, (ii) a two to four family dwelling, (iii) a one family dwelling unit in a condominium project that meets the eligibility requirements of FNMA, or AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 6 (iv) a detached one family dwelling in a planned unit development. Mortgaged Properties that consist of the following property types are not --- eligible for sale to the Buyer: (a) co-operative units, (b) log homes, except when the appraisal indicates that the property is in a market where log homes are not unusual, at least two of the comparables are also of log construction and the log home has no deferred maintenance and a complete set of functioning modern appliances, (c) earthen homes, (d) underground homes, (e) mobile homes, (f) manufactured homes (as defined in the FNMA Seller-Servicer's Guide), except when the appraisal indicates that the home is of comparable construction to a stick or beam construction home, is readily marketable, has been permanently affixed to the site and is not in a mobile home "park" and (g) none of which is situated on more than ten acres of property. "RESPA": Real Estate Settlement Procedures Act, 12 U.S.C. (Section Symbol) ----- 2601 et seq. ------ "Seller": Pan American Bank, F.S.B., a federal savings bank. ------ "Servicing Transfer Date": The date which is at least fifteen (15) days but ----------------------- no more than thirty (30) days after the date on which Seller sends its notices pursuant to Section 6.1 and on which Seller transfers to the New Servicer all ----------- servicing responsibilities relating to all the Loans sold on the corresponding Settlement Date pursuant to Section 2.5. ------------ "Settlement" or "Settlement Date": Each date mutually agreed upon by the ------------------------------- parties on which Seller sells and Buyer acquires a portfolio of Loans. "TILA": The Truth in Lending Act, 15 U.S.C. (Section Symbol) 1600 et seq. ---- Section 1.2 Other Terms ----------- (a) Accounting and financial terms used herein and not otherwise defined in this Agreement shall be construed in accordance with generally accepted accounting definitions and principles as consistently applied. (b) Words used in this Agreement in the singular, where the context so permits, shall be deemed to include the plural, and vice versa. SECTION 2 PURCHASE OF LOANS AND TRANSFER OF SERVICING Section 2.1 Notice of Availability. ---------------------- (a) From time to time, Seller may make available to Buyer and Buyer may offer to purchase any or all of the Offered Loans listed in a Notice of Availability on a servicing-released basis pursuant to the terms of this Agreement. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 7 (b) Each Notice of Availability shall be either communicated verbally to Buyer or sent to Buyer by hand delivery or overnight courier. Such Notice of Availability shall indicate a proposed Closing Date, which shall be at least fifteen (15) Business Days after the date of such Notice of Availability. (c) Based upon the information contained in the Notice of Availability, the Buyer may submit a Letter of Intent to Seller. Seller shall have three (3) Business Days to accept such Letter of Intent. (d) Upon acceptance of the Letter of Intent by Seller, Buyer shall commence due diligence on the Offered Loans, at the conclusion of which Buyer may submit an Offer. Seller shall deliver an Offered Loan Schedule with each Notice of Availability, which shall include information relating to each Offered Loan generally in accordance with the format and criteria set forth in Schedule 2.1 to this Agreement. Seller shall bear all costs of sending or communicating the Notice of Availability and Offered Loan Schedule to Buyer. Section 2.2 Buyer's Offer and Seller's Acceptance. ------------------------------------- (a) If Buyer chooses to submit an offer to purchase any or all of the Offered Loans, Buyer shall send an Offer to Seller by overnight mail for delivery the following day or by facsimile, within a reasonable period of time after the end of the Due Diligence Period. If the Offer is sent by facsimile, the original Offer shall be sent to Seller by overnight mail for delivery the following day. The Offer shall attach the Offered Loan Schedule (minus the Excluded Loans) and shall set forth the Bid Percentage(s). (b) To accept the Offer, Seller shall, within two (2) Business Days after Seller's receipt of the Offer, execute and return, by facsimile, an Acceptance, with an original, which shall have attached thereto a Loan Schedule, sent by overnight courier for delivery the following day. If Buyer has not received an executed Acceptance by facsimile within 2 Business Days after Seller's receipt of the Offer, Buyer's Offer to purchase the Loans pursuant to the terms of the Offer shall automatically expire, unless Buyer agrees, in writing, to extend the period for acceptance of the Offer. (c) By executing the Acceptance, Seller agrees to execute the Bill of Sale and to sell on the related Settlement Date the Loans set forth in the related Loan Schedule (as such Loan Schedule may be amended by mutual agreement of Seller and Buyer to reflect the actual Loans accepted by Buyer as of the Settlement Date) for a Purchase Price based on the Bid Percentage set forth in the Offer and the Acceptance, and to perform all obligations of Seller contained in Section 3.2 of this Agreement. ----------- AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 8 Section 2.3 Purchase of Loans and Transfer of Servicing Rights. -------------------------------------------------- (a) By execution of a Bill of Sale on a Settlement Date, subject to the terms and conditions set forth in this Agreement, (i) Seller shall sell, transfer, assign, and convey to Buyer, without recourse, but subject to the terms of this Agreement, and Buyer shall purchase and take on such Settlement Date, all of Seller's right, title, and interest in and to the Loans listed in the Loan Schedule attached to such Bill of Sale; (ii) Seller shall sell, transfer, assign, and convey to Buyer, and Buyer shall purchase and take on such Settlement Date, all of Seller's right, title, and interest in and to all escrow deposits held in connection with the Loans listed in the Loan Schedule attached to such Bill of Sale; and (iii) Seller shall also irrevocably assign to Buyer, and Buyer shall take on such Settlement Date, Seller's right to service each Loan sold pursuant to the Bill of Sale and to collect any servicing fee in connection with such Loan, which Buyer shall subsequently assign to New Servicer. Section 2.4 Purchase Price. The Purchase Price for the Loans purchased on -------------- each Settlement Date shall be based on the Bid Percentage set forth in the Offer and the Acceptance and shall be calculated according to the formula set forth in the definition of the term Purchase Price. Section 2.5 Transfer of Servicing. As of each Settlement Date, Seller shall --------------------- transfer to Buyer any and all rights to service the Loans sold on the related Settlement Date, including but not limited to Seller's right to receive all payments and receivables with respect to the Loans. Buyer may, at its option, transfer the rights to service the Loans to New Servicer. Notwithstanding the foregoing, Seller shall continue to service the Loans for Buyer following the Settlement Date and until the corresponding Servicing Transfer Date as set forth in Section 5.1; provided, however, that Seller shall not take any action which ----------- -------- ------- would modify any Loan without the prior written consent of Buyer. New Servicer shall assume responsibility for servicing the Loans on and after such Servicing Transfer Date. Seller shall ensure that all escrow balances are received by Buyer or, at Buyer's option to New Servicer, on the Servicing Transfer Date. If such balances are not received by Buyer within ten (10) days, Seller shall remit to Buyer, or at its option, to New Servicer, in immediately available funds, an amount equal to said balances. The Seller shall be required to pay all expenses incurred by it in connection with its servicing activities hereunder and shall not be entitled to any servicing compensation or reimbursement for such expenses. Section 2.6 Sale Treatment. The sale of each Loan shall be reflected on the -------------- Seller's balance sheet and other financial statements as a sale of assets by the Seller. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 9 SECTION 3 SETTLEMENT Section 3.1 Place and Time of Settlement. Each Settlement shall take place ---------------------------- at Seller's place of business in San Mateo, California or at such other place as the parties may agree, on the Settlement Date, which shall be within 2 Business Days of the satisfaction of all conditions to Settlement, as set forth herein. Section 3.2 Seller's Deliveries on Settlement Date. On or before each -------------------------------------- Settlement Date, Seller shall deliver at its sole cost and expense the following to Buyer: (a) a Bill of Sale, executed by Seller, substantially in the form of Exhibit A, with respect to the Loans sold at such Settlement; --------- (b) as required by RESPA, the form of notice of servicing transfer, to be sent by Seller pursuant to Section 6.1 for each Loan, which ----------- form shall indicate the date on which it shall be sent by Seller; (c) the Mortgage File with respect to each Loan sold at such Settlement, the contents of which are subject to the approval of Buyer and its legal counsel; (d) evidence satisfactory to Buyer of Seller's authority to execute the endorsements, assignments, and Bills of Sale; and (e) all other documents, instruments and writings required to be delivered by Seller prior to or at such Settlement pursuant to Section 7.1 ----------- of this Agreement or as reasonably requested by Buyer. Section 3.3 Buyer's Deliveries at Settlement. At each Settlement, Buyer -------------------------------- shall deliver to Seller the Purchase Price for the Loans sold at such Settlement by wire transfer of immediately available funds in U.S. dollars to the account designated by Seller, subject to any adjustments required hereunder. SECTION 4 REPRESENTATIONS AND WARRANTIES Section 4.1 General Representations and Warranties of Seller. As of the ------------------------------------------------ date hereof, and as of each Settlement Date, Seller represents and warrants as follows: (a) Organization. Seller is a savings bank, duly organized, ------------ validly existing, and in good standing under the laws of the United States of America, and is qualified and authorized to transact business in, and is in good standing under the laws of, each state where a Mortgaged Property is located and each jurisdiction in which it is required to be qualified in order to conduct its business. Seller has the requisite corporate power and authority to AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 10 own and operate its properties, and holds all required licenses, certificates and permits, if necessary, to carry on its business as it is now being conducted, and to consummate the transactions contemplated by this Agreement. (b) Authorization of this Agreement. Seller has the requisite ------------------------------- corporate power and authority to execute and deliver this Agreement, and to consummate the transactions contemplated hereby. The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of Seller are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Seller and constitutes a legal, valid, and binding obligation of Seller, enforceable against Seller in accordance with its terms, except as such enforcement may be affected by bankruptcy, by other insolvency laws, or by general principles of equity. (c) Ordinary Course of Business. The consummation of the --------------------------- transactions contemplated by this Agreement are in the ordinary course of business of Seller, and the transfer, assignment and conveyance of the Notes and the Mortgages by Seller pursuant to this Agreement are not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction. (d) No Conflict or Violation. The execution and delivery of this ------------------------ Agreement by Seller does not, and the performance of this Agreement by Seller will not, (i) result in a violation of or conflict with any provisions of the charter or by-laws or equivalent governing instruments of Seller or any material agreement to which Seller is a party, (ii) violate any law, rule, regulation, code, ordinance, judgment, injunction, order, writ, decree, or ruling applicable to Seller, or (iii) conflict with or violate any agreement, permit, concession, grant, franchise, license, or other governmental authorization or approval necessary for sale of the Loans by Seller. No regulatory approvals or consents are required with respect to Seller's consummation of the transactions contemplated by this Agreement. (e) Litigation. No action, suit, proceeding, or governmental ---------- investigation or inquiry is currently pending, or to the knowledge of Seller, threatened against Seller which, if adversely determined, would have a material adverse effect on the business, combined assets or financial condition of Seller or on the Loans or would prevent the consummation of the transactions contemplated by this Agreement. (f) Financial Condition. Seller has previously furnished Buyer ------------------- with Seller's most recent audited financial statements, together with the respective reports thereon of the Seller's independent public accountants, and Seller's most recent unaudited financial statements, each of which has been prepared in accordance with generally accepted accounting principles. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 11 Each of the balance sheets included in the financial statements sets forth Seller's financial condition as of the date thereof, and there have been no material adverse changes in Seller's business or financial conditions since that date. (g) Accuracy of Statements. Neither this Agreement, nor any ---------------------- statement, report, or other document furnished or to be furnished pursuant to this Agreement, or in connection with the transaction contemplated hereby, contains any untrue statement of fact by Seller, or omits to state a fact necessary to make the statements of Seller contained therein not misleading. (h) Fidelity Bond. Upon request, Seller will deliver to Buyer a ------------- true and correct copy of Seller's fidelity bond and Seller's errors and omissions policy, and/or certificates evidencing the same as currently in effect, the amounts and coverages of both of which will be acceptable to Buyer. Seller shall, at its own expense, maintain a fidelity bond and an errors and omissions policy, in amounts at least as great as, and with the coverages at least as broad as, those currently in effect. Seller shall, upon request, furnish proof of such coverage at or before the first Settlement and, upon request, annually thereafter. (i) Ability to Perform; Solvency. Seller does not believe, nor ---------------------------- does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement. Seller is solvent and the sale of the Loans will not cause Seller to become insolvent. The sale of the Loans is not undertaken with the intent to hinder, delay or defraud any of the Seller's creditors. (j) No Consent Required. No consent, approval, authorization or ------------------- order of any court or governmental agency or body is required for the execution, delivery and performance by Seller of or compliance by Seller with this Agreement or the Loans, or the sale of the Loans to the Buyer or the consummation of the transactions contemplated by this Agreement, or if required, such approval has been obtained prior to each Settlement Date. (k) Selection Process. The Loans were not intentionally selected ----------------- in a manner intended to adversely affect the interest of the Buyer. (1) Commissions to Third Parties. Seller has not dealt with any ---------------------------- broker or agent or other Person who might be entitled to a fee, commission or compensation in connection with this transaction other than the Buyer except as Seller has previously disclosed to Buyer in writing. (m) Fair Consideration. The consideration received by Seller upon ------------------ the sale of the Loans under this Agreement constitutes fair consideration and reasonably equivalent value for the Loans. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 12 (n) HUD Approval. Seller is a mortgagee approved by the Secretary ------------ of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, as amended. (o) Sale Treatment. The Seller has determined that the disposition -------------- of the Loans pursuant to this Agreement will be afforded sale treatment for accounting and tax purposes. Section 4.2 Representations and Warranties of Seller Regarding the Offered -------------------------------------------------------------- Loans. With respect to each Notice of Availability, Seller and any of its - ----- Affiliates represents and warrants to Buyer that as of the corresponding Notice Date: (a) Accuracy of Statements. The information contained in the ---------------------- Offered Loan Schedule and all information provided regarding delinquencies in the Offered Loans are true and correct in all respects. Neither the Offered Loan Schedule nor the Mortgage File nor any other document furnished in connection with this transaction contains any untrue statement of fact by Seller or its Affiliates, or omits to state a fact, necessary to make the statements of Seller or its Affiliates contained therein not misleading. (b) Origination. Each of the Offered Loans was originated or ----------- acquired (i) by the Seller either directly or indirectly through loan brokers or a correspondent lender specifically approved by the Seller, such that (A) the Offered Loan was originated in conformity with the underwriting standards of Seller set forth in Schedule 4.2(b) (A) to this ------------------- Agreement and were underwritten in strict accordance therewith, (B) the Seller approved the Offered Loan either prior to or after the funding thereof, and (C) the Seller funded the Offered Loan on the date of origination thereof with its own funds or with funds obtained by it or, in the case of an Offered Loan originated by a correspondent lender approved by the Seller, the Offered Loan was approved by the Seller prior to origination and was purchased by the Seller from such correspondent lender within thirty (30) days of the date of origination pursuant to a mandatory purchase commitment in effect at origination, (ii) by a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203 and 211 of the National Housing Act, or (iii) by a savings and loan association, a savings bank, a commercial bank, a credit union, an insurance company, or similar institution which is supervised and examined by a Federal or State authority. The Note, the Mortgage and all other documents contained in the Legal Files are on FNMA or FHLMC uniform instruments or are on forms acceptable to FNMA or FHLMC. The documents, instruments and agreements submitted for loan underwriting were not falsified and contain no untrue statement of material fact and do not omit to state a material fact required to be stated therein or necessary to make the information and statements therein not misleading. Seller has not made any representations to the Obligor that are inconsistent with the mortgage instruments used. (c) Genuineness of Signatures. Each of the documents in the Legal ------------------------- File is genuine and contains genuine signatures. Each document that Buyer requires to be an AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 13 original document is an original document. All certified copies of original documents are true copies and meet the applicable requirements and specifications of this Agreement and any other requirements that Buyer has reasonably made of Seller. Section 4.3 Representations and Warranties of Seller Regarding the Loans. ------------------------------------------------------------ With respect to each Loan, Seller represents and warrants to, and covenants with Buyer that, as of the Settlement Date on which such Loan is sold: (a) Title to Loans. Seller has good title to and is the sole owner -------------- of record and holder of the Loan and the indebtedness evidenced by each Note. Unless otherwise disclosed in the Note or the Mortgage or on the Offered Loan Schedule, Seller is the original mortgagee or assignee of the Mortgage, and there has been no more than one prior assignment and no sale or hypothecation by Seller of the Loan. The Loan is not assigned or pledged, and Seller has good, indefeasible and marketable title thereto, and has full right to transfer and sell the Loan to Buyer free and clear of any encumbrance, equity interest, participation interest, lien, pledge, charge, claim or security interest, and has full right and authority subject to no interest or participation of, or agreement with, any other party, to sell and assign each Loan pursuant to this Agreement, and following the sale of each Loan, Buyer will own such Loan free and clear of any encumbrance, equity interest, participation interest, lien, pledge, charge, claim or security interest. (b) Accuracy of the Loan Schedule. The Loan is as described in the ----------------------------- Loan Schedule delivered by Seller to Buyer, and the information contained in the Loan Schedule is true and correct as of the Settlement Date. (c) Payments. As of the Settlement Date, no Loan is thirty (30) or -------- more days delinquent (determined on a contractual basis), no Loan will have been thirty (30) or more days delinquent (determined on a contractual basis) more than once during the twelve (12) months preceding the Settlement Date, and the first Monthly Payment has been made, or shall be made, as the case may be, with respect to the Loan on its Due Date. (d) No Outstanding Charges. There are no defaults in complying ---------------------- with the terms of the Mortgage. All taxes, governmental assessments, insurance premiums, water, sewer and municipal charges, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. Seller has not advanced funds, or induced or solicited or knowingly received any advance of funds by a party other than the Obligor, directly or indirectly, for the payment of any amount required under the Loan, except for interest accruing from the date of the Note or date of disbursement of the Loan proceeds, whichever occurred later, to the day which precedes by one month the Due Date of the first Monthly Payment. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 14 (e) Original Terms Unmodified. The terms of the Note and the ------------------------- Mortgage have not been impaired, waived, altered or modified in any respect, except by a written instrument which has been recorded, if necessary to protect the interests of Buyer. The substance of any such waiver, alteration or modification has been approved by the title insurer, to the extent required by the policy, and its terms are reflected on the Loan Schedule. No Obligor has been released, in whole or in part, except in connection with an assumption agreement approved by the title insurer, to the extent required by the policy, and which assumption agreement is part of the Legal File. (f) Absence of Defenses. The Loan and the Note are not subject to ------------------- any right of rescission, set-off, counterclaim, or defense (including the defense of usury), based on the invalidity or unenforceability of the Note and/or Mortgage or on any conduct of Seller or any of its officers, employees, representatives, Affiliates or assignors in originating or servicing the Loan prior to the Settlement Date, nor will the operation of any of the terms of the Loan or the Note, or the exercise of any right thereunder, render the Loan or the Note unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim , or defense (including the defense of usury) based on any such invalidity, unenforceability or conduct. No right of rescission, set-off, counterclaim, or defense with respect thereto has been asserted to Seller or, to Seller's knowledge, has been asserted to any other person and no Obligor was a debtor in any state or Federal bankruptcy or insolvency proceeding at the time the Loan was originated. (g) Hazard Insurance. Pursuant to the terms of the Mortgage, all ---------------- improvements upon the Mortgaged Property are insured by an insurer acceptable to FNMA against loss by fire and such other risks as are usually insured against in the broad form of extended coverage hazard insurance available from time to time, including flood hazards if upon origination of the Loan, the Mortgaged Property was in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards (and if flood insurance was required by federal regulation and such flood insurance has been made available). All such insurance policies (collectively, the "hazard insurance policy") meet the requirements of the current guidelines of the Federal Insurance Administration, conform to the requirements of the FNMA Seller's Guide and the FNMA Servicers' Guide, and are a standard policy of insurance for the locale where the Mortgaged Property is located. The amount of the insurance is at least in the amount of the full insurable value of the Mortgaged Property on a replacement cost basis or the unpaid balance of the Loan, whichever is less. The hazard insurance policy names (and will name) the Obligor as the insured and contains a standard mortgagee loss payable clause in favor of Seller (or Seller's servicer) and its successors and assigns. The Mortgage obligates the Obligor thereunder to maintain the hazard insurance policy at the Obligor's cost and expense, and on the Obligor's failure to do so, authorizes the holder of the Mortgage to obtain and maintain such insurance at such Obligor's cost and expense, and to seek reimbursement therefor from the Obligor. Where required by state law or regulation, the Obligor has been given an opportunity to AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 15 choose the carrier of the required hazard insurance policy, provided the policy is not a "master" or "blanket" hazard insurance policy covering a condominium, or any hazard insurance policy covering the common facilities of a planned unit development. The hazard insurance policy is the valid and binding obligation of the insurer, is in full force and effect, and will be in full force and effect and inure to the benefit of Buyer upon the consummation of the transactions contemplated by this Agreement. Seller has not engaged in, and has no knowledge of the Obligor's or any subservicer's having engaged in, any act or omission which would impair the coverage of any such policy, the benefits of the endorsement provided for therein, or the validity and binding effect of either. In connection with the issuance of the hazard insurance policy, no unlawfil fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attorney, firm or other person or entity, and no such unlawful items have been received, retained or realized by Seller. (h) Compliance with Applicable Laws. Any and all requirements of ------------------------------- any federal, state or local law including, without limitation, usury, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity or disclosure laws applicable to the Loan have been complied with, and the Seller shall maintain in its possession available for the Buyer's inspection, and shall deliver to the Buyer upon demand, evidence of compliance with all such requirements. The consummation of the transactions contemplated hereby will not involve the violation of any such laws or regulations. (i) No Satisfaction of Mortgage or Note. Neither the Mortgage nor ----------------------------------- the Note has been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Property has not been released from the lien of the Mortgage, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission. Seller has not waived the performance by the Obligor of any action, if the Obligor's failure to perform such action would cause the Loan to be in default, nor has Seller waived any default resulting from any action or inaction by the Obligor. (j) Location and Type of Mortgaged Property. The Mortgaged --------------------------------------- Property consists of a parcel of real property with a single family residence erected thereon, or a two to four-family dwelling, or an individual condominium unit in a low -rise or high-rise condominium project, or an individual unit in a planned unit development. The Mortgaged Property is either a fee simple estate or a long-term residential lease. If the Loan is secured by a long-term residential lease, (A) the terms of such lease expressly permit the mortgaging of the leasehold estate, the assignment of the lease without the lessor's consent (or the lessor's consent has been obtained and such consent is in the Mortgage File) and the acquisition by the holder of the Mortgage of the rights of the lessee upon foreclosure or assignment in lieu of foreclosure to provide the holder of the Mortgage with substantially similar protection; (B) the terms of such lease do not (i) allow the termination thereof upon the lessee's default without the holder of the Mortgage being entitled to receive written notice of, and AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 16 opportunity to cure, such default, (ii) allow the termination of the lease in the event of damage or destruction as long as the Mortgage is in existence or (iii) prohibit the holder of the Mortgage from being insured under the hazard insurance policy relating to the Mortgaged Property; (C) the original term of such lease is not less than fifteen (15) years; (D) the term of such lease does not terminate earlier than five (5) years after the maturity date of the Note; and (E) the Mortgaged Property is located in a jurisdiction in which the use of leasehold estates for residential properties is a widely accepted practice. (k) Valid Lien. The Mortgage for any Loan creates a valid, ---------- subsisting, enforceable and perfected first lien on the Mortgaged Property, and includes all buildings on the Mortgaged Property and all installations and mechanical, electrical, plumbing, heating and air conditioning systems located in or annexed to such buildings, and all additions, alterations and replacements made at any time with respect to the foregoing. The lien of the Mortgage is subject only to "Permitted Exceptions," which consist of the following: (1) the lien of current real property taxes and assessments not yet due and payable; (2) covenants, conditions and restrictions, rights of way, easements and other matters of the public record as of the date of recording acceptable to prudent mortgage lending institutions generally and specifically referred to in the lender's title insurance policy delivered to the originator of the Loan and referred to or otherwise considered in the appraisal made for the originator of the Loan; and (3) other matters to which like properties are commonly subject which do not materially interfere with the benefits of the security intended to be provided by the Mortgage or the use, enjoyment, value or marketability of the related Mortgaged Property. Any security agreement, chattel mortgage or equivalent document related to and delivered in connection with the Loan established and created a valid, subsisting, enforceable and perfected first lien and first priority security interest on the property described therein, and Seller has full right to sell and assign the same to Buyer. (1) Validity of Mortgage Documents. The Note and the Mortgage and ------------------------------ every other agreement, if any, executed and delivered by the Obligor in connection with the Loan are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms. All parties to the Note, the Mortgage and each other such related agreement had legal capacity to enter into the Loan and to execute and deliver the Note, the Mortgage and each other such related agreement, and the Note, the Mortgage and each other such related agreement have been duly and properly executed by the respective Obligors. Seller has reviewed all of the documents constituting the Mortgage AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 17 File and has made such inquiries as it deems necessary to make and confirm the accuracy of the representations set forth herein. The documents, instruments and agreements submitted for loan underwriting were not falsified by any party and contain no untrue statement of material fact or omit to state a material fact required to be stated therein or necessary to make the information and statements therein not misleading. No fraud was committed by any party in connection with the origination of the Loan. (m) Full Disbursement of Proceeds. The Loan has been closed and ----------------------------- the proceeds of the Loan have been fully disbursed and there is no requirement for future advances thereunder, and any and all requirements as to completion of any on-site or off-site improvement and as to disbursements of any escrow funds therefor have been complied with. All costs, fees and expenses incurred in making or closing the Loan and the recording of the Mortgage were paid, and the Obligor is not entitled to any refund of any amounts paid or due under the Note or Mortgage. (n) Doing Business. All parties which have had any interest in the -------------- Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or, during the period in which they held and disposed of such interest, were) (1) in compliance with any and all applicable licensing requirements of the laws of the state where the Mortgaged Property is located, and (2)(a) organized under the laws of such state, or (b) qualified to do business in such state, or (c) federal savings and loan associations, savings banks, or national banks having principal offices in such state, or (d) not doing business in such state. (o) LTV. The Loan to Value Ratio for each Loan was no greater than --- 90%. (p) Title Insurance. The Loan is covered by either (a) an --------------- attorney's opinion of title and abstract of title the form and substance of which is acceptable to FNMA, or (b) an ALTA lender's title insurance policy or other generally acceptable form of policy of insurance issued by a title insurer qualified to do business in the jurisdiction where the Mortgaged Property is located, insuring Seller, its successors and assigns, as to the first priority lien of the Mortgage in the original principal amount of the Loan, subject only to the Permitted Exceptions, and against any loss by reason of the invalidity or unenforceability of the lien resulting from the provisions of the Mortgage providing for adjustment in the Mortgage Interest Rate and Monthly Payment. Additionally, such lender's title insurance policy affirmatively insures ingress and egress, and against encroachments by or upon the Mortgaged Property or any interest therein. Where required by state law or regulation, the Obligor has been given the opportunity to choose the carrier of such lender's title insurance policy. Seller, its successors and assigns, are the sole insureds (except in the case of a joint protection policy, in which case the Seller's interest is insured) of such lender's title insurance policy, and such lender's title insurance policy is valid and remains in full force and effect and will be in full force and effect upon the sale of the Loan to Buyer. No claims have been made under such lender's title insurance policy, and no prior holder of the Mortgage, AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 18 including Seller, has done anything which would impair the coverage of such lender's title insurance policy. In connection with the issuance of such lender's title insurance policy, no unlawful fee, commission, kickback or other unlawful compensation or value of any kind has been or will be received, retained or realized by any attomey, firm or other person or entity, and no such unlawful items have been received, retained or realized by Seller. (q) No Defaults. There is no default, breach, violation or event ----------- of acceleration existing under the Mortgage or the Note or related documents and no event which, with the passage of time or with notice and the expiration of any applicable grace or cure period, would constitute a default, breach, violation or event of acceleration, and neither Seller nor its predecessors have waived any default, breach, violation or event of acceleration. (r) No Mechanics' Liens. There are no mechanics' or similar liens ------------------- or claims which have been filed for work, labor or material (and no rights are outstanding that under the law could give rise to such liens) affecting the related Mortgaged Property which are or may be liens prior to, or equal or coordinate with, the lien of the related Mortgage. (s) Location of Improvements; No Encroachments. All improvements ------------------------------------------ which were considered in determining the Appraised Value of the Mortgaged Property lay wholly within the boundaries and building restriction lines of the Mortgaged Property and no improvements on adjoining properties encroach upon the Mortgaged Property. No improvement located on or being part of the Mortgaged Property is in violation of any applicable zoning law or regulation; provided, that in no event shall a legal non-conforming use of the Mortgaged Property be considered a violation of any such zoning law or regulation. (t) Payment Terms. For Fixed Rate Loans, the Note is payable on ------------- the first day of each month in equal monthly installments (other than the last payment) of principal and interest. For Adjustable Rate Loans, the Mortgage Interest Rate is adjusted in accordance with the terms of the Note and the Note is payable on the first day of each month and, during an adjustment period or initial period, in equal monthly installments of principal and interest. Installments of interest are subject to change due to the adjustments to the Mortgage Interest Rate on each Interest Rate Adjustment Date, with interest calculated and payable in arrears, sufficient to amortize the Loan fully by the stated maturity date, over an original term of not more than thirty years from inception of the Loan. (u) Interest Rate Adjustments. All required notices of interest ------------------------- rate and payment amount adjustments have been sent to the Obligor on a timely basis and the computations of such adjustments were properly calculated. All interest rate adjustments applicable to the Loans have been made in strict compliance with state and federal law and the terms of the related Note. Any interest required to be paid pursuant to state and local law has been properly paid and credited. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 19 (v) Customary Provisions. The Mortgage contains customary and -------------------- enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgaged Property of the benefits of the security provided thereby, including, (i) in the case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii) otherwise by judicial or nonjudicial foreclosure. Upon default by an Obligor on a Loan and foreclosure on, or trustee's sale of, the Mortgaged Property pursuant to the proper procedures, the holder of the Loan will be able to deliver good and merchantable title to the Mortgaged Property. There is no homestead or other exemption available to the Obligor which would interfere with the right to sell the Mortgaged Property at a trustee's sale or the right to foreclose the Mortgage subject to applicable federal and state laws and judicial precedent with respect to bankruptcy and right of redemption. (w) Occupancy of the Mortgaged Property. All inspections, licenses ----------------------------------- and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Property and with respect to the use and occupancy of the same, including, but not limited to, certificates of occupancy and fire underwriting certificates, have been made or obtained from the appropriate authorities. (x) No Additional Collateral. The Note is not and has not been ------------------------ secured by any collateral except the lien of the corresponding Mortgage and the security interest of any applicable security agreement or chattel mortgage referred to in the "Valid Lien" representation above. (y) Deeds of Trust. In the event the Mortgage constitutes a deed -------------- of trust, a trustee, authorized and duly qualified under applicable law to serve as such, has been properly designated and currently so serves and is named in the Mortgage, and no fees or expenses are or will become payable by Buyer to the trustee under the deed of trust, except in connection with a trustee's sale after default by the Obligor. (z) Due on Sale. Each Mortgage, together with any such documents ----------- as may be required under applicable law, contains a provision for the acceleration of the payment of the unpaid principal balance of the Loan in the event that the Mortgaged Property is sold or transferred without the prior written consent of the mortgagee thereunder, at the option of the mortgagee. This provision provides that the mortgagee cannot exercise its option if either (a) the exercise of such option is prohibited by federal law or (b)(i) the Obligor causes to be submitted to the mortgagee information required by the mortgagee to evaluate the intended transferee as if a new loan were being made to such transferee and (ii) the mortgagee reasonably determines that the mortgagee's security will not be impaired by the assumption of such Loan by the transferee and that the risk of breach of any covenant or agreement in the documents evidencing such Loan is acceptable to the mortgagee. To the best of Seller's knowledge, such provision is enforceable. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 20 (aa) Transfer of Loans. Each of the Mortgage and the Assignment of ----------------- Mortgage is in recordable form and is acceptable for recording under the laws of the jurisdiction in which the Mortgaged Property is located, and each Mortgage has been delivered to the appropriate recorder's office for recording. Each Assignment of Mortgage shall be sufficient to effect the transfer of Seller's security interest in the corresponding Mortgaged Property. (bb) No Buydown Provisions: No Graduated Payments or Contingent ---------------------------------------------------------- Interests. The Loan does not contain provisions pursuant to which Monthly --------- Payments are paid or partially paid with funds deposited in any separate account established by Seller, the Obligor or anyone on behalf of the Obligor, or paid by any source other than the Obligor, nor does it contain any other similar provisions currently in effect which may constitute a "buydown" provision. The Loan is not a graduated payment mortgage loan and the Loan does not have a shared appreciation or other contingent interest feature. (cc) Consolidation of Future Advances. Any future advances made to -------------------------------- the Obligor prior to the Offer Date have been consolidated with the outstanding principal amount secured by the Mortgage, and the secured principal amount, as consolidated, bears a single interest readjustment feature or rate and single repayment term. The lien of the Mortgage securing the consolidated principal amount is expressly insured as having first lien priority by a title insurance policy, an endorsement to the policy insuring the mortgagee's consolidated interest or by other title evidence acceptable to Buyer, FNMA and FHLMC. The consolidated principal amount does not exceed the original principal amount of the Loan. (dd) Mortgaged Property Undamaged; No Condemnation Proceedings. --------------------------------------------------------- There is no proceeding pending or, threatened for the total or partial condemnation of the Mortgaged Property. The Mortgaged Property is undamaged by waste, fire, earthquake or earth movement, windstorm, flood, water, tornado or other casualty so as to adversely affect the value of the Mortgaged Property as security for the Loan or the use for which the premises were intended and each Mortgaged Property is in good repair. There have not been any condemnation proceedings with respect to the Mortgaged Property and Seller has no knowledge of any such proceedings in the future. (ee) Collection Practices; Escrow Deposits. The origination, ------------------------------------- servicing and collection practices used by Seller with respect to the Loan have been in accordance with Accepted Servicing Practices and are in all respects in compliance with all applicable laws and regulations. With respect to escrow deposits and Escrow Payments, all such payments are in possession of Seller or the servicer of such Loan and there exist no deficiencies in connection therewith for which customary arrangements for repayment thereof have not been made. All Escrow Payments have been collected in full compliance with state and federal law. Unless prohibited by applicable law, an escrow of funds has been established in an amount sufficient to pay for every item which remains unpaid and which has been assessed but is not yet due and payable. No escrow deposits or Escrow Payments or other charges or payments due Seller have been capitalized under the Mortgage or the Note. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 21 (ff) Appraisals. Seller has delivered to Buyer an appraisal of the ---------- Mortgaged Property signed prior to the approval of the Mortgage application by a qualified appraiser, who (i) is licensed in the state where the Mortgaged Property is located, (ii) has no interest, direct or indirect, in the Mortgaged Property or in any Loan or the security therefor, and (iii) does not receive compensation that is affected by the approval or disapproval of the Loan. The appraisal shall have been made within ninety (90) days of the Settlement Date, be completed in compliance with the Uniform Standards of Professional Appraisal Practice, any additional requirement set forth for appraisals in Schedule 2.1 attached to this ------------ Agreement, and all applicable Federal and state laws and regulations. (gg) Soldier's and Sailors' Relief Act. The Obligor has not --------------------------------- notified Seller and Seller has no knowledge of any relief requested or allowed to the Obligor under the Solider's and Sailors's Civil Relief Act of 1940. (hh) Environmental Matters. There exists no violation of any local, --------------------- state or federal environmental law, rule or regulation in respect of the Mortgaged Property which violation has or could have a material adverse effect on the market value of such Mortgaged Property. Seller has no knowledge of any pending action or proceeding directly or indirectly involving the related Mortgaged Property in which compliance with any environmental law, rule or regulation is in issue; and, to the best of Seller's knowledge, nothing further remains to be done to satisfy in full all requirements of each such law, rule or regulation constituting a prerequisite to the use and enjoyment of such Mortgaged Property. (ii) Obligor Acknowledgment. The Obligor has executed a statement ---------------------- to the effect that the Obligor has received all disclosure materials required by applicable law with respect to the making of adjustable rate mortgage loans. Seller shall maintain or cause to be maintained such statement in the Credit File. (jj) No Construction Loans. The Loan was not made in connection --------------------- with (a) the construction or rehabilitation of a Mortgaged Property or (b) facilitating the trade-in or exchange of a Mortgaged Property. (kk) Selection. The Loans were not selected for inclusion under --------- this Agreement from among Seller's mortgage loan portfolio on any basis which would have an adverse effect on the interests of Buyer. (11) Circumstances Affecting Value, Marketability or Prepayment. ---------------------------------------------------------- Except as otherwise disclosed to Buyer, Seller has no knowledge of any circumstances or conditions with respect to the Mortgage, the Mortgaged Property, the Obligor, or the Obligor's credit standing that could reasonably be expected to adversely affect the value or the marketability of any Mortgaged Property or Loan, subject to the economic and geological conditions generally and specifically to the area in which the Mortgaged Property is located, or cause the Loan to become delinquent. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 22 (mm) Riegle Act. Except as disclosed on the Loan Schedule, none of ---------- the Loans are classified as "high cost" loans under Section 32 of the Home Ownership and Equity Protection Act of 1994. (nn) REMIC Status. The Loan is a qualified mortgage for inclusion ------------ in a "real estate mortgage investment conduit" for federal income tax purposes. The Seller hereby covenants to bring each of the representations and warranties referred to above current as of the Servicing Transfer Date. Additionally, upon Buyer's request, the Seller hereby covenants to bring the representations and warranties stated in Subsections 4.3(a)-(h), (j)-(p), (s), ------------------------------------- (t), (v)-(cc), (ff), (ii)-(kk), (mm) and (nn) current up to ninety (90) days - --------------------------------------------- after the related Settlement, provided that with respect to a securitization of the Loans, such representations and warranties shall be revised, to the extent allowed or required by the rating agencies and the certificate insurer and acceptable to Buyer, to reflect the actual pool of Loans being securitized. Section 4.4 General Representations and Warranties of Buyer. As of the ----------------------------------------------- date hereof, and as of each Settlement Date, Buyer represents and warrants as follows: (a) Organization. Buyer is a corporation, duly organized, validly ------------ existing, and in good standing under the laws of the State of Delaware, and is qualified and authorized to transact business in, and is in good standing under the laws of, each jurisdiction in which such qualification is required for Buyer to do business. Buyer has the requisite corporate power and authority to own and operate its properties, to carry on its business as it is now being conducted, to execute and deliver this Agreement and to consummate the transactions contemplated by this Agreement. (b) Authorization of this Agreement. The execution, delivery, and ------------------------------- performance of this Agreement and the consummation of the transactions contemplated hereby have been duly and validly authorized by all necessary corporate action, and no other corporate proceedings on the part of Buyer are necessary to authorize this Agreement or to consummate the transactions contemplated hereby. This Agreement has been duly executed and delivered by Buyer and constitutes a legal, valid, and binding obligation of Buyer, enforceable against Buyer in accordance with its terms, except that such enforcement may be affected by bankruptcy, by other insolvency laws, or by general principles of equity. (c) No Conflict or Violation. The execution and delivery of this ------------------------ Agreement by Buyer does not, and the performance of this Agreement by Buyer will not, (i) result in a violation of or conflict with any provisions of the charter or by-laws or equivalent governing instruments of Buyer, (ii) violate any law, rule, regulation, code, ordinance, judgment, injunction, order, writ, decree, or ruling applicable to Buyer, or (iii) conflict with or violate any agreement, permit, concession, grant, franchise, license, or other governmental AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 23 authorization or approval necessary for purchase of the Loans by Buyer. No regulatory approvals or consents are required with respect to Buyer's consummation of the transactions contemplated by this Agreement. (d) Litigation. No action, suit, proceeding, or governmental ---------- investigation or inquiry is currently pending, or to the knowledge of Buyer, threatened against Buyer which, if adversely determined, would have a material adverse effect on the business, combined assets or financial condition of Buyer or on the Loans or would prevent the consummation of the transactions contemplated by this Agreement. SECTION 5 PRE-SETTLEMENT COVENANTS Seller covenants and agrees that: Section 5.1 Continued Servicing. Seller shall continue servicing the Loans ------------------- to be sold on each Settlement Date until the related Servicing Transfer Date (the "Interim Servicing Period"), unless otherwise agreed to in writing by the ------------------------ parties, on Seller's system in conformance and accordance with (i) all of the requirements in the Legal File, (ii) applicable law, (iii) Accepted Servicing Practices, and (iv) the terms of this Agreement. Seller shall make interest rate adjustments for each Loan in compliance with the requirements of the related Mortgage and Note and execute and deliver the notices required by each Mortgage and Note regarding interest rate adjustments. Seller shall also, at its sole cost and expense, provide timely notification to the Obligor of all applicable data and information regarding such interest rate adjustments and Seller's methods of implementing such interest rate adjustments for any interest rate adjustment scheduled to occur up to ten (10) days after the Servicing Transfer Date. Continuously during the Interim Servicing Period, Seller will proceed diligently to collect all payments due under each of the Loans when the same shall become due and payable and will take special care in ascertaining and estimating annual ground rents, taxes, assessments, water rates, municipal charges, condominium charges, fire and hazard insurance premiums, mortgage insurance premiums, and all other charges that, as provided in any Mortgage, will become due and payable, to the end that the installments payable by the Obligors will be sufficient to pay such charges as and when they become due and payable. Seller shall deposit, without duplication, in the Collection Account on a daily basis within one Business Day of receipt, and retain therein the following payments and collections: (i) all payments on account of principal, including principal prepayments, on the Loans; (ii) all payments on account of interest on the Loans; AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 24 (iii) all late payment charges; and (iv) any proceeds for the Loan (i.e., liquidation, insurance, condemnation) and other amounts. All payments received by Seller on account of principal, including principal prepayments, on the Loans during the Interim Servicing Period referred to in (i) above, shall be credited by Seller against the Loan to reduce the outstanding principal amount due on such Loan. "Principal prepayments" as used herein shall include any payment or other recovery of principal on a Loan which is received in advance of its scheduled due date, including any prepayment penalty or premium thereon, which is not accompanied by an amount of interest representing scheduled interest due on any date or dates in any month or months subsequent to the month of prepayment. Seller shall segregate and hold all funds collected and received pursuant to each Loan separate and apart from any of its own funds and general assets in the Collection Account in the form of time deposit or demand accounts, which may be interest bearing. Funds in the Collection Account shall be insured by the FDIC to the maximum extent available. The creation of the Collection Account shall be evidenced by a letter agreement substantially in the form of Attachment ---------- 1 hereto. - - On the thirtieth (30th) day of each month during the Interim Servicing Period, Seller shall remit to Buyer by wire transfer of immediately available funds to the account designated in writing by Buyer the funds in the Collection Account. Additionally, on the Servicing Transfer Date, Seller shall wire transfer all funds in the Collection Account to Buyer to the account designated by Buyer. Section 5.2 Preparation of Assignments. Prior to each Settlement Date, -------------------------- Seller shall, at its sole expense, prepare and deliver an Assignment of Mortgage in form and substance acceptable to Buyer and its counsel and assignments of any other security documents corresponding to each Loan to be sold on such Settlement Date. Section 5.3 IRS Reporting. To the extent required by law, Seller shall ------------- report to the IRS and each Obligor the amount of interest paid (including, without limitation, the obligations with respect to Forms 1098 and 1099 and back up withholding with respect to same, if required) by such Obligor on the Loan on which he is the Obligor from the date of the advance made by Seller to such Obligor through and including the Servicing Transfer Date, and Buyer or New Servicer shall thereafter report to the IRS and each Obligor the amount of interest paid by such Obligor on the Loan on which he is the Obligor. Section 5.4 Compliance with Law. From the date of this Agreement to each ------------------- Settlement Date, Seller shall comply with and use its best efforts to cause each Obligor to comply with all applicable state and Federal rules and regnlations including those requiring the giving of notices, and AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 25 where applicable, Seller warrants that it will comply with the National Housing Act of 1934, as from time to time amended, the Servicemen's Readjustment Act of 1944, as amended, and with all rules and regulations issued under either such act. Section 5.5 No Sale of Assets. Without the prior written consent of Buyer, ----------------- Seller shall not sell, lease, assign, transfer, encumber or permit the encumbrance of, or otherwise dispose of: (a) any of the Offered Loans from the date that Seller signs the Letter of Intent until the earlier of (i) the day on which Seller receives Buyer's Offer or (ii) the close of business on the day ten (10) Business Days after the Due Diligence Period expires; and (b) any of the Loans included in the Loan Schedule to Buyer's Offer from the date on which such Offer is received until the Settlement Date or until the Offer is rejected by Seller. Section 5.6 Private Mortgage Insurance. Seller shall provide any -------------------------- notification to private mortgage insurance companies necessary to ensure continuation of such insurance upon transfer of the Loans to Buyer. SECTION 6 POST-SETTLEMENT COVENANTS Section 6.1 Notice of Servicing Transfer. Seller and Buyer shall each ---------------------------- comply with, and Seller shall assist Buyer in complying with, the notice requirements of the Cranston Gonzalez National Affordable Housing Act of 1990. Such compliance by each party shall include, without limitation, sending its own notices of the transfer of servicing from Seller to Buyer, at its sole expense. Seller's notice to each Obligor shall state that any payments due from such Obligor that are due 15 or more days after the date on which Seller sends such notice shall be made to Buyer in care of New Servicer. Seller's assistance to Buyer shall include providing Buyer with any information that Seller has or has access to and that Buyer reasonably requires to complete its notices. Buyer shall approve any such notices sent by Seller, and Seller shall have the right to approve any such notices sent by Buyer, prior to the date mailed. To enable the parties to determine the Servicing Transfer Date, Seller shall, with respect to all Loans sold on each Settlement Date, send all notices pursuant to this Section 6.1 on the same day, and shall, upon sending such notices, inform Buyer - ----------- of the date on which such notices are sent. Within ten (10) days of each Settlement Date, Seller shall deliver to Buyer or, at Buyer's option, to New Servicer, a copy of the notice sent with respect to each Loan sold on such Settlement Date. Section 6.2 IRS Examination. Buyer and Seller shall cooperate fully with --------------- each other in connection with any examination conducted by any tax authority after each Settlement Date, provided that nothing herein shall be construed as obligating Buyer or Seller to disclose or furnish any tax information not related to the transfer of the Loans. Buyer and Seller shall inform each other promptly of any material developments in the course of any such examination, the results of any such examination, and any proceeding related thereto. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 26 Section 6.3 Tax on Sale. Each party shall promptly pay in full and when ----------- due any tax or other governmental charge or fee imposed upon it under applicable law on the sale of the Loans from Seller to Buyer pursuant to this Agreement. Section 6.4 Books and Records. Seller agrees to keep and maintain such ----------------- books and records so as to meet and comply with all applicable laws, and the requirements or recommendations of ECOA and TILA. The same shall be available to Buyer at any time, upon reasonable notice, during regular business hours, for examination and audit to the extent required to determine compliance with such laws. Such records shall include a loan register documenting all loan applications taken by Seller. Section 6.5 On-Site Reviews. Seller agrees, upon reasonable notice and --------------- during regular business hours, to meet with Buyer from time to time to discuss Seller's business activities related to this Agreement and to allow Buyer to conduct periodic on-site audits of Seller's business activities related to this Agreement. Section 6.6 Financial Statements. Each party shall furnish to the other -------------------- for as long as this Agreement is in effect, (i) as soon as available, and in any event within ninety (90) days after the end of each fiscal year, audited or certified financial statements consisting of a balance sheet as of the end of such fiscal year, together with related statements of income or loss and reinvested earnings and changes in financial position for such fiscal year, prepared by independent certified public accountants in accordance with generally accepted accounting principles, and (ii) if available, within ten (10) days after the end of each quarterly period unaudited financial statements which may be satisfied by furnishing a copy of the quarterly report filed with the Securities and Exchange Commission ("SEC"). With respect to Buyer, this covenant --- may be fulfilled by providing the audited financial statements and/or SEC filings of Parent. In addition, each party shall provide the other, from time to time, upon reasonable request (which shall include a written statement describing the reason therefor) and sixty (60) days' notice, any other financial reports or statements reasonably required by the requesting party. Section 6.7 Post-Servicing Transfer Date Loan Payments. Seller agrees that ------------------------------------------ it will remit to Buyer, or at Buyer's option, to New Servicer, within 48 hours after receipt, any payment on a Loan including, without limitation, all payments of principal and interest, late charges, and back check charges received from an Obligor on or after the Servicing Transfer Date at the following address: Advanta Mortgage Corp. USA, P.O. Box 15473, Wilmington, DE 19850-9011, or such other address as Buyer may designate. Seller shall remit such payment via an overnight delivery service. Section 6.8 Transfer of Servicing Rights and PMI. Seller shall use all ------------------------------------ efforts to assist Buyer in the transfer from Seller to Buyer of servicing rights and servicing contracts for the monitoring of ad valorem taxes and flood hazard insurance for each Loan, including assisting Buyer with any notices to private mortgage insurance companies or ad valorem tax or flood hazard insurance service companies. AMRESCO RESIDENTIAL CAPITAL MARKETS, INC. Continuing Loan Purchase Agreement 02/25/97 Page 27 Section 6.9 Delivery of Original Mortgage. With respect to each Loan, if ----------------------------- the original recorded Mortgage is not delivered on the Settlement Date, the Seller shall cause by no later than sixty (60) days after the Settlement Date, the original recorded Mortgage and, if applicable, any prior Assignment of Mortgage to be delivered to Buyer, or at Buyer's option to Custodian. The Seller shall pay the out-of-pocket costs incurred in connection with such acts. Section 6.10 Confidentiality. --------------- (a) Seller shall not disclose any confidential or proprietary information of Buyer, the Offered Loans, the Mortgage Files, the Offer, the Acceptance, any of the terms of this Agreement or the list of Obligors and data relating to their mortgages (collectively, the "Confidential Information") to ------------------------- any person who is not a partner, officer, employee, counsel, or agent of Seller except with the consent of Buyer or pursuant to a subpoena or order issued by a court of competent jurisdiction or by a judicial or administrative or legislative body or committee. (b) In the event that Seller receives a request to disclose any Confidential Information under such subpoena or order, Seller shall (i) notify Buyer thereof within 10 days after receipt of such request, (ii) consult with Buyer on the advisability of taking steps to resist or narrow such request, and (iii) if disclosure is required or deemed advisable, cooperate with Buyer in any attempt that it may make to obtain an order or other reliable assurance that confidential treatment will be accorded to designated portions of the Confidential Information. (c) All information and documents that Buyer provides to Seller pursuant to this Agreement shall be deemed to be Confidential Information. (d) Neither Seller nor any of its Affiliates shall issue any press release or public announcement concerning the contemplated transaction, the existence of this Agreement, or the terms, conditions, and provisions of this Agreement (i) without the prior written consent of Buyer or (ii) except as required by law, in which event Seller shall consult with Buyer to the extent practicable before making such disclosure. Section 6.11 Continued Cooperation. Seller shall cooperate with Buyer in --------------------- Buyer's future efforts to pool the Loans (perhaps with other loans) for securitization purposes. Such cooperation shall include providing Buyer with historical delinquency information for loans similar in type to the Loans originated by Seller (including appropriate comfort letters with respect thereto), execution of additional transfer or assignment documents, estoppel certificates or other verification of Buyer's performance of this Agreement, and compliance with other reasonable requests made by Buyer. Section 6.12 Covenant to Cooperate. Seller hereby covenants to cooperate --------------------- with any disposition of the Loans which Buyer attempts, which shall include but not be limited to: (i) providing reasonable and customary reports on an ongoing basis to sponsors, rating agencies, credit Continuing Loan Purchase Agreement Page 28 enhancers and investors involved in the securitization or other disposition of the Loans ("Disposition Participants"), (ii) giving access to records, ------------------------ facilities and employees for the on-and off-site legal investigation and due diligence by Disposition Participants upon reasonable notice and at reasonably acceptable times, and (iii) making representations to Disposition Participants generally no more onerous than its representations made herein. Section 6.13 No Personal Solicitation. From and after each Settlement Date, ------------------------ Seller agrees that it will not take any action or permit or cause any action to be taken by any of its agents and Affiliates, or by any independent contractors or independent mortgage brokerage companies on Seller's behalf, to personally, by telephone or mail, solicit the borrower or Obligor under any Loan for any purpose whatsoever, including to refinance a Loan, nor will Seller buy a loan to an Obligor secured by a Mortgaged Property, in whole or in part, without the prior written consent of Buyer. It is understood and agreed that all rights and benefits relating to the solicitation of any Obligors and the attendant rights, title and interest in and to the list of such Obligors and data relating to their mortgages (including insurance renewal dates) shall be transferred to Buyer pursuant hereto on each Settlement Date and Seller shall take no action to undermine these rights and benefits. Notwithstanding the foregoing, it is understood and agreed that promotions undertaken by Seller or any Affiliate of Seller which are directed to the general public at large, including, without limitation, mass mailing based on commercially acquired mailing lists, newspaper, radio and television advertisements, shall not constitute solicitation under this paragraph, nor is Seller prohibited from responding to unsolicited requests or inquiries made by an Obligor. SECTION 7 CONDITIONS TO SETTLEMENT Section 7.1 Conditions to Buyer's Obligations. The obligations of Buyer to --------------------------------- purchase the Loans at each Settlement are subject to the satisfaction at or prior to such Settlement of each of the following conditions (any or all of which may be waived by Buyer): (a) Representations and Warranties Correct. Each of the -------------------------------------- representations and warranties of Seller contained in this Agreement shall be true and correct in all material respects in accordance with their terms as of the date of this Agreement, and on and as of such Settlement Date with the same force and effect as though made on and as of such Settlement Date, and, if Buyer so requests, Seller shall have delivered to Buyer a certificate in the form of Exhibit F attached hereto to such effect signed on Seller's behalf by its - --------- President or another appropriate officer. (b) Compliance with Covenants. Seller shall have performed and be in ------------------------- compliance with, in all material respects, all of its respective covenants, acts, and obligations to be performed under this Agreement, and Seller shall have delivered to Buyer a certificate in the form of Exhibit F attached hereto --------- to such effect signed on Seller's behalf by its President or another appropriate officer. Continuing Loan Purchase Agreement Page 29 (c) Settlement Documents. Seller shall have executed and delivered -------------------- this Agreement and this Agreement shall not have been terminated; Seller shall have delivered the Mortgage Files in connection with the Loans to be purchased on such Settlement Date, and executed all documents required to transfer the Loans in accordance with the terms of this Agreement. (d) Corporate Documents. On or before each Settlement Date, Seller ------------------- shall have delivered to Buyer: (i) a certificate of its jurisdiction of incorporation dated not earlier than the date of the thirtieth day preceding the Settlement Date, to the effect that Seller is a corporation validly existing and in good standing (if applicable) under the laws of such jurisdiction as of such date; (ii) a certificate of the Secretary or Assistant Secretary of Seller attaching (A) evidence of such corporation action or authorization as is necessary to approve of this Agreement and the authorization of the officers of Seller to sign this Agreement, which action or authorization shall continue to be in force as of the Settlement Date, and (B) specimen signatures of the officers of Seller authorized to sign this Agreement; (iii) a copy, certified as true by the Secretary or Assistant Secretary of Seller, of the charter and the by-laws of Seller; and (iv) all other documents, instruments, and writings required to be delivered by Seller pursuant to this Agreement. (e) Corporate Actions. All corporate and other acts necessary to ------------------ authorize the execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereunder shall have been taken by Seller. (f) Access to Information: Due Diligence. Buyer and its ------------------------------------- representatives shall have had access to such information and records of Seller as Buyer shall have reasonably requested to ascertain Seller's compliance with this Agreement, and all such information and records shall be satisfactory to Buyer and its representatives in accordance with the terms of this Agreement. (g) No Pending Litigation. There shall not be pending or threatened --------------------- any suit, action, injunction, investigation, inquiry, or other proceeding against either of the parties before any court or government agency, which, in Buyer's good faith judgment, has resulted or is reasonably likely to result in an order staying or judgment restraining or prohibiting the transactions contemplated hereby or subjecting a party to material liability on the grounds that it has breached any law or regulation or otherwise acted improperly in connection with the transactions contemplated hereby. Continuing Loan Purchase Agreement Page 30 Section 7.2 Opinion of Counsel. The obligations of Buyer to purchase the ------------------ Loans at the first Settlement following execution of this Agreement are subject to Buyer having received an opinion of Seller's counsel satisfactory to Buyer, in the form of Exhibit E attached hereto, as to such matters concerning this --------- Agreement or the Settlement as are reasonably requested by Buyer. Thereafter, at each Settlement, Seller's counsel must furnish a reliance letter relating to the original opinion or must provide a new opinion. Section 7.3 Conditions to Seller's Obligations. The obligations of Seller ---------------------------------- to sell the Loans at each Settlement are subject to the satisfaction at or prior to such Settlement, of each of the following conditions (any or all of which may be waived by Seller): (a) Purchase Price. The Purchase Price shall have been delivered to -------------- Seller pursuant to Seller's reasonable instructions in accordance with Section 3.3. ----------- (b) Representations and Warranties Correct. Each of the -------------------------------------- representations and warranties of Buyer contained in this Agreement shall be true and correct in all material respects in accordance with their terms as of the date of this Agreement, and on and as of such Settlement Date with the same force and effect as though made on and as of such Settlement Date, and if Seller so requests, Buyer shall have delivered to Seller a certificate to such effect signed on Buyer's behalf by its President or another appropriate officer. (c) Compliance with Covenants. Buyer shall have performed and be in ------------------------- compliance with, in all material respects, all of its respective covenants, acts, and obligations to be performed under this Agreement, and Buyer shall have delivered to Seller a certificate to such effect signed on Buyer's behalf by its President or another appropriate officer. (d) Corporate Documents. On or before the Settlement Date, Buyer shall ------------------- have delivered to Seller: (i) a certificate of its jurisdiction of incorporation dated not earlier than the date of the thirtieth day preceding the Settlement Date, to the effect that Buyer is a corporation validly existing and in good standing (if applicable) under the laws of such jurisdiction as of such date; (ii) a certificate of the Secretary or Assistant Secretary of Buyer attaching (A) evidence of such corporation action or authorization as is necessary to approve of this Agreement and the authorization of the officers of Buyer to sign this Agreement, which action or authorization shall continue to be in force as of the Settlement Date, and (B) specimen signatures of the officers of Buyer authorized to sign this Agreement; (iii) a copy, certified as true by the Secretary or Assistant Secretary of Buyer, of the charter and the by-laws of Buyer; and Continuing Loan Purchase Agreement Page 31 (iv) all other documents, instruments, and writings required to be delivered by Buyer pursuant to this Agreement. (e) Corporate Actions. All corporate and other acts necessary to ----------------- authorize the execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereunder shall have been taken by Buyer. (f) No Pending Litigation. There shall not be pending or threatened --------------------- any suit, action, injunction, investigation, inquiry, or other proceeding against either of the parties before any court or government agency, which, in Seller's good faith judgment, has resulted or is reasonably likely to result in an order staying or judgment restraining or prohibiting the transactions contemplated hereby or subjecting a party to material liability on the grounds that it has breached any law or regulation or otherwise acted improperly in connection with the transactions contemplated hereby. SECTION 8 SURVIVAL OF COVENANTS, REPRESENTATIONS AND WARRANTIES It is understood and agreed that the covenants, representations and warranties set forth in this Agreement shall survive delivery and release of the Mortgage Files to Buyer for a period of two (2) years from the date on which such covenant, representation, or warranty is made or one year from the date that the breach or misrepresentation was actually discovered by Buyer, whichever is later. It is further understood that the covenants, representations and warranties set forth in this Agreement shall inure to the benefit of Buyer, its successors and assigns, or any holder of any endorsement of any Note or any assignment of the Loan Documents. SECTION 9 POST-SETTLEMENT REPURCHASE AND ADJUSTMENTS; REPURCHASE OBLIGATION OF SELLER Section 9.1 Repurchase Obligations. It is understood and agreed ---------------------- that the representations and warranties contained in Section 4 of this Agreement --------- shall survive the sale of the Loans to Buyer and shall inure to the benefit of Buyer, its successors and assigns, notwithstanding any restrictive or qualified endorsement on any Note or Assignment of Mortgage or the examination or lack of examination of any Mortgage File. (a) In the event that Buyer discovers that any of the representations and warranties set forth herein were untrue in any material respect as of the related Settlement Date and that such breaches of the representations and warranties materially and adversely affect the interest of Buyer in the Loans: Buyer shall give Seller notice of, and shall request that Seller cure, such failure, breach, or action within sixty (60) days of Seller's receipt of such notice. For purposes of this section, Seller acknowledges that Buyer intends to sell the Loans to a trust for the purpose of Continuing Loan Purchase Agreement Page 32 securitization to be insured by a "certificate insurer", and that any breach of representation or warranty which would cause the Loan to be ineligible for securitization or cause the certificate insurer to refuse coverage would constitute a material adverse effect. The Seller shall, at the request of the Buyer and assuming that Seller has a Qualified Substitute Loan, rather than repurchase the Loan as provided below, remove such Loan and substitute in its place a Qualified Substitute Loan or Loans; provided that such substitution shall be effected not later than one hundred twenty (120) days after the related Settlement Date. Any repurchase of a Loan pursuant to the foregoing provisions of this Section 9.1 (a) shall occur on ----------- - a date designated by Buyer and shall be accomplished by deposit in the Collection Account of the amount of the Repurchase Price for distribution to Buyer. At the time of repurchase of any deficient Loan, Buyer and Seller shall arrange for the reassignment of the repurchased Loan to Seller and the delivery to Seller of any documents held by the Custodian relating to the repurchased Loan. In the event the Repurchase Price is deposited in the Collection Account, Seller shall, simultaneously with such deposit, give written notice to Buyer that such deposit has taken place. Upon such repurchase, the related Loan Schedule shall be amended to reflect the withdrawal of the repurchased Loan from this Agreement. As to any Deleted Loan for which Seller substitutes a Qualified Substitute Loan or Loans, Seller shall effect such substitution by delivering to Buyer for such Qualified Substitute Loan or Loans the Note, the Mortgage, the Assignment of Mortgage and such other documents and agreements as are required by the Custodial Agreement, with the Note endorsed as required therein. Seller shall deposit in the Collection Account the Monthly Payment and any servicing fee due on such Qualified Substitute Loan or Loans in the month following the date of such substitution. Monthly Payments due with respect to Qualified Substitute Loans in the month of substitution will be prorated between Buyer and Seller. For the month of substitution, distributions to Buyer will include a prorated portion of the Monthly Payment due on such Deleted Loan, and Seller shall thereafter be entitled to retain all amounts subsequently received by Seller in respect of such Deleted Loan. Seller shall give written notice to Buyer that such substitution has taken place and shall amend the Loan Schedule to reflect the removal of such Deleted Loan from the terms of this Agreement and the substitution of the Qualified Substitute Loan. Upon such substitution, such Qualified Substitute Loan or Loans shall be subject to the terms of this Agreement in all respects, and Seller shall be deemed to have made with respect to such Qualified Substitute Loan or Loans, as of the date of substitution, the covenants, representations and warranties set forth in Sections 4.1, 4.2 and --------------------- 4.3. - --- For any month in which Seller substitutes one or more Qualified Substitute Loans for one or more Deleted Loans, Seller will determine the amount (if any) by which the aggregate principal balance of all such Qualified Substitute Loans as of the date of substitution is less than the aggregate stated Principal Balance of all such Deleted Loans (after application of Continuing Loan Purchase Agreement Page 33 scheduled principal payments due in the month of substitution). An amount equal to the product of the amount of such shortfall multiplied by the Repurchase Price shall be distributed by Seller in the month of substitution. Accordingly, on the date of such substitution, Seller will deposit from its own funds into the Collection Account an amount equal to such amount. It is understood and agreed that the obligations of Seller set forth in this Section 9.1(a) to cure, substitute for or repurchase a defective Loan constitute - ------------- the sole remedies of Buyer respecting a breach of the foregoing representations and warranties. Any cause of action against Seller relating to or arising out of the breach of any representations and warranties made in Sections 4.1, 4.2 or 4.3 shall ------------------------ accrue as to any Loan upon (i) discovery of such breach by Buyer or notice thereof by Seller to Buyer, (ii) failure by Seller to cure such breach or repurchase such Loan as specified above, and (iii) demand upon Seller by Buyer for compliance with the relevant provisions of this Agreement. (b) If Seller fails to cure such failure, breach or action to the sole satisfaction of Buyer within such 60-day period, Seller shall, not later than thirty (30) days after said 60-day period, repurchase such Loan at the Repurchase Price set forth in Section 9.2. ----------- Section 9.2 Repurchase Price. In the event Seller repurchases a Loan from ---------------- Buyer pursuant to Section 9.1 above, the Repurchase Price shall be an amount ----------- equal to (a) the product of (i) the Bid Percentage and (ii) the Principal Balance of such Loan, (b) minus the aggregate amount of all payments of principal made to Buyer on such Loan from the Settlement Date up to, but not including, the date of repurchase, (c) plus accrued but unpaid interest up to and including the date of repurchase, (d) plus any reasonable and customary out-of-pocket expenses paid to third parties relating to such Loan. Upon payment of the Repurchase Price as set forth herein, Buyer shall deliver the Mortgage Files relating to such repurchased Loan and shall execute and deliver such instruments of transfer or assignment, in each case without recourse, as shall be necessary to vest in Seller title to such repurchased Loan on a servicing-released basis. Seller shall pay all out-of-pocket costs incurred in delivering the Mortgage File to Seller. Except for the negligence or willful misconduct of Buyer or Buyer's representative, Buyer shall have no liability for the failure by the courier to deliver the Mortgage File to Seller for any reason whatsoever. Continuing Loan Purchase Agreement Page 34 Section 9.3 Post-Settlement Adjustments to Purchase Price. Within sixty --------------------------------------------- (60) days after each Settlement Date, the parties to this Agreement shall notify the other in writing of any miscalculations, misapplied payments, unapplied payments or other accounting errors (each, a "Discrepancy") which said party has ------------ discovered and which affects the Principal Balance of any of the Loans purchased on such Settlement Date or the Purchase Price for the Loans purchased on such Settlement Date. Notice under this Section 9.3 shall include copies of documents ----------- sufficient to describe each Discrepancy. Buyer shall pay Seller or Seller shall pay Buyer, as the case may be, an amount sufficient to correct such Discrepancy, with all such adjustments calculated using the Bid Percentage. Any amounts due hereunder shall be paid within ten (10) days of notice by the first party to the other party. SECTION 10 INDEMNIFICATION Section 10.1 Seller's Indemnification. ------------------------ (a) Seller agrees to indemnify and hold Buyer, its Affiliates, and their respective officers, directors, employees, agents, successors, and assigns, and related entities from and to reimburse them for, any loss, cost, expense, damage, liability, or claim (including, without limitation, all Legal Fees) relating to, arising out of, based upon, or resulting from: (i) Seller's ownership of or actions with respect to the Loans; (ii) Seller's breach of any of its representations and warranties contained in this Agreement; or (iii) Seller's breach of or failure to perform any of its covenants or agreements contained in or made pursuant to this Agreement. (b) The obligations of Seller under this Section shall survive the transfer and delivery of the Loans to Buyer and the termination of this Agreement. (c) Notwithstanding the foregoing, Seller shall not have any liability in respect of the representations or warranties on the part of Seller herein contained to the extent such liability would not have arisen but for Buyer's own willful misconduct or negligence. Section 10.2 Buyer's Indemnification. ----------------------- (a) Buyer agrees to indemnify and hold Seller, its Affiliates, and their respective officers, directors, employees, agents, successors, and assigns, and related entities from and to reimburse them for, any loss, cost, expense, damage, liability, or claim (including, without limitation, all Legal Fees) relating to, arising out of, based upon, or resulting from: Continuing Loan Purchase Agreement Page 35 (i) Buyer's ownership of or actions with respect to the Loans; (ii) Buyer's breach of any of its representations and warranties contained in this Agreement; or (iii) Buyer's breach of or failure to perform any of its covenants or agreements contained in or made pursuant to this Agreement. (b) The obligations of Buyer under this Section shall survive the transfer and delivery of the Loans to Seller and the termination of this Agreement. (c) Notwithstanding the foregoing, Buyer shall not have any liability in respect of the representations or warranties on the part of Buyer herein contained to the extent such liability would not have arisen but for Seller's own willful misconduct or negligence. Section 10.3 Indemnification Procedures. -------------------------- (a) Within 10 days after a receipt by a party of a third party claim, the indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under this Agreement, deliver a claim notice to the indemnifying party; provided, however, that the omission so to notify the ----------------- indemnifying party shall not relieve the indemnifying party from any liability that the indemnifying party may have to the indemnified party otherwise than under this subsection. In the event that any third party claim is made against the indemnified party and the indemnified party notifies the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, to assume the defense thereof, with counsel satisfactory to the indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), which consent shall not be unreasonably withheld. The indemnified party shall have the right to employ separate counsel in any action or claim and to participate in the defense thereof at the expense of the indemnifying party, if the retention of such counsel has been specifically authorized by the indemnifying party, if such counsel is retained because the indemnifying party does not notify the indemnified party within 20 days after receipt of a claim notice that it elects to undertake the defense thereof, or if there is a reasonable basis on which the indemnified party's interest may differ from those of the indemnifying party. (b) The indemnifying party shall remit payment for the amount of a valid and substantiated claim for indemnification hereunder within 15 business days of the receipt of a claim notice therefor. Upon the payment in full of any claim hereunder, the indemnifying party shall be subrogated to the rights of the indemnified party against any person with respect to the subject matter of such claim. In the event of a dispute, the parties shall proceed in good faith to negotiate a resolution of such dispute. Continuing Loan Purchase Agreement Page 36 (c) The indemnified party shall have the right to reject any settlement approved by the indemnifying party if the indemnified party waives its right to indemnification hereunder. The indemnified party shall have the right to settle any third party claim over the objection of the indemnifying party; provided, however, that if the indemnifying party is contesting such --------- ------- claim in good faith and has assumed the defense of such claim from the indemnified party, the indemnified party waives any right to indemnity therefor. (d) In the event that the indemnifying party reimburses the indemnified party with respect to any third party claim and the indemnified party subsequently receives reimbursement from another person with respect to that third party claim, then the indemnified party shall remit such reimbursement from such other person to the indemnifying party within thirty (30) days of receipt thereof. SECTION 11 TERMINATION Section 11.1 Termination by Either Party. --------------------------- (a) This Agreement may be terminated with or without cause by either party upon thirty (30) days written notice to the other party, provided that the delivery requirements and other terms of this Agreement have been fully complied with as to prior Settlements. (b) After termination pursuant to Section 11.1(a), the provisions of --------------- this Agreement shall continue to apply to any Loans previously transferred from Seller to Buyer pursuant to this Agreement. Section 11.2 Termination by Buyer. This Agreement may be immediately -------------------- terminated by Buyer, at Buyer's sole option, upon notice to Seller upon the occurrence of any of the following events ("Termination Events"): ------------------ (a) Seller breaches or fails to comply with any term or condition of this Agreement and fails to cure such breach or failure within fifteen (15) days of receipt of notice thereof from Buyer; (b) Any of Seller's representations or warranties in Sections 4.1 or --------------- 4.2 of this Agreement is untrue in any material respect; --- (c) Notwithstanding Section 11.2(a), Seller does not deliver the Loans --------------- or any Loan Document relating to such Loans within the time periods stated in this Agreement; (d) Notwithstanding Sections 11.2(a) and 11.2(b), any document or ---------------------------- paper delivered hereunder is incorrect in any material respect or otherwise does not comply with the terms and provisions of this Agreement; Continuing Loan Purchase Agreement Page 37 (e) Any material reduction in Seller's net worth occurs, as determined solely by Buyer; (f) A petition for involuntary bankruptcy is filed against Seller, or Seller is adjudged bankrupt or insolvent by a court of competent jurisdiction or a regulatory agency, or a court of competent jurisdiction or a regulatory agency appoints a receiver, liquidator, conservator, or trustee for Seller or all or substantially all of its assets, or approves any petition filed against Seller for its reorganization; (g) Seller institutes proceedings for voluntary bankruptcy, files a petition seeking reorganization under the Federal Bankruptcy Code, files under any law for the relief of debtors, consents to the appointment of a receiver of all or substantially all of its property, makes a general assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due; (h) Seller merges with or consolidates into another corporation, sells or otherwise disposes of all or substantially all of its property and assets, or permits any change to occur in the stock ownership of Seller which would transfer effective voting control from the persons now exercising such control to others; or (i) The placement of Seller on probation or restriction of its activities in any manner by a Federal or state government agency, including FHLMC, FNMA, or GNMA. Section 11.3 Effect of Termination. Upon expiration of the thirty (30) day --------------------- notice period pursuant to Section 11.1(a) or upon written notice to Seller -------------- pursuant to Section 11.2 that a Termination Event has occurred, this Agreement ------------ shall be of no force and effect and the parties' obligations to each other hereunder shall cease; provided, however, that each party shall continue to have --------- ------- such obligations as may remain with respect to all Loans acquired by Buyer in Settlements that have occurred prior to the date on which this Agreement terminates. SECTION 12 MISCELLANEOUS Section 12.1 No Waiver. Failure or delay on the part of Buyer to audit any --------- Loan or to exercise any right provided for herein, shall not act as a waiver thereof, nor shall any single or partial exercise of any right by Buyer or Seller preclude any other or further exercise thereof. In no event shall a term or provision of this Agreement be deemed to have been waived, modified or amended, unless said waiver, modification or amendment is in writing and signed by the parties hereto. Notwithstanding any investigation conducted before or after the purchase of any Loan, and notwithstanding any actual or implied knowledge or notice of any facts or circumstances which Buyer may have as a result of such investigation or otherwise, Buyer shall be entitled to rely upon the warranties, representations, and covenants of Seller in this Agreement, and the obligations of Seller with respect thereto shall survive the purchase of said Loans by Buyer and inure to the benefit of all future assignees of said Loans. Continuing Loan Purchase Agreement Page 38 Section 12.2 Amendment and Modification. Subject to applicable law, this ------------------------- Agreement may not be amended, modified, or supplemented except in writing signed by both parties. Section 12.3 Notices. All notices, requests, demands, consents, approvals, ------- agreements, or other communications, to or by a party to this Agreement shall: (a) be in writing addressed to the authorized address of the recipient set out in Section 12.3(c) of this Agreement or to such other address as --------------- such recipient may have notified the sender; (b) be signed by an authorized officer of the sender (if necessary) or an employee of the sender; and (c) be delivered in person or sent by registered or certified mail return receipt requested, facsimile transmission, or by overnight courier and be - ------------------------ deemed to be duly given or made: (i) in the case of delivery in person, when delivered to the recipient at such address; (ii) in the case of registered or certified mail, three days after the date of mailing; (iii) in the case of overnight courier, two days after shipment or the date of receipt, whichever is earlier; or (iv) in the case of facsimile transmission when received in legible form by the recipient at such address and in the event that the recipient has been requested to acknowledge receipt of the entire facsimile transmission, upon the sending or receiving the acknowledgment of receipt (which acknowledgment the recipient will promptly give); but if such delivery or dispatch is later than 5:00 p.m. local time on a Business Day or occurs on a day which is not a Business Day, it will be deemed to have been duly given or made at the commencement of business on the next Business Day. Notices may be sent to Buyer: AMRESCO Residential Capital Markets, Inc. c/o AMRESCO Residential Credit Corporation 3401 Centrelake Drive, Suite 480 Ontario, California 91761 Attention: Jason R. Marx Fax No.: (909) 390-5570 Continuing Loan Purchase Agreement Page 39 with copy to: AMRESCO Residential Capital Markets, Inc. 700 North Pearl Street Suite 2400, LB #342 Dallas, Texas 75201 Attention: General Counsel Fax No.: (214) 953-7757 to Seller: Pan American Bank, F.S.B. 1300 South El Camino Real Suite 320 San Mateo, California 94401 Attention: Blair Kenny, Vice President Fax No.: (415)345-0323 to New Servicer: Advanta Mortgage Corp. USA 16875 West Bernardo Drive San Diego, California 92128 Attention: SVP Loan Servicing Fax No: (714) 674-1353 or to such other address as Buyer, Seller and New Servicer shall have specified in writing to each other. Section 12.4 Expenses. Each party hereto shall bear its own expenses, -------- including the fees of any attorneys, accountants, or others engaged by such party, in connection with this Agreement and the transactions contemplated hereby, except as otherwise expressly provided herein. Section 12.5 No Remedy Exclusive. No remedy under this Agreement is intended ------------------- to be exclusive of any other available remedy, but each remedy shall be cumulative and shall be in addition to other remedies under this Agreement or existing at law or in equity. Section 12.6 Independent Contractor. Nothing herein contained shall be ---------------------- deemed or construed to create a partnership or joint venture between Seller and Buyer. In the performance of its duties or obligations under this Agreement or any other contract, commitment, undertaking, or agreement made pursuant to this Agreement, neither Seller nor Buyer shall be deemed to be, or permit itself to be, understood to be the employee or agent of the other and shall at all times take whatever measures as are necessary to insure that its status shall be that of an independent contractor operating as a separate entity. None of Seller's or Buyer's employees, agents or servants is entitled to the benefits that are provided to the employees of the other party. Each party is solely interested in the results obtained under this Agreement and therefore the manner and means of conducting the other party's business affairs are under the sole control of such other party and such other party shall be solely and entirely responsible for its acts and for the acts of its agents, employees, and servants. Continuing Loan Purchase Agreement Page 40 Section 12.7 Severability. If any one or more of the provisions of this ------------ Agreement shall be held to be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions of this Agreement shall not be affected thereby. To the extent permitted by applicable law, each party hereto waives any provision of law which renders any provision of this Agreement invalid, illegal, or unenforceable in any respect, unless material to the purpose of this Agreement. Section 12.8 Entire Agreement. Seller and Buyer each acknowledge that no ---------------- representations, agreements, or promises were made to such party by the other party or any of its employees other than those representations, agreements, or promises specifically contained herein. This Agreement and any Schedules and Exhibits hereto constitute the entire agreement and understanding of the parties with respect to the matters and transactions contemplated hereby. This Agreement supersedes any prior agreement and understanding with respect to these matters and transactions. Section 12.9 Assignment. Except as set forth in the following sentence, ---------- neither party shall have the right to assign any of its duties, obligations, or rights under this Agreement without the prior written consent of the other. Buyer shall have the right to assign its rights under this Agreement to any Affiliate or to any successor holder of the Notes. Section 12.10 Captions. The captions in this Agreement are for convenience -------- only, do not form a part of this Agreement, and do not in any way modify, interpret, or construe the intentions of the parties hereto. Section 12.11 Governing Law. This Agreement shall be governed by and be ------------- constructed in accordance with the laws of the State of California, without regard to the conflicts of laws rules thereof. Section 12.12 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which shall be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. Section 12.13 Drafting. Each party acknowledges that its legal counsel -------- participated in the preparation of this Agreement. The parties therefore stipulate that the rule of construction that ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement to favor any party against the other. Section 12.14 Choice of Forum. Any judicial proceeding brought against any --------------- of the parties hereto with respect to this Agreement shall be brought in any court of competent jurisdiction in either Los Angeles or Orange County, California, or Dallas County, Texas or in the Federal District Court for the Northern District of the State of Texas or the Central District of the State of California, irrespective of where such party may be located at the time of such proceeding, and by execution and delivery of this Agreement, each of the parties to this Agreement hereby consents to the exclusive jurisdiction of any such court and waives any defense or opposition to such jurisdiction. Continuing Loan Purchase Agreement Page 41 Section 12.15 WAIVER OF JURY TRIAL. EACH PARTY HERETO WAIVES, TO THE FULLEST -------------------- EXTENT PERMITTED BY APPLICABLE LAW, THE RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. [INTENTIONALLY LEFT BLANK] Continuing Loan Purchase Agreement Page 42 IN WITNESS WHEREOF, Buyer and Seller have caused their respective duly authorized representatives to execute this Agreement as of the date first above written. BUYER: AMRESCO Residential Capital Markets, Inc., a Delaware corporation By: /s/ JASON R. MARX ----------------------------- Printed Name: Jason R. Marx ------------------- Title: Vice President -------------------------- SELLER: Pan American Bank, F.S.B., a federal savings bank By: /s/ LAWRENCE J. GRILL ----------------------------- Printed name: Lawrence J. Grill ------------------- Title: President -------------------------- Continuing Loan Purchase Agreement Page 43 EX-10.72 40 MORTGAGE LOAN PURCHASE AGREEMENT EXHIBIT 10.72 MORTGAGE LOAN PURCHASE AGREEMENT --------------------------------- This is a Mortgage Loan Purchase Agreement (the "Agreement"), dated as of May 28 1997, by and between SAXON MORTGAGE, INC., a Virginia corporation, ------ ("Saxon" or the "Purchaser"), and PAN AMERICAN BANK, FSB (the "Seller"). RECITALS 1. The Seller desires to sell certain mortgage loans (the "Mortgage Loans") to the Purchaser and the Purchaser desires to purchase such Mortgage Loans from the Seller. 2. The parties intend hereby to set forth the terms and conditions upon which the transaction will be effected. AGREEMENT NOW THEREFORE, in consideration of the premises and the mutual agreements set forth herein, the parties hereto agree as follows: SECTION 1. Definitions. Whenever used herein, the following words and ----------- phrases, unless the context otherwise requires, shall have the following meanings. Borrower: Each person liable as maker of the Note evidencing the related -------- Mortgage Loan or executing the Mortgage securing such Loan. Certified Copy: A photocopy bearing a certificate signed by an officer of -------------- Seller, or, in the case of recorded documents, signed by the title company or the escrow/settlement agent responsible for recording such document, certifying that such copy represents a true and correct reproduction of the original of such document and, in the case of any recorded document, that such original has been sent for recordation in the appropriate jurisdiction. Closing Date: May 28, 1997, (or, if no different date has been specified ------------- ------------ the preceding blank space, the date of this Agreement) or as soon thereafter as the conditions to payment of the Purchase Price contained in this Agreement can be met; the actual date of payment of the Purchase Price shall be deemed to be the Closing Date. Cut-off Balance: As to each Mortgage Loan, the scheduled unpaid principal ------- ------- balance thereof as of the close of business on the Cut-off Date after application of (i) 1 scheduled payments of principal due on or before the Cut-off Date, whether or not collected, and (ii) all other recoveries of principal collected on or before the Cut-off Date. Cut-off Date: The first day of the month in which the Closing Date occurs. ------------ FHLMC: The Federal Home Mortgage Corporation, or any successor thereto. ----- FNMA: The Federal National Mortgage Association, or any successor thereto. ---- Mortgage or Security Instrument: A valid mortgage, deed of trust, or other ------------------------------- form of security instrument customary under the laws and practices of the Property State for the purpose of creating a voluntary lien on residential real estate. Mortgage Loan or Loans: The mortgage loans to be delivered to the Purchaser ---------------------- pursuant to this Agreement, as more particularly described in the schedule of Mortgage Loans attached to this Agreement as Exhibit 3, and the documents relating to each such loan required to be delivered pursuant to the Saxon Shipping Manual. Mortgage File: As to each Mortgage Loan, a file containing all of the ------------- documents relating to each such Mortgage Loan required to be delivered pursuant to this Agreement. Mortgage Note: The note evidencing each Mortgage Loan indebtedness. ------------- Mortgaged Premises: The property described in the Mortgage as securing the ------------------ Mortgage Loan. Originator: The Seller, or, as to a Mortgage Loan originated by an entity ---------- other than the Seller, such other originator. Property State: The jurisdiction in which the Mortgaged Premises are -------------- located. Purchase Price:Purchase Price Percentage: See Section 2(b) hereof. ---------------------------------------- Saxon Shipping Manual. The manual setting forth Saxon's general document --------------------- shipping requirements entitled the "Saxon Shipping Manual" as provided to Seller on or before the date of this Agreement . Servicing Transfer Effective Date: If the Closing Date occurs 16 or more --------------------------------- days prior to the end of a calendar month, the Servicing Transfer Effective Date shall be the FIRST day of the month immediately following the month in which the Closing Date occurs; if the Closing Date occurs fewer than 16 days prior to the end of a calendar month, the Servicing Transfer Effective Date shall be the first day of the SECOND month following the month in which the Closing Date occurs. 2 SECTION 2. AGREEMENT TO SELL AND PURCHASE. ------------------------------- (a) Pursuant to the terms of this Agreement, the Purchaser agrees to purchase and the Seller hereby agrees to sell, transfer, assign set over and convey to the Purchaser, without recourse but subject to the terms of this Agreement, all right, title and interest of the Seller in and to the Mortgage Loans. (b) The purchase price for the Mortgage Loans (the "Purchase Price") shall be equal to the Cut-off Balance of each Mortgage Loan, multiplied by the percentage of par (the "Purchase Price Percentage") agreed upon by the parties pursuant to that certain Commitment Letter to the Seller from the Purchaser, dated as of May 22, 1997 (the "Commitment Letter") a copy of which is attached ------------ hereto as Exhibit 1, plus accrued interest on each Mortgage Loan at the interest rate provided in each related Mortgage Note from the Cut-off Date through the day prior to the Closing Date. The Purchaser shall be entitled to (1) all principal and interest due after the Cut-off Date, (2) all other recoveries of principal collected after the Cut-off Date, provided, however, that all scheduled payments of principal due on or before the Cut-off Date and collected thereafter shall belong to the Seller. (c) This sale of the Mortgage Loans shall be made on a "servicing released" basis and shall constitute a transfer by the Seller to the Purchaser of all rights of every kind with respect to the servicing of each Mortgage Loan. This transfer of the servicing rights to the Purchaser will be effective as of the Servicing Transfer Effective Date. In the interim between the Closing Date and the Servicing Transfer Effective Date, the Seller will service the Mortgage Loans in accordance with FNMAI/FHLMC guidelines. Seller shall deliver to each Borrower the notice of transfer of servicing required by law (commonly known as the "goodbye letter") no fewer than 15 days prior to the Servicing Transfer Effective Date. (d) Upon request of Saxon, Seller agrees to refund to Saxon any above-par portion of the Purchase Price of any Mortgage Loan which refinances for any reason within six (6) months of sale by Seller to Saxon, provided, however, that the amount of the above-par portion to be refunded shall be offset by the amount of any prepayment penalty received by Saxon respecting such loan. SECTION 3. TRANSFER AND DELIVERY OF DOCUMENTS AND OTHER INFORMATION. -------------------------------------------------------- A. Ownership of each Mortgage Loan, and the related Mortgage File, shall be transferred to Purchaser upon payment of the Purchase Price. Seller shall also provide a schedule setting forth the following information with respect to each Mortgage Loan: (1) Mortgage Loan number, (2) Borrower name and address, (3) occupancy type, (4) Mortgage Loan purpose, (5) first payment date, (6) original loan-to-value (LTV) ratio, (7) original balance, (8) Cut-off Balance, (9) documentation type, (10) date through which 3 the Loan is paid, (11) original term to maturity, and (12) the Note interest rate as of the Cut-off Date. Each Mortgage File shall contain the following documents for the related Mortgage Loan provided, however, that if the original of any document specified in Paragraphs 2, 3, or 4 of this Section has been sent for recording and not yet returned, a Certified Copy thereof shall be delivered at closing. Seller shall cause the original of each such document to be delivered to the Purchaser as soon as it is available bearing evidence of such recordation, but in any event on or before six (6) months after the closing of this sale, or upon demand of Purchaser, repurchase the Mortgage Loan at the Repurchase Price calculated pursuant to Section 6(b) hereof: 1. Original executed Note, together with the original of any surety agreement or guaranty agreement relating to the Note or any such assumption agreement, endorsed without recourse to the order of "Texas Commerce Bank National Association, as Custodian," which acts as custodian for the Purchaser, together with the original of any and all of the following which exist with respect to the Note: . Conversion option agreement . Buydown Agreement . Modification agreement or any other agreement affecting Note terms . Surety or guarantee agreement . Any power of attorney used in executing the Note. 2. An original Mortgage creating a valid lien upon the Mortgage Premises to secure the Mortgage Note, and bearing evidence that such Mortgage has been duly recorded in the appropriate public records depository for the jurisdiction in which the Mortgaged Premises are located (the "Appropriate Recording Location"); 3. An "original Mortgage assignment", assigning the Mortgage to the Purchaser's custodian, "Texas Commerce Bank National Association, as the Custodian", bearing evidence of recordation in the Appropriate Recording Location and which has been prepared and executed in accordance with the laws in effect in such Location. Additionally, the Seller shall deliver to the Purchaser original or Certified Copies of any intervening mortgage assignments, bearing such evidence of recordation, which establish a complete chain of title from the originator of the Mortgage to the Seller; 4. If any power of attorney was used in connection with the Mortgage, the recorded original of such power attorney. If any assumption agreement, modification agreement, or other agreement affecting terms of the Mortgage exists in connection with the Mortgage Loan, the recorded original of such agreement; 5. As to each Mortgage Loan, a lender's title insurance policy satisfying the requirements of Section 4(23) of this Agreement, or if all conditions for issuance of such 4 a policy have been met, but the policy has not been issued, a written commitment binder, or other form of preliminary documentation for such a policy as customarily issued by title insurers and relied upon by institutional mortgage lenders in the Property State. Seller shall either deliver the original lender's title insurance policy to the Purchaser on or before 90 days after the closing of this sale, or upon demand of Purchaser repurchase the Mortgage Loan; 6. As to each Mortgage Loan on which a mortgage insurance policy was required at origination, the original mortgage insurance policy, issued by the applicable insurer; 7. A hazard insurance policy satisfying the requirements of Section 4(10) and 4(12) of this Agreement or a certificate of insurance issued by the insurer certifying that a such a hazard insurance policy is in effect as to the Mortgaged Premises; 8. If the Mortgaged Premises are located is a Special Flood Hazard Area participating in a flood insurance program, a certificate of insurance issued by the insurer certifying that a flood insurance policy meeting FNMA guidelines is in effect as to the Mortgaged Premises in the lesser of the amount of the Mortgage Loan or the maximum available amount under such insurance program; otherwise; evidence of a "life-of-loan" flood hazard tracking service or other documents as necessary to enable compliance with applicable laws relating to flood insurance; 9. An original report of appraisal of the Mortgaged Premises, or a Certified Copy of the original; 10. An original settlement statement, on the form approved by the Department of Housing and Urban Development ("HUD") executed in connection with the Mortgage Loan in the manner required by HUD-administered laws and regulations, or, if the original thereof is not available or if any such statement is not signed by any required party, a Certified Copy thereof; 11. All other Mortgage Loan documents relating to the Mortgage Loan required to be delivered pursuant to the Saxon Shipping Manual. B. As to any Mortgage Loan on which one or more payments have been received, Seller shall deliver complete payment histories, escrow/impound account records, copies of any written communications with or on behalf of the borrower, and all other servicing records reasonably requested by Purchaser to evaluate or perform such servicing. SECTION 4. REPRESENTATION AND WARRANTIES OF SELLER. --------------------------------------- As a material inducement to the Purchaser to enter into this Agreement, the Seller makes the following representations and warranties to the Purchaser and to Purchaser's 5 successors and assigns, each of which shall survive closing of this sale, and shall not be merged into the documents executed at such closing: Company Representation and Warranties. - ------------------------------------- The Seller represents and warrants to the Purchaser that as the Closing Date: (a) The Seller has not dealt with any broker or agent or anyone else who might be entitled to a fee or commission in connection with such sale other that the Purchaser or any of its affiliates; (b) The Seller is a corporation duly organized, validly existing and in good standing under the laws of the State set forth in the Seller's Officer's Certificate attached hereto as Exhibit B, with file corporate power necessary to carry on its business as now being conducted; the Seller has the file corporate power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement (including all instruments of transfer to be delivered pursuant to this Agreement) by the Seller and the consummation of the transactions contemplated hereby have been duly and validly authorized; this Agreement evidences the valid, binding and enforceable obligation of the Seller; and all requisite corporate action has been taken by the Seller to make this Agreement valid and binding upon the Seller in accordance with its terms; (c) The consummation of the transactions contemplated by this Agreement is in the ordinary course of business of the Seller, and the transfer, assignment and conveyance of the Notes and the Security Instruments by the Seller pursuant to this Agreement are not subject to the bulk transfer or any similar statutory provisions in effect in any applicable jurisdiction; (d) Neither the execution and delivery of this Agreement, the sale of any Mortgage Loan to the Purchaser, nor the fulfillment of or compliance with the terms and conditions of this Agreement, will conflict with or result in a breach of any provision of the Seller's charter or by-laws or any legal restriction or any material agreement to which the Seller is now a party or by which it is bound, or result in the violation of any law, rule, regulation, order, judgment or decree to which the Seller or its property is subject, or impair the value of any such Loan; (e) There is no action, suit, proceeding or investigation pending or to the Seller's knowledge threatened against the Seller that, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, or assets of the Seller, or in any material impairment of the right or ability of the Seller to carry on its business substantially as now conducted, or in any material liability on the part of the Seller, or that would draw into question the validity of this Agreement or any Mortgage Loan or of any action taken or to be taken in connection 6 with the obligations of the Seller contemplated herein, or that would be likely to impair materially the ability of the Seller to perform under the terms of this Agreement; (f) The Seller is the sole owner of each Mortgage Loan, free and clear of any adverse claim or security interest, and has the full right to sell each Mortgage Loan to the Purchaser, together with any rights with respect to the servicing of each Mortgage Loan following the closing date sold pursuant to this Agreement; (g) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Seller of or compliance by the Seller with this Agreement or the sale of each Mortgage Loan as evidenced by the consummation of the transactions contemplated by this Agreement, or if required, such approval has been obtained prior to the closing date; (h) The Seller used no selection procedures adverse to the interests of Purchaser in selecting each Mortgage Loan from among the outstanding residential mortgage loans in its portfolio as to which the representations and warranties in this Agreement could be made; (i) The Seller will treat the disposition of each and all Mortgage Loans as sales of assets for financial accounting and reporting purposes; (j) The Seller is an experienced seller/servicer of residential mortgage loans, with the facilities, procedures, and experienced personnel necessary to service each Mortgage Loan in accordance with industry standards. In the event any Mortgage Loan is required by the terms of the Commitment Letter to conform origination guidelines of FNMA or FHLMC (each an "Agency"), Seller is approved and is in good standing, to sell and service mortgage loans for such Agency, and no event has occurred, including but not limited to a change in insurance coverage, which would make the Seller unable to comply with such Agency's eligibility requirements or which would require notification to such Agency; (k) The Seller does not believe, nor does it have any reason or cause to believe, that it cannot perform each and every covenant contained in this Agreement; (l) To the best of Seller's knowledge, neither this Agreement nor any statement, report or other document furnished or to be furnished pursuant to this Agreement or in connection with the sale of any Loan or Loans to Saxon contains any materially untrue statement of fact or omits to state a fact necessary to make the statements contained therein not misleading; (m) Each of Seller's financial statements delivered to the Purchaser fairly present the pertinent results of operations and have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods 7 involved, except as set forth in the notes thereto. There has been no change in the business, operations, financial condition, properties or assets of the Seller since the date of the Seller's financial statements that would have a material adverse effect on its ability to perform its obligations under this Agreement; (n) The consideration received by the Seller upon the sale of each Mortgage Loan under this Agreement constitutes fair consideration and reasonably equivalent value for the Mortgage Loans; (o) Seller is solvent, and the sale of the Mortgage Loans individually and in the aggregate, will not cause the Seller to become insolvent. No sale of the Mortgage Loans to Saxon is undertaken with the intent to hinder, delay or defraud any of the Seller's creditors. Seller Representations and Warranties Regarding Individual Mortgage Loans. ------------------------------------------------------------------------- As to each Mortgage Loan, the Seller hereby represents and warrants to the Purchaser that, as of the Closing Date: (1) Mortgage Loans as Described. The information set forth in the schedule ---------------------------- of Mortgage Loans, if any, attached hereto or to any Bulk Purchase Agreement between the parties is complete, true and correct in all material respects. Any photocopy delivered to Saxon purporting to be a copy of a Note or other Mortgage Loan document is certified by Seller to be a true copy of the document represented therein; (2) Note Calculations and Terms. The Note related to the Mortgage Loan is ---------------------------- payable on the first day of each month in equal monthly installments of principal and interest, with interest calculated and payable in arrears, sufficient to amortize the Mortgage Loan fully by the stated maturity date, over an original term from commencement of amortization of not more than 30 years. If the Mortgage Loan provides for an adjustable rate of interest, all blank spaces in the Note relating to change dates, calculation of changes, and limits on interest rate changes have been correctly filled in; and the index is correctly defined. Any blank space in the Note relating to the late change for overdue payments has been correctly filled in; (3) Payment Status. All payments required to be made prior to the --------------- Closing Date for the Mortgage Loan under the terms of the Note have been made, and no payment has been 30 days delinquent more than once in the past 12 months; (4) No Defaults. There is no default, breach, violation or event of ------------ acceleration existing under the Security Instrument or the Note, and no event which, with the passage of time or with notice and the expiration of any grace or cure period, would constitute a default, breach, violation or event of acceleration, and neither the Seller nor its predecessors have waived any default, breach, violation or event of acceleration; 8 (5) No Outstanding Charges. There are no defaults in complying with the ---------------------- terms of the Security Instrument, and all taxes, governmental assessments, insurance premiums, leasehold payments or ground rents which previously became due and owing have been paid, or an escrow of funds has been established and delivered to Saxon in an amount sufficient to pay for every such item which remains unpaid and which has been assessed but is not yet due and payable. The Seller has not advanced funds or induced, solicited or knowingly received any advance of funds by a party other than the Borrower, directly or indirectly, for the payment of any amount required under the Mortgage Loan, except for interest accruing from the date of the Note or date of disbursement of the Mortgage Loan proceeds, whichever is later, to the day which precedes by one month the due date of the first installment of principal and interest; (6) Original Terms Unmodified. The terms of the Note and Security ------------------------- Instrument have not been impaired, waived, altered or modified in any respect, except by a written instrument which has been recorded, if necessary to protect the interests of the Purchaser, and which is contained in the Mortgage File for each Mortgage Loan to be delivered to Saxon. The substance of any such waiver, alteration or modification has been approved by the issuer of any related mortgage insurance policy and the title insurer, to the extent required by such policies, and its terms have been disclosed to Saxon. No Borrower has been released, in whole or in part, except in connection with an assumption agreement approved by the issuer of any related mortgage insurance policy and the title insurer, to the extent required by such policies, and which assumption agreement is part of the related Mortgage File delivered to Saxon. Any prepayment penalty set forth in the terms of the Note has not been waived or limited and remains in force according to its terms; (7) No Fraud in Origination. The Seller has not, and no borrower, appraiser, ----------------------- broker, or person verifying income, assets, or employment of any borrower has made any false or intentionally misleading statement of material fact, or intentionally withheld information necessary to prevent any such statement from being misleading, in connection with the approval or origination of the Mortgage Loan. Seller has not failed to disclose to Saxon any material fact known to Seller in connection with the Mortgage Loan; (8) No Defenses. The Mortgage Loan is not subject to any right of ----------- rescission, set-off, counterclaim or defense, including without limitation the defense of usury, nor will the operation of any of the terms of the Note of the Security Instrument, or the exercise of any right thereunder, render either the Note or the Security Instrument unenforceable, in whole or in part, or subject to any right of rescission, set-off, counterclaim or defense, including without limitation the defense of usury, and no such right of rescission, set-off, counterclaim or defense has been asserted with respect thereto. Seller has no knowledge that any mortgagor intends to assert any such defense; and Seller has no knowledge that any person liable on the Mortgage Loan was a debtor under any 9 bankruptcy or insolvency law at the time the Mortgage Loan was originated, or has become such a debtor since origination; (9) Authority and Licensing. At all relevant times the originator of the ----------------------- Mortgage Loan was duly organized, validly existing and in good standing in its state of incorporation, and fully authorized to do business in the State in which the mortgage premises are located under any applicable state law regarding doing business. The Mortgage Loan was originated in compliance with any applicable state or local law regarding doing business, and the licensing of mortgage brokers and/or lenders. At all relevant times all acts of officers acting or purporting to act on behalf of the Seller and the originator, if different from the Seller, in the origination of the Mortgage Loan, the execution of documents, and the performance of any other act pursuant to this Agreement have been duly and validly authorized, and shall be deemed to have been expressly ratified and confirmed; (10) Hazard Insurance. All buildings or other, improvements upon the ---------------- Mortgaged Premises are insured against loss by fire, hazards of extended coverage and such other hazards as are customary in the area where the Mortgaged Premises is located pursuant to insurance policies issued by insurers having a current rating by Best's Insurance Reports of BIVI or better, and providing for no deductible in excess of the lesser of $1,000 or 1% of the applicable amount of coverage; (11) Flood Insurance. If upon origination of the Mortgage Loan, the --------------- Mortgaged Premises were in an area identified in the Federal Register by the Federal Emergency Management Agency as having special flood hazards, and such flood insurance has been made available in the Mortgaged Premises' jurisdiction, a flood insurance policy meeting FNMA guidelines in effect at the time of origination is in effect. If at such time the Mortgaged Premises was not located in such an area, Seller has obtained a life-of-loan flood certification with respect to the Mortgaged Premises and has delivered the documentation related thereto with each Mortgage Loan; (12) Hazard and Flood Policies. All individual insurance policies contain a ------------------------- standard mortgagee clause naming the Seller and its successors and assigns as Mortgagee, and all premiums thereon have been paid. The Security Instrument obligates the borrower thereunder to maintain the insurance policy at the borrower's cost and expense, and on the borrower's failure to do so, authorizes the holder of the Security Instrument to obtain and maintain such insurance at such borrower's cost and expense, and to seek reimbursement therefor from the borrower. The Seller has not engaged in, and has no knowledge of the borrower's or any services' having engaged in, any act or omission which would impair the coverage of any such policy. Seller is not affiliated with any insurance agent or broker which received compensation in connection with any such policy, and Seller has not and will not receive any payment or thing of value in connection with the issuance of any such policy; 10 (13) Appraisal. Seller has delivered to Purchaser an appraisal of the --------- Mortgaged Premises signed prior to the approval of the Mortgage Loan application by a qualified appraiser, duly appointed by the Seller, who had no interest, direct or indirect in the Mortgaged Premises or in any loan made on the security thereof; and whose compensation is not affected by the approval or disapproval of the Mortgage Loan. The determination of value of the Mortgaged Premises contained in such appraisal was determined in substantial compliance, in all material respects, with Uniform Standards of Professional Appraisal Practice; (14) ARM Disclosure. If the Mortgage Loan provides for an adjustable rate of -------------- interest, an adjustable rate mortgage disclosure ("ARM Disclosure") has been provided to the borrower as required by the federal truth-in-lending laws ("TILA") and a copy of the ARM Disclosure is contained in the Mortgage File for each Mortgage Loan to be delivered to Saxon. All material terms of the Arm Disclosure are correct and consistent with the Note; (15) No Satisfaction of Security Instrument. The Security Instrument has not -------------------------------------- been satisfied, canceled, subordinated or rescinded, in whole or in part, and the Mortgaged Premises have not been released from the lien of the Security Instrument, in whole or in part, nor has any instrument been executed that would effect any such release, cancellation, subordination or rescission; (16) Location and Type of Mortgage Property. The Mortgage Loan is secured by -------------------------------------- real property improved with a detached single family residence, other dwelling, or a two-to-four-family dwelling constituting an eligible type of Mortgaged Premises under Saxon's Underwriting guidelines. If the Mortgage Loan is secured premises containing a manufactured home, such Loan is identified as such in the Mortgage Loan Schedule. No portion of the Mortgage Premises is used for commercial purposes; (17) Valid Lien. The Security Instrument is a valid and enforceable lien on ---------- the Mortgaged Premises, including all improvements thereon, subject only to the lien of current real property taxes, assessments not yet due and payable, and to covenants, conditions and restrictions, rights of way, easements and other matters acceptable to mortgage lending institutions generally and specifically referred to in the lender's title insurance policy which do not adversely affect the appraised value of the Mortgaged Premises; do not materially interfere with the residential use, enjoyment, value, or marketability of the related Mortgaged Premises; and are not identified in Saxon's underwriting guidelines as unacceptable title exceptions. If the Loan has been expressly offered to and accepted by Saxon as a second lien Mortgage Loan, then the Security Instrument is subject to only to only one prior mortgage lien; otherwise the Loan is not subject to any other mortgages, deeds of trust, or similar liens. To the best of the Seller's knowledge, as of the date of origination of the Mortgage Loan, the Mortgaged Preniises were not subject to any lien subordinate to the 11 lien of the Security Instrument, except as specifically set forth in the related title insurance policy or binder; (18) Mortgage Documents and Execution. If the Mortgage Loan is an adjustable -------------------------------- interest mortgage ("ARM"), the Note is of a form identical to that prescribed by Purchaser for the applicable ARM program. If the Mortgage Loan is a fixed rate loan, the Note is of FNMA/FHLMC Form 3200 or other form acceptable to those agencies. The Security Instrument is of a form acceptable to FNMA and FHLMC for first liens (or, if the Loan has been expressly offered to and accepted by Saxon as a second lien Mortgage Loan, the form is acceptable to FNMA and FHLMC for second liens). The Note and the Security Instrument are genuine, and each is the legal, valid and binding obligation of the maker thereof enforceable in accordance with its terms subject to bankruptcy, reorganization or other similar laws. All parties to the Note and the Security Instrument had legal capacity to enter into the Mortgage Loan and to execute and deliver the Note and the Security Instrument, and no party was induced to do so by fraud, duress, or undue influence; (19) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan have ----------------------------- been fully disbursed, and there is no requirement for future advances thereunder, and any and all requirements as to completion of any on-site or off- site improvement and as to disbursements of any escrow funds therefor have been complied with. Any advances of proceeds prior to the Cut-Off Date have been consolidated with the outstanding principal amount secured by the Security Instrument. All costs, fees and expenses incurred in making or closing the Mortgage Loan and the recording of the Security Instrument were paid, and the Borrower is not entitled to any refund of any amount paid or due under the Note or Security Instrument; (20) Ownership: Third Party Interests. Immediately prior to the sale of the -------------------------------- Mortgage Loan to the Purchaser, the Seller will be the sole owner of, and will have good and marketable title to, the Mortgage Loan, subject to no prior lien, mortgage, security interest, participation interest, pledge, claim, charge or other encumbrance. On the date of sale to Saxon, the Mortgage Loan will be duly and validly assigned, and the related Notes will be endorsed, in the manner required by Saxon's published shipping instructions. The Mortgage Loan is not subject to any servicing or subservicing agreement with any third party as of the Closing Date; (21) Doing Business. All parties which have had any interest in the Mortgage -------------- Loan, whether as mortgagee, assignee, pledgee, Seller or otherwise, are (or, during the period in which they held and disposed of such interest, were) (a) in compliance with any and all applicable licensing requirements of the laws of the state and locality in which the Mortgaged Premises is located, and (b) either organized under the laws of such state, or in compliance with any applicable laws of such state related to qualification to do business in such state; 12 (22) LTV: Primary Mortgage Insurance Policy. No Mortgage Loan has an LTV -------------------------------------- equal to or greater than 95%. Either the original LTV of the Mortgage Loan was not more than 80% or the excess over 75% is and will be insured as to payment defaults by a mortgage insurance policy until the LTV of such Mortgage Loan reduced to 80%. All provisions of any such mortgage insurance policy have been and are being complied with, if the Mortgage Loan documents purport to show that such insurance policy is in force, then such policy is in full force and effect, and all premiums due thereunder have been paid. Any Mortgage Loan subject to a mortgage insurance policy obligates the mortgagor thereunder to maintain the mortgage insurance policy and to pay all premiums and charges in connection therewith. The note rate for the Mortgage Loan is net of any such insurance premium. If the Loan has been expressly offered to and accepted by Saxon as a second lien Mortgage Loan, then the cumulative LTV with respect to total of the first lien loan and the Mortgage Loan is not equal to or greater than 95%; (23) Title Insurance. The Mortgage Loan is insured by an ALTA-form lender's --------------- title insurance policy, or other form of policy of insurance acceptable to FNMA or FHLMC, issued by a title insurer acceptable to FNMA or FHLMC and qualified to do business in the jurisdiction in which the Mortgaged Premises are located, insuring the Seller, its successors and assigns, in the original principal amount of the Mortgage Loan, subject only to the exceptions permitted under the terms of this Agreement and Saxon's Underwriting guidelines. The Seller is the sole insured of such title insurance policy, and no prior holder of the Security Instrument, including the Seller, has done, by act of omissions, anything which would impair the coverage of such policy. (If the mortgaged premises are located in the state of Iowa, an attorney's opinion of title of a form acceptable to FNMA or FHLMC may be substituted for such title policy; however the aforesaid standards for acceptable title exceptions nevertheless apply); If the Loan has been expressly offered to and accepted by Saxon as a second lien Mortgage Loan, then the Mortgage Loan is insured by a title insurance policy meeting the requirements contained in Saxon's Underwriting guidelines; (24) No Mechanics' Liens. No mechanics' or similar liens or claims relating ------------------- to work, labor or material have been filed, and no rights are outstanding that under applicable law could give rise to any such liens, affecting the Mortgaged Premises which are or may be liens prior to, or of equal priority with the lien of the Security Instrument; (25) [Reserved]; (26) Location of Improvements: No Encroachments. All improvements which were ------------------------------------------ considered in determining the appraised value of the Mortgaged Premises lie wholly within the boundaries and building restriction lines of the Mortgaged Premises, and no improvements on adjoining properties encroach upon the Mortgaged Premises. No improvement located or being part of the Mortgaged Premises is in material violation of any applicable zoning law or regulation; 13 (27) Approved Originator. The Mortgage Loan was originated (in some cases ------------------- within the meaning contemplated by "no action" letters issued by the Securities Exchange Commission) by (i) a mortgagee approved by the Secretary of Housing and Urban Development pursuant to Sections 203, and 211 of the National Housing Act or by a Supervised Depository Institution; or (ii) by a savings and loan association, bank, credit union, or other depository institution or insurance company supervised as such by a federal or state supervisory agency having jurisdiction over such depository institution or insurance company; (28) Customary Provisions. The Security Instrument contains customary and -------------------- enforceable provisions such as to render the rights and remedies of the holder thereof adequate for the realization against the Mortgage Property of the benefits of the security provided thereby, including, (i) in the case of a Security Instrument designated as a deed of trust or security deed, by trustee's sale, and (ii) otherwise by judicial foreclosure. There is no homestead or other exemptions available to a mortgagor which would interfere with the right to sell the Mortgaged Premises at a trustee's sale or the right to foreclose the Security Instrument; (29) Conformance with Seller's Underwriting and Documents. Although ---------------------------------------------------- Purchaser may re-underwrite the Mortgage Loan under Purchaser's guidelines, Seller represents and warrants that the Mortgage Loan substantially meets the underwriting guideline of the Seller in effect at the time the Mortgage Loan was originated; (30) Occupancy of the Mortgaged Premises. As of the closing date, the ----------------------------------- Mortgaged Premises are not unlawfully occupied. All inspections, licenses and certificates required to be made or issued with respect to all occupied portions of the Mortgaged Premises and, with respect to the use and occupancy of the same, including but not limited to certificates of occupancy, have been made or obtained from the appropriate authorities; (31) No Additional Collateral. The Note is not and has not been secured by ------------------------ any collateral except the lien of the corresponding Security Instrument and such collateral deemed to be included therein under applicable law; (32) Deed of Trust Trustees. In the event the Security Instrument is a deed ---------------------- of trust, the trustee named in the deed of trust is fully qualified under applicable law to serve as such, has been properly designated and currently so serves, and no fees or expense are or will become payable by the Purchaser to the trustee under the deed of trust, except as expressly provided in the deed of trust or under applicable law in connection with a trustee's sale following default; (33) Acceptable Investment. The Seller has no knowledge of any circumstances --------------------- or conditions with respect to the Security Instrument, the Mortgaged 14 Premises, the Borrower or the Borrower's credit standing that can reasonably be expected to cause the Mortgage Loan to become delinquent, or adversely affect the value or marketability of the Mortgage Loan; (34) Assignment. All assignments of the Security Instrument necessary to ---------- establish a chain of title from the originator of the Mortgage Loan through Seller to Saxon, or its servicer or custodian as required by Saxon's published guidelines, and meeting the requirements of the jurisdiction in which the Mortgaged Premises are located, have been duly executed and recorded, and customary evidence of such recordation has been delivered to Purchaser; (35) Due on Sale. The Note and the Security Instrument contain identical ----------- customary provisions for the acceleration of the payment of the unpaid principal balance of the Mortgage Loan in the event that the Mortgaged Premises is sold or transferred without the prior written consent of the Mortgagee thereunder; (36) Assumability. The Mortgage Loan is assumable in accordance with the ------------ terms thereof, if such terms so provide; (37) No Buydown Provisions; No Graduated Payments or Contingent Interests. -------------------------------------------------------------------- The Mortgage Loan does not contain provisions pursuant to which monthly payments are paid or partially paid with funds deposited in any separate account established by the Seller, the Borrower or anyone on behalf of the Borrower, or paid by any source other than the Borrower nor does it contain any other similar provisions currently in effect which may constitute a "buydown" or "temporary buydown" provision. The Mortgage Loan is not a graduated payment mortgage loan, and the Mortgage Loan does not have a shared appreciation or other contingent interest feature; (38) No Negative Amortization. The Mortgage Loan does not provide for ------------------------ negative amortization of the indebtedness in any circumstances; (39) Mortgaged Premises Undamaged; No Condemnation. The Mortgaged --------------------------------------------- Premises are undamaged by waste, fire, earthquake or earth movement, windstorm, flood, tornado or other casualty so as to materially affect adversely the value of the Mortgaged Premises as security for the Mortgage Loan or for the use of the premises as a residence. There is no proceeding pending or threatened for the total or partial condemnation of the Mortgaged Premises; (40) Origination Fees. The fees collected and procedures employed at ---------------- origination of the Mortgage Loan were reasonable, customary, and in compliance with all applicable laws. Neither Seller nor any other lender or broker participating in the origination had, at the time of origination, any ownership interest in or revenue sharing agreement with any appraiser, credit reporter, title or escrow company, or other 15 settlement service provider involved in the origination or settlement of the loan, except as disclosed to and accepted by the borrower in accordance with applicable law; (41) Escrow Accounts. Any escrow or impound payments have been calculated, --------------- collected, and administered in compliance with all applicable laws. Any escrow or impound account is in Seller's possession as set forth in the mortgage loan documents and records, in an amount sufficient to pay for every item provided for by such account, without, however exceeding any maximum balance allowed by law. No escrow payments or other charges or payments due the Seller have been capitalized, and there exist no deficiencies in connection therewith. Any interest required by law or contract to be paid on any escrow account has been fully paid or appropriately credited; (42) Compliance with Applicable Laws. Requirements of all federal, state and ------------------------------- local law including, without limitation, truth-in-lending, real estate settlement procedures, consumer credit protection, equal credit opportunity, or usury, applicable to the Mortgagee Loan have been complied with. Any evidence of such compliance requested by Purchaser to be included in the Mortgage Loan file has been included, and Seller will maintain in its files and deliver to Purchaser upon demand any additional evidence of such compliance; (43) Soldiers' and Sailors' Relief Act. The Borrower has not notified the --------------------------------- Seller, and the Seller has no knowledge of any relief requested or allowed to Borrower under the Soldiers' and Sailors' Civil Relief Act of 1940; (44) Environmental Matters. The Mortgaged Premises are sufficiently free --------------------- from any and all toxic or hazardous substances so as to be in compliance with all applicable local, state or federal environmental laws, rules or regulations; (45) Legal Proceedings. As of the date hereof; no property securing a ----------------- Mortgage Loan is subject to foreclosure, litigation, bankruptcy or insolvency proceedings or any work out or foreclosure agreement, and, to the best of the Seller's knowledge, the filing of a bankruptcy or insolvency proceeding that would result in such Mortgage Loan becoming subject to bankruptcy or insolvency proceedings is not imminent; (46) Servicing. Any servicing of the Mortgage Loan since origination has --------- been in accordance with FNMA/FHLMC guidelines. In the event any servicing has been performed, all servicing and collection practices used with respect to the Mortgage Loan have been reasonable, customary, and in compliance with all applicable laws; (47) No Convertibility. The Mortgage Loan is not subject to conversion from ----------------- an adjustable to a fixed rate of interest; 16 (48) No Section 32 Loans. The Mortgage Loan is not a "High Rate, High Cost" ------------------- loan (commonly known as a Section 32 loan) according to Regulation Z of the Truth in Lending Act, as amended; (49) No Consumer Credit Loans. The Mortgage Loan is not a "purchase money ------------------------ loan" for the purchase of non-real estate consumer goods, or "a consumer credit contract" for the purchase of non-real estate consumer goods, as those terms are defined in the regulations of the Federal Trade Commission relating to preservation of consumer's claims and defenses as set forth in 16 C.F.R. Part 433 or as amended or recodified. SECTION 5. Representations and Warranties of the Purchaser. The ----------------------------------------------- Purchaser makes the following representations and warranties to the Seller and to Seller's successors and assigns, each of which shall survive closing of this sale, and shall not be merged into the documents executed at such closing: (a) The Purchaser is acquiring the Mortgage Loans for its own account and not as agent for any other person or entity; (b) The Purchaser considers itself a substantial, sophisticated institutional investor having such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of investment in the Mortgage Loans; (c) The Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the Commonwealth of Virginia and has all licenses necessary to carry on its business as now being conducted; the Purchaser has the full corporate power and authority to execute and deliver this Agreement and to perform in accordance herewith; the execution, delivery and performance of this Agreement by the Purchaser and the consummation of the transactions contemplated hereby have been duly and validly authorized; this Agreement evidences the valid, binding and enforceable obligation of the Purchaser; and all requisite corporate action has been taken by the Purchaser to make this Agreement valid and binding upon the Purchaser in accordance with its terms; (d) The consummation of the transactions contemplated by this Agreement are in the ordinary course of business of the Purchaser; (e) Neither the execution and delivery of this Agreement, the acquisition of the Mortgage Loans by the Purchaser, the sale of the Mortgage Loans to the Purchaser or the transactions contemplated hereby, nor the fulfillment of or compliance with the terms and conditions of this Agreement, will conflict with or result in a breach of any of the terms, conditions or provisions of the Purchaser's charter or by-laws or any legal restriction or any agreement or instrument to which the Purchaser is now a party or by which it is bound, or constitute a default or result in an acceleration under any of the 17 foregoing, or result in the violation of an law, rule, regulation, order, judgment or decree to which the Purchaser or its property is subject; (f) There is no action, suit, proceeding or investigation pending or, to the best of Purchaser's knowledge, threatened against the Purchaser that, either in any one instance or in the aggregate, may result in any material adverse change in the business, operations, financial condition, properties or assets of the Purchaser, or in any material impairment of the right or ability of the Purchaser to carry on its business substantially as now conducted, or in any material liability on the part of the Purchaser, or that would draw into question the validity of this Agreement or of any action taken or to be taken in connection with the obligations of the Purchaser contemplated herein, or that would be likely to impair materially the ability of the Purchaser to perform under the terms of this Agreement; and (g) No consent, approval, authorization or order of any court or governmental agency or body is required for the execution, delivery and performance by the Purchaser of or compliance by the Purchaser with this Agreement or the sale of the Mortgage Loans as evidenced by the consummation of the transactions contemplated by this Agreement, or if required, such approval has been obtained prior to the Closing Date. SECTION 6. Remedies Upon Breach of Representation or Warranty; Repurchase -------------------------------------------------------------- Obligations. ----------- (a) Seller agrees that each of the representations, warranties and covenants made herein have been relied upon by Purchaser notwithstanding any examination of Mortgage Loans heretofore or hereafter made by Purchaser or the Custodian on its behalf; and that such representations, warranties and covenants shall survive payment of the Purchase Price and the delivery of the Mortgage Loans, and shall remain in full force and effect until such time as all of the Mortgage Loans have been paid in full, foreclosed or otherwise retired, notwithstanding any applicable statute of limitations, which Seller hereby expressly waives. (b) Upon discovery by either party of a breach of a representation and warranty of Seller set forth in this Agreement, and upon further discovery that such breach materially and adversely affects any Mortgage Loan or the interest of the Purchaser therein, such party shall give prompt notice to the other party. Purchaser may also give such notice relating to any failure by Seller to deliver final documents as required under Section 3 of this Agreement. Seller shall have 60 days after receipt of such notice in which to cure in all material respects such breach. In the event that the Seller is unable to effect such cure within such time, then upon written demand by Purchaser the Seller shall within 10 days of such demand repurchase each affected Mortgage Loan at a price equal to the unpaid principal balance of such Mortgage Loan multiplied by the Purchase Price Percentage, plus accrued and unpaid interest thereon at the gross coupon rate through the date of repurchase (the "Repurchase Price"). Upon 18 payment of the repurchase price, Purchaser shall promptly return the Mortgage File relating to the repurchased Mortgage Loan to the Seller. (c) In addition, the Seller shall indemnify the Purchaser and hold it harmless against any losses, damages, penalties, fines, forfeitures, reasonable and necessary legal fees and related costs, judgments and other costs and expenses arising out of or resulting from any claim, demand, defense or assertion based on, related to, or arising from (a) a breach by the Seller of any of its convenants, representations or warranties contained in this Agreement or (b) the servicing of any Mortgage Loan prior to the transfer of servicing to Purchaser or its designated servicer. (d) Any cause of action relating to or arising out of the breach of any covenant, representation, or warranty of Seller made herein shall be deemed to accrue as to any Mortgage Loan upon the last to occur of (i) discovery of such breach by the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by the Seller to cure such breach upon and in accordance with the demand of Purchaser made in accordance with this Agreement. (e) The remedies described in this Section 6 shall be cumulative and in addition to any other remedies available under applicable law. SECTION 7. Successors and Assigns; Assignment of Agreement. ----------------------------------------------- A. This Agreement shall bind and inure to the benefit of and be enforceable by the Seller and the Purchaser and their respective successors and assigns. This Agreement shall not be assigned, pledged or hypothecated by either party without the consent of the other party or its successors or assigns, which consent shall not be unreasonably withheld or delayed. Failure or delay by a prospective assignee of either party in executing upon request a written assumption of this Agreement and all convenants, representations, and warranties contained herein shall be reasonable grounds for withholding consent to assignment to such prospective assignee. B. The foregoing limitations on assignments notwithstanding, the Purchaser may, at the Purchaser's sole option, effect one or more assignments of this Agreement or sales of some or all of the Mortgage Loans (a) to a trustee as part of one or more rated or unrated public or private pass-through transactions; (b) to one or more third party purchasers in one or more whole loan or participation pools; or (c) in connection with other secondary market or securitization transactions provided, however, that Purchaser shall not effect any such sale in any manner that would (i) impose an obligation on the Seller or the Purchaser to register under the Securities Act of 1933 or (ii) otherwise result in the violation of any applicable securities laws or regulations. The Seller shall cooperate with reasonable requests of the Purchaser to provide the information necessary to facilitate any assignment of the Agreement pursuant to this paragraph. In addition, Seller agrees to execute, upon request of Purchaser, reconstitution agreements in 19 connection with such transactions, subject to the following conditions: (i) Seller shall have an opportunity to review such documents and negotiate in good faith regarding the terms thereof; (ii) Seller shall upon request restate all of the representators or warranties contained in this Agreement, but any such restated representations and warranties shall be made as of the Closing Date; and (iii) Purchaser shall reimburse Seller for any out-of-pocket expenses incurred in connection with complying with this Section 7(B). SECTION 8. Conditions to Closing. The obligations of the Seller and the --------------------- Purchaser to consummate the sale and purchase of the Mortgage Loans on the Closing Date are subject to the satisfaction of the following conditions: (a) all of the representations and warranties of the Seller and the Purchaser under this Agreement shall be true and correct as of the Closing Date, and no event shall have occurred that, with notice or the passage of time, would constitute a default under this Agreement; (b) all Mortgage Files shall have been delivered to the Purchaser as provided by this Agreement; and (c) all other terms and conditions of this Agreement shall have been complied with in all material respects. SECTION 9. Closing; Delivery of Mortgage Loans. The closing of the ----------------------------------- purchase and sale of the Mortgage Loans and the delivery of the Mortgage Loans shall take place on the Closing Date. At the Purchaser's option, the closing shall be either: by telephone, confirmed by letter or wire as the parties shall agree; or conducted in person, at such place as the parties shall agree. The Closing Documents shall consist of fully executed originals of the following documents: (a) this Agreement, which may be executed in counterparts; (b) the schedule of Mortgage Loans, to be attached to each counterpart of this Agreement; and (c) an Officer's Certificate in the form of Exhibit 2 hereto, including all attachments thereto. Subject to the conditions to closing set forth herein, the Purchaser shall pay the Purchase Price to the Seller on the Closing date by wire transfer of immediately available funds to the account designated by the Seller. SECTION 10. Certain Costs to be Paid by Seller. The Seller shall pay any ---------------------------------- commissions due to any broker or agent in connection with this transaction on any Mortgage Loan. In addition, Seller will pay any legal fees and expenses of its attorneys, 20 and fees incurred in connection with the transfer and delivery of the Mortgage Loans, including preparation and recording of Assignments. SECTION 11. Protection of Confidential Information. The Seller shall keep -------------------------------------- confidential and shall not divulge to any party, without the Purchaser's written consent, the price paid by the Purchaser for the Mortgage Loans, except to the extent required by law or to the extent that it is appropriate for the Seller to do so in working with legal counsel, auditors, contract service providers, taxing authorities or other governmental agencies. SECTION 12. No Solicitation. From and after the effective date of this --------------- Agreement, the Seller shall not directly or indirectly solicit, and the Seller shall exercise reasonable efforts to prevent any of its affiliates from directly or indirectly soliciting, by means of direct mail, or telephonic or personal solicitation, any Borrower of any of the Mortgage Loans for purposes of prepayment or refinance or modification of such Loans; it being understood and agreed that all rights and benefits relating to the direct solicitation of such Borrowers and all attendant rights, title and interest in and to the list of such Loans shall be included among the Mortgage Loan assets transferred to the Purchaser pursuant hereto. Provided that the transaction contemplated by this Agreement is consummated, the benefits of such transfer shall inure to the Purchaser from and after the effective date of this Agreement, and the Seller and its affiliates shall take no action after the date hereof to adversely affect such rights and benefits. It is understood and agreed that (i) promotions undertaken by the Seller or any affiliate of the Seller which are directed to the general public at large, including without limitation mass mailings based on commercially acquired mailing lists, newspaper, radio and television advertisements, and (ii) unsolicited requests made by customers to any retail branches or offices of the Seller or its affiliates shall not constitute solicitation under this Section 12. SECTION 13. Indulgences, Not Waivers. Any failure or delay by either party ------------------------ in enforcing any provision this Agreement shall not constitute a waiver of such party's right to enforce such provision subsequently with respect to the same or subsequent circumstances. SECTION 14. Notices. All demands, notices and communications hereunder ------- shall be in writing and shall be deemed to have been duly given on the earlier of (a) three business days after being mailed by registered or certified mail, return receipt requested and (b) otherwise when received by the other party at the address shown below in this Section or such other address as may hereafter be furnished to the other party by like notice. Any such demand, notice or communication hereunder shall be deemed to have been received on the date delivered to or received at the premises of the addressee as 21 follows: if to the Purchaser: Saxon Mortgage, Inc., 4880 Cox Road, Glen Allen, Virginia 23060, Attn.: Senior Vice President, and if to the Seller, Pan American Bank, FSB, at: 1300 South El Camino Real, 6th Floor, San Mateo, California ----------------------------------------------------------- 94402. Attn.: Mr. Blair Kenny, or if no other address is specified in the - ----------------------------- preceding blank space, to the officer of Seller executing this Agreement at the address of such officer on file with Purchaser. SECTION 15. Severability. Any determination by a court of competent ------------ jurisdiction that any provision of this Agreement is void or unenforceable shall not affect the validity and enforceability the remaining provisions hereof. SECTION 16. Counterparts. This Agreement may be executed simultaneously ------------ in any number of counterparts. Each counterpart shall be deemed to be an original, and all such counterparts shall constitute one and the same instrument. SECTION 17. Governing Law. This Agreement shall be governed by, and ------------- construed in accordance with, the laws of the Commonwealth of Virginia, without giving effect to any choice of law provisions thereof. SECTION 18. Waivers: Modifications. No term or provision of this Agreement ---------------------- may be waived or modified unless such waiver or modification is in writing and signed by the party against whom such waiver or modification is sought to be enforced. SECTION 19. Exhibits. The exhibits to this Agreement are hereby -------- incorporated and made a part hereof and are an integral part of this Agreement. SECTION 20. Survival. This Agreement, and all covenants, representations, -------- and warranties set forth herein, shall survive the Closing and shall not merge into the Closing documents. Without limiting the foregoing, proceeding with Closing shall not constitute any waiver of Purchaser's right too require any missing or incorrect document required to be delivered hereunder, even if Purchaser was afforded an opportunity to review such Mortgage Loan prior to Closing. IN WITNESS WHEREOF the parties have caused this document to be executed by their respective authorized officers as of the date first written above: SELLER: PAN AMERICAN BANK, FSB By: /s/ LAWRENCE J. GRILL ------------------------------------- Name: Lawrence J. Grill Its: President 22 PURCHASER: SAXON MORTGAGE, INC. By: /s/ CHARLES E. COUDRIET ------------------------------------- Name: Charles E. Coudriet Its: President EX-21.1 41 SUBSIDIARIES Exhibit 21.1 Subsidiaries of United PanAm Financial Corp. 1. United PanAm Mortgage Corp. 2. Pan American Financial, Inc. 3. Pan American Bank, FSB 4. United Auto Credit Corporation EX-23.1 42 CONSENT OF KPMG PEAT MARWICK 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. /s/ KPMG PEAT MARWICK LLP San Francisco, California November 10, 1997 -----END PRIVACY-ENHANCED MESSAGE-----