1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
---------------------
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______
Commission file number 2-94289
PRESIDENTIAL MORTGAGE COMPANY
(Exact name of Registrant as specified in its charter)
California 95-3611304
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
21031 Ventura Boulevard
Woodland Hills, California 91364
(Address of Principal Executive Office) (Zip Code)
Registrant's telephone number, including area code (818) 992-8999
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Class C and D Units
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES NO X .
--- ---
As of June 30, 1995, the aggregate market value of the voting limited
partnership interests of the Registrant held by non-affiliates of the
Registrant, based on the price at which such interests were originally sold, was
as follows: Class A Limited Partnership Interests: $278,750; Class B Limited
Partnership Interests: $2,581,000; Class C Limited Partnership Interests:
$13,234,375; Class D Limited Partnership Interests: $11,980,500; Class E Limited
Partnership Interests: $10,497,000; Distribution Reinvestment Plan Units:
$255,723; aggregate total of all Limited Partnership Interests held by
non-affiliates: $38,827,348.
Documents Incorporated by Reference
None.
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ITEM 1. BUSINESS
THE PARTNERSHIP
Presidential Mortgage Company is a California limited partnership formed
in 1981. Since 1986, Presidential Management Company (the "General Partner") has
been the sole general partner of the Partnership. The Partnership currently
conducts substantially all of its business through three operating subsidiaries,
Pacific Thrift and Loan Company ("Pacific Thrift"), Consolidated Reconveyance
Company ("Consolidated") and Lenders Posting and Publishing Company ("Lenders").
When referring to the assets held and business engaged in directly by the
Partnership, excluding the assets held and businesses engaged in by Pacific
Thrift, Consolidated and Lenders, the Partnership is referred to herein as the
"Partnership". The term "Company", on the other hand, refers to the Partnership
and its subsidiaries on a consolidated basis. The executive offices of the
Company are located at 21031 Ventura Boulevard, Woodland Hills, California,
telephone number (818) 992-8999.
The Company incurred a net operating loss of approximately $9.5 million
for the year ended December 31, 1994, primarily due to increases in the
provision for loan losses caused by continuing declines in the value of
California real property securing loans made by the Partnership and Pacific
Thrift over the past five years and to the reduction in net interest income
caused by the reduction of the loan portfolios of the Partnership and Pacific
Thrift. The Partnership has suspended all distributions of net income and
payments to limited partners requesting withdrawal of capital since June 1993.
During the years ended December 31, 1994 and 1993, the Partnership denied
requests from limited partners to withdraw approximately $.9 million and $8.2
million in capital, respectively, in accordance with provisions of the
Partnership Agreement and restrictions under a loan agreement with the
Partnership's bank lender. The Partnership does not anticipate that it will be
possible to approve any capital withdrawal requests for the foreseeable future
due to the restrictions under the loan agreement and the Partnership's current
financial condition.
THE PARTNERSHIP
The Partnership is a California licensed commercial and consumer finance
lender and personal property broker. Effective July 1, 1995, these licenses will
be consolidated into a single California finance lender license in accordance
with amendments passed by the California legislature in 1994 consolidating the
laws applicable to commercial and consumer finance lenders and personal property
brokers into a new California finance lender law. Since 1990, the Partnership
has not actively solicited new loan originations, although it has continued to
rewrite some maturing loans. On an unconsolidated basis (not including the
operations of any subsidiaries), the Partnership incurred a net loss of
approximately $7.5 on its operations during the year ended December 31, 1994,
primarily due to loan losses incurred as a result of continuing declines in real
estate values on California properties securing the Partnership's existing loan
portfolio. For the years ended December 31, 1993 and 1992, the Partnership
incurred unconsolidated net losses of approximately $3.9 million and $.6
million, respectively.
PACIFIC THRIFT
Pacific Thrift is a California licensed industrial loan company that
commenced business in 1988 and is supervised and regulated by the California
Department of Corporations ("DOC") and the Federal Deposit Insurance Corporation
("FDIC"). The deposits of Pacific Thrift are insured by the FDIC up to
applicable limits. Pacific Thrift conducts its operations at its main office in
Woodland Hills, and originates loans through five loan production offices
located in Walnut Creek, San Jose, Costa Mesa and West Covina, California and,
as of June 27, 1994 Bellevue, Washington. Pacific Thrift focuses its lending
activities exclusively on real estate secured loans to individuals and small
businesses. Pacific Thrift does not offer lease financing or credit lines.
Pacific Thrift offers passbook accounts, term certificates and money market
certificates. Pacific Thrift does not offer other traditional banking services,
such as checking accounts, travelers' checks or safe deposit boxes.
Pacific Thrift incurred a net loss on its operations of approximately
$2.9 million for the year ended December 31, 1994, compared with net losses of
$3.2 million and $0.6 million for the years ended December 31, 1993 and 1992,
respectively. Net losses in 1994, 1993 and 1992 were due primarily to increased
loan losses caused by continuing declines in the value of California real
estate.
CONSOLIDATED AND LENDERS
Consolidated is a California limited partnership formed by the General
Partner in December 1986 which was purchased by the Company in 1990. See Item
13. "Certain Relationships and Related Transactions." Consolidated provides
foreclosure related services on real estate trust deeds. Lenders was formed by
the General Partner in 1990 and purchased by the Company in the same year.
Lenders provides posting and publishing of
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notices of default and notices of sale and conducts foreclosure sales for
Consolidated and other trust deed foreclosure companies. Consolidated provides
services on California trust deeds to over 300 banks, thrifts, mortgage banks,
life insurance companies and federal regulatory agencies located across the
country. Approximately one-third of Consolidated's revenues are derived from
lenders located outside of California, and management anticipates that this
percentage will continue to grow. Less than 5% of the revenues of Consolidated
or of Lenders are derived from services provided to the Partnership and Pacific
Thrift.
Trustee foreclosure services accounted for net income of approximately
$.9 million for the year ended December 31, 1994, compared with net income of
approximately $1.4 million for each of the years ended December 31, 1993 and
1992. Management believes that the primary reason for the decline in net income
has been the merger or acquisition of many small lending companies into larger
banks and lending companies. The acquiring entities often have affiliated
foreclosure service companies or arrangements with other foreclosure service
companies, resulting in the loss of business to Consolidated. Consolidated has
been able to replace many of its lost customers with new customers, which has
partially mitigated the loss of some accounts. Consolidated has now refocused
its marketing strategy to target primarily small and medium-sized lenders.
Consolidated has hired a sales representative in the San Diego area, and is
seeking a sales representative for the northern California area. In the
meantime, Consolidated's southern California sales representatives are covering
the northern California area. Management of Consolidated believes that it can
increase net income by increasing its volume of sales through its current
marketing strategy. There can be no assurance, however, that it will
successfully increase net income.
LENDING ACTIVITIES
For the past three years, all new lending activity has been conducted
exclusively by Pacific Thrift pursuant to its lending guidelines. Under an
arrangement between the Partnership and Pacific Thrift effective January 1,
1994, Pacific Thrift provides loan servicing for all of the Partnership's
outstanding loans for a loan servicing fee of 1.5% per annum of the principal
amount of each loan serviced. On or before the maturity of the Partnership
loans, Pacific Thrift will consider rewriting, for its own loan portfolio, those
loans that meet Pacific Thrift's lending guidelines. Pacific Thrift has received
the necessary regulatory approvals to rewrite the Partnership loans which meet
Pacific Thrift's underwriting guidelines. In addition, the Partnership may
continue to rewrite existing loans when appropriate.
Over the past year, Pacific Thrift has substantially increased its
origination of loans for immediate sale to the secondary loan market. This
business plan has allowed Pacific Thrift to earn fee income and dramatically
expand its customer base and lending areas with its existing capital base.
Pacific Thrift's current business plan calls for continuing expansion of loans
originated for sale, with fee income generated from sales being used to increase
its capital. When capital has increased to a level sufficient to support growth
of Pacific Thrift's own loan portfolio, it plans to expand its existing
portfolio loan programs, while continuing the loan sales programs at optimum
levels. All of Pacific Thrift's loans are real estate secured loans. Following
is a brief description of the types of loans originated by Pacific Thrift.
LOANS ORIGINATED FOR SALE.
Pacific Thrift originates nonconforming first and second trust
deed residential loans for immediate sale in the secondary loan market. Loans
originated for sale generally have loan-to-value ratios of from 60% to 85% and
meet the credit criteria established in advance by the loan purchasers. Pacific
Thrift originated and sold the following amounts of loans during each of the
months of 1994 and the first five months of 1995:
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Originated Sold
---------- ----
1994
January 1,088,000 -0-
February 239,000 -0-
March 1,609,000 -0-
April 734,000 -0-
May 1,319,000 -0-
June 3,526,000 3,969,000
July 981,000 1,210,000
August 4,218,000 4,561,000
September 3,598,000 5,272,000
October 4,853,000 3,560,000
November 4,594,000 6,897,000
December 8,023,000 4,130,000
1995
January 8,621,000 8,917,000
February 6,953,000 9,133,000
March 10,358,000 11,425,000
April 11,294,000 11,575,000
May 10,708,000 9,299,000
Pacific Thrift and the Partnership each entered agreements with Aames
Capital Corporation ("Aames") as of December 1, 1993, pursuant to which Pacific
Thrift and the Partnership agreed to sell to Aames an aggregate of up to $75
million of loans secured by residential property over a period of up to 18
months. Pacific Thrift had sold $75 million of loans under that agreement as of
May 26, 1995. All loans sold by Pacific Thrift were included in pools of loans
securitized by Aames. Credit enhancement was provided for each securitization
through private credit insurance, and each pool was rated AAA by one or more
rating services. Aames acts as loan servicer for each of the pools. All loans
were sold nonrecourse except for the obligation to repurchase any loan which
does not meet certain customary representations and warranties or to repurchase
loans adversely affected by any breach of general representations and
warranties. As of May 31, 1995, three loans ($131,000 aggregate principal
amount) have been repurchased by Pacific Thrift and no loans additional loans
have been requested to be repurchased. Pacific Thrift does not expect to incur a
loss on the three loans repurchased. Except for an initial sale of approximately
$3.9 million in loans, all loans sold by Pacific Thrift to Aames were sold for a
premium of from 2.00% to 3.75% above face value of the loans sold. Pacific
Thrift received a servicing released fee of .27% per annum, payable quarterly,
on the principal amount of each loan sold from September 19, 1994 to January
1995. Effective February 1, 1995, Pacific Thrift receives a servicing released
fee of .45% per annum on the principal amount of each loan sold, including the
loans sold from September 1994 to May 26, 1995, until each loan is paid off.
Pacific Thrift retains an interest in the net spread (i.e. all interest and fees
paid on the loans less servicing and other costs) in $3.9 million in loans sold
to Aames, which management estimates will represent a return of approximately
3.3% on the principal amount of the $3.9 million of loans sold.
Pacific Thrift entered into a new agreement with Aames Capital
Corporation effective June 21, 1995, pursuant to which it will continue to sell
pre-approved residential loans to Aames. The new agreement provides for Pacific
Thrift to receive a premium of 3.25% of the face amount of each loan sold which
meets preset interest rate requirements upon date of sale. An additional .5%
purchase premium will be paid for all loans sold during any quarter if at least
$22.5 million of loans are sold during that quarter. The premium for all loans
sold in excess of $25 million will be 4.25%. In addition, Pacific will receive a
servicing released fee of .45% per annum on the principal amount of each loan
sold, payable on a quarterly basis, until the loan is paid off.
During the first five months of 1995, Pacific Thrift has also sold an
aggregate of $2.8 million of pre-approved loans to other purchasers. Pacific
Thrift has no commitment to offer or sell any specified amount of loans to any
purchaser, but has entered arrangements whereby other purchasers may pre-approve
loans to be made by Pacific Thrift prior to funding, which are sold within
approximately one month from origination.
To the extent that Pacific Thrift originates loans for sale, it bears an
interest rate risk between the date of origination of each loan and the time
that each loan is sold. However, loans are generally sold on a monthly basis,
which reduces the risk of interest rate fluctuations between the date of
origination and date of sale. Loans which are held for sale during the period
prior to sale are accounted for at the lower of cost or market value of such
loans.
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PORTFOLIO LENDING.
Pacific Thrift has historically originated for its own loan portfolio
primarily first and second trust deed real estate loans secured by one-to-four
family residential, multi-family residential, commercial and, to a very minor
extent, undeveloped, property. The loan origination and underwriting criteria
for these loans are described in detail under Item 1. "Business -- Lending
Activities -- Loan Origination and Underwriting." For the past 18 months,
Pacific Thrift has significantly reduced the origination of loans for its own
portfolio due to a lack of sufficient capital necessary to meet regulatory
asset-to-capital ratios. Pacific Thrift plans to gradually expand portfolio
lending during 1995 after it reaches a capital level of approximately $7
million.
Over the past four years, as California real property values declined
substantially, the Partnership and Pacific Thrift have incurred higher than
anticipated loan losses and losses on foreclosures, particularly on loans made
prior to 1994.. The characteristics of the combined loan portfolio of the
Partnership and Pacific Thrift are described herein under Item 1. "Business --
Lending Activities."
HOME IMPROVEMENT LOANS.
From 1990 until March 31, 1993, Pacific Thrift operated a home
improvement loan division, which originated three types of home improvement
loans, including (i) loans partially insured by the Federal Housing
Administration ("FHA") under Title I of the National Housing Act ("Title I
Loans"); (ii) loans partially insured by a policy of credit insurance issued by
a private insurer; and (iii) uninsured loans subject to an additional annual fee
paid by the borrower to Pacific Thrift. The program was discontinued on March
31, 1993. All home improvement loans were made under substantially the same loan
underwriting standards and policies set by the U.S. Department of Housing and
Urban Development ("HUD"), including a requirement that each loan be secured by
a first or second priority lien on residential property having a value of at
least 100% of the loan amount plus all prior encumbrances. Home improvement
loans were made in amounts not in excess of $25,000 on loans secured by single
family residences and not in excess of $60,000 on loans secured by multi-family
residences.
Pacific Thrift held $3.4 million of home improvement loans and loan
participations at December 31, 1994, compared with $7.7 million and $8.4 million
at December 31, 1993 and 1992, respectively. Due to claims made on Title I Loans
and privately insured loans for the four years ended December 31, 1994, there is
no material amount of insurance coverage remaining on any of the outstanding
home improvement loans. Pacific Thrift has continued to service all outstanding
home improvement loans in the manner that is required pursuant to its contracts
with the purchasers of loan participations. However, the fact that there is no
material insurance coverage available on any home improvement loans exposes
Pacific Thrift to contingent risks of loss on home improvement loans and loan
participations held by Pacific Thrift.
No home improvement loans have been originated since March 1993. Over
the past six months, Pacific Thrift has sold $3,896,710 of home improvement
loans at par value. Pacific Thrift may sell additional home improvement loans
during the remainder of 1995.
LENDING POLICIES
The following description of lending policies refers to the lending
policies of Pacific Thrift for portfolio loans. The Partnership does not
presently originate new loans. The description of the existing loan portfolio as
of December 31, 1994, refers to the combined loan portfolio of both the
Partnership and Pacific Thrift.
GEOGRAPHIC CONCENTRATION. At December 31, 1994, the combined loan
portfolio of the Partnership and Pacific Thrift included loans geographically
distributed approximately 77% in Southern California (south of San Luis Obispo),
19% in Northern California, 3% in Washington and 1% in Oregon, based on
principal loan balances. Pacific Thrift's loan policy limits the total dollar
amount of loans and total number of loans made in each zip code area to no more
than 5% of its total outstanding loans.
Although Pacific Thrift originates loans in states outside California,
substantially all of such loans are pre-approved loans for immediate sale. At
the present time, Pacific Thrift intends to limit the origination of loans for
retention in its loan portfolio to California and, to a minor extent, Washington
and Oregon.
COLLATERAL REQUIREMENTS. Although substantially all of the loans
originated by Pacific Thrift for sale are residential loans, changes in the
pricing structure for residential loans due to increased competition have caused
management to redirect Pacific Thrift's portfolio lending over the past year to
loans secured by commercial property. Commercial properties accepted by Pacific
Thrift as collateral include primarily retail, multi-unit residential and light
industrial properties. No more than 30% of Pacific Thrift's total loan portfolio
may be secured
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by multi-unit residential property, and no more than 3% by unimproved land.
Loans secured by commercial property are generally made at 65% or less loan to
value ratios.
At December 31, 1994, approximately 38% of the aggregate principal
amount of loans comprising the combined loan portfolio were secured by
one-to-four family residential property, 29% by multi-family residential
property, 30% by commercial property, and 3% by undeveloped property.
At each of the dates set forth below the combined gross loan portfolio
of the Partnership and Pacific Thrift (which does not reflect reserves for loan
losses) was collateralized by the following types of real property:
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Dec. 31, 1994 Dec. 31, 1994 Dec. 31 1993 Dec. 31, 1993 Dec. 31, 1992 Dec. 31, 1992
Principal Loan Percentage of Principal Loan Percentage of Principal Loan Percentage of
Balances Total Portfolio Balances Total Portfolio Balances Total Portfolio
One-to-four family
residential property
1st TDs 6,271,007 10.66 $22,629,958 25.29% $ 27,189,568 25.60%
2nd TDs 11,983,931 20.39 20,454,710 22.86% 37,008,291 34.84%
3rd TDs 1,833,001 3.12 3,103,656 3.47% 3,862,048 3.63%
Home Imp. Loans 2,298,050 3.91 7,699,823 8.60% 8,422,557 7.93%
----------- ----- ------------ -----
TOTAL 22,385,989 38.08 53,888,147 60.22% 76,482,464 72.00%
========== ====== =========== ====== ============ ======
Five and Over
Multi-Family
residential property
1st TDs 13,531,290 23.02 10,266,956 11.48% 7,040,860 6.63%
2nd TDs 3,154,197 5.37 4,284,452 4.79% 3,545,922 3.34%
3rd TDs 34,993 .06 35,062 0.04% 35,818 0.03%
----------- ----- ------------ -----
TOTAL 16,720,480 28.45 14,586,470 16.31% 10,622,600 10.00%
========== ====== =========== ====== ============ ======
Commercial
Property
1st TDs 14,184,456 24.13 16,036,924 17.92% 13,495,988 12.70%
2nd TDs 3,579,936 6.09 2,759,898 3.08% 3,193,933 3.10%
3rd TDs 104,212 .18 266,523 0.30% 306,239 0.29%
----------- ----- ------------ -----
TOTAL 17,868,604 30.40 19,063,345 21.30% 16,996,160 16.00%
========== ====== =========== ====== ============ ======
Undeveloped
Property
1st TDs 1,805,151 3.07 1,944,519 2.17% 2,124,520 2.00%
2nd TDs -0- 0.00 0 0.00% 0 0
3rd TDs -0- 0.00 0 0.00% 0 0
----------- ----- ------------ -----
TOTAL 1,805,151 3.07 1,944,519 2.17% 2,124,520 2.00%
========== ====== =========== ====== ============ ======
TOTAL
PORTFOLIO
1st TDs 35,791,904 60.88 50,878,357 56.86% 49,850,936 46.93%
2nd TDs 18,718,064 31.85 27,499,060 30.73% 43,748,146 41.18%
3rd TDs 1,972,206 3.36 3,405,241 3.81% 4,204,105 3.96%
Home Imp. Loans 2,298,050 3.91 7,699,823 8.60% 8,422,557 7.93%
----------- ----- ------------ -----
TOTAL 58,780,224 100.00 $89,482,481 100.00% $106,225,744 100.00%
========== ====== =========== ====== ============ ======
LOAN ORIGINATION AND UNDERWRITING. Pacific Thrift's loans are primarily
originated through referrals from mortgage loan brokers and other licensed
referral sources for which the borrower pays a referral fee. As of May 31, 1995
Pacific Thrift employed 40 loan representatives, who maintain contacts with loan
referral sources and provide customer service.
At December 31, 1994, the maximum amount that Pacific Thrift could loan
to one borrower was $622,000. On that date, the largest Partnership loan in the
combined portfolio was $1,265,475 and the largest Pacific Thrift loan in the
portfolio was $812,950. There were 15 loans in the combined loan portfolio which
exceeded $500,000. The average loan balance at December 31, 1994, not including
Home Improvement Loans, was $139,381 for Pacific Thrift and $98,085 for the
Partnership.
Following an analysis of a loan applicant's credit, repayment ability
and collateral appraisal, every loan must be approved by one of four senior
officers. Loans over $150,000 and up to $500,000 must be approved by
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two of the four senior officers. If the loan does not meet all credit
guidelines, but has satisfactory explanations or compensating factors, or the
loan exhibits other unusual characteristics, it requires approval of the
President or the Chief Executive Officer and one of the other two senior
officers. Any loan in excess of $500,000 must be approved by the President or
the Chief Executive Officer and one of the other two senior officers and one
non-officer director. In addition, any loan in excess of 5% of Pacific Thrift's
capital or $300,000 (whichever is greater at the time of loan origination) must
be approved by a non-officer director unless the property securing the loan is
first visited and inspected by a senior officer of Pacific Thrift. Loan
rewrites, extensions and troubled debt restructurings require the approval of
the Vice President of the Debt Restructuring Department or the President of
Pacific Thrift.
Pacific Thrift obtains independent third party appraisals or evaluations
of all properties securing its loans prior to loan origination. The Partnership
also required third party appraisals on all of its outstanding loans at loan
origination. Pacific Thrift maintains an approved appraiser list and specifies
minimum criteria which must be met by every appraisal.
Pacific Thrift's loan policies, in conformity with FDIC regulations,
require that maximum loan to value ratios be limited as follows with respect to
the following types of properties (except for home improvement loans described
below): 90% for owner-occupied one-to-four family residential property with
mortgage insurance or readily marketable collateral; 85% for all other improved
property; 85% for construction of one-to-four family residential property; 80%
for construction of commercial, multi-family and non-residential property; 75%
for land development and 65% for unimproved land. Pacific Thrift generally seeks
to originate portfolio loans with loan to value ratios which are generally 5% or
more lower than these maximum ratios. Loans to facilitate sale of properties
acquired in settlement of loans (also known as "other real estate owned, or
"OREO") may be higher than the maximum loan to value ratios allowed for new
loans. Due to the significant decline in Southern California real estate values
over the past five years, management believes that the current values of
properties securing loans made prior to 1994 do not meet the original loan to
value ratios.
It is anticipated by management that Pacific Thrift's Board of Directors
will periodically adjust and modify its collateral requirements and underwriting
criteria in response to economic conditions and business opportunities.
The following table sets forth the number and aggregate loan balances of
loans, not including Home Improvement Loans, originated by both the Partnership
and Pacific Thrift (not including loans originated specifically for sale) since
1988 and currently held in the combined portfolio:
Aggregate Original Aggregate
Number Balance Loan Balances Average Amount
of Loan at Time of at December 31, of Loan
Originations Origination 1994 Originated
------------ ------------------- --------------- --------------
1988 793 $59,486,049 $2,442,061 $75,014
1989 1,159 $95,428,656 $1,457,650 $82,337
1990 882 $72,778,968 $4,138,413 $82,516
1991 716 $60,278,404 $6,832,070 $84,188
1992 632 $53,207,352 $8,930,411 $84,189
1993 547 $48,611,898 $17,560,462 $88,870
1994 272 $42,055,615 $29,474,743 $154,616
MATURITIES AND RATE SENSITIVITIES OF LOAN PORTFOLIO
The table below sets forth the amounts of loans in the combined
portfolio at December 31, 1994 that have fixed interest rates and floating or
adjustable interest rates. Loans that have adjustable or floating interest rates
are shown as maturing in the period during which the loan matures. The table
does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
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Loan Balances due in: As of December 31, 1994
-----------------------
Number of Loans Principal Balances Percentage of
--------------- ------------------ Portfolio
---------
One year or less:
Variable Rate 1,116 12,473,545 21.23
Fixed Rate 57 4,602,183 7.83
After one year but
within five years:
Variable Rate 149 17,578,064 29.90
Fixed Rate 50 3,881,955 6.60
After five years but
within ten years:
Variable Rate 138 10,806,677 18.38
Fixed Rate 13 1,468,044 2.50
After ten years:
Variable Rate 87 4,100,668 6.98
Fixed Rate 1,249 3,869,128 6.58
Pacific Thrift and the Partnership generally rewrite loans at maturity
if the borrower makes a new loan application. In addition, Pacific Thrift and
the Partnership may rewrite loans at the end of an initial interest-only payment
period. In cases where the loan to value ratio has declined on an existing loan
and no longer meets Pacific Thrift's loan to value guidelines, Pacific Thrift's
policy is to make an exception and rewrite the loan. The Partnership follows
generally the same policy for loan rewrites.
A substantial portion of the combined loan portfolio is repriced, pays
off or matures approximately every two years. Of the 24% of all loans bearing
fixed rates at December 31, 1994, 39% were either due in two years or less or
payable interest only for the first two years, which loans are generally renewed
at the then current rates or paid at the end of the interest only period. Based
upon these facts, over 86% of the combined loan portfolio (exclusive of home
improvement loans) at December 31, 1994, consisted of either variable rate loans
or fixed rate loans which mature or loans which were payable interest only for
two years or less. Management therefore expects that within two years,
approximately 86% of the combined loan portfolio (excluding home improvement
loans) may reprice at the greater of the current rate then applicable to new
loans or the rate in effect on the existing loan at the time the loan is
repriced.
The initial interest rate on variable rate loans is set as of the date
of origination of each loan based upon the then prevailing reference rate
established by Bank of America, which initial rate may increase by not less than
.125% in any three-month period, but may not increase by more than five (10 in
some cases) percentage points in the aggregate. Such increases (or decreases, as
the case may be) occur at three-month intervals as the result of changes in the
Bank of America reference rate. Although the interest rate may decrease, it
cannot decrease below the original interest rate set for each loan.
CLASSIFIED ASSETS AND LOAN LOSSES
The general policy of Pacific Thrift is to discontinue accrual of
interest and make a provision for anticipated loss on a loan when: (i) it is
more than two payments contractually past due; (ii) the current estimated
loan-to-value ratio is 90% or more; and (iii) the loan exhibits the
characteristics of an in-substance foreclosure, generally including any loan as
to which the borrower does not have the ability, willingness or motivation to
repay the loan. The current estimated loan-to-value ratio of each delinquent
loan is determined by a new independent appraisal, unless an independent
appraisal was obtained no more than twelve months prior to review, in which case
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the current estimated loan-to-value ratio is determined by in-house review. When
a loan is reclassified from accrual to nonaccrual status, all previously accrued
interest is reversed at Pacific Thrift in accordance with regulatory
requirements. Consistent with generally accepted accounting principles, the
Partnership's policy for determination of nonaccrual status is the same as
Pacific Thrift's, except that the Partnership only reverses that portion of
accrued interest which is not covered by the current estimated net realizable
value of the underlying real estate collateral. Interest income on nonaccrual
loans is subsequently recognized when the loan resumes payment or becomes
contractually current as appropriate. Accounts which are deemed fully or
partially uncollectible by management are generally fully reserved or charged
off for the amount that exceeds the estimated net realizable value (net of
selling costs) of the underlying real estate collateral. Gains on the sale of
OREO are not recognized until the close of escrow upon sale. Home improvement
loans are classified nonaccrual when no payment has been received for 60 days or
more, and are charged off when they become five payments delinquent.
Unless an extension, modification or rewritten loan is obtained,
Pacific Thrift's policy is to commence procedures for a non-judicial trustee's
sale within 30 to 60 days of a payment delinquency on a loan under the power of
sale provisions of the trust deed securing such loan, as regulated by applicable
law. Pacific Thrift's policy is to extend or rewrite a delinquent loan only if
it can be determined that the borrower has the ability to repay the loan on the
modified terms.
The determination of the adequacy of the allowance for loan losses is
based on a variety of factors, including loan classifications and underlying
loan collateral values, and the level of nonaccrual loans. See Item 1. "Business
- -- Classified Assets and Nonperforming Assets -- Allowance for Loan Losses."
Therefore, changes in the amount of nonaccrual loans will not necessarily result
in increases in the allowance for loan losses. The ratio of nonaccrual loans
past due 90 days or more to total loans was 5.35%, 5.94% and 3.06% at December
31, 1994, 1993 and 1992, respectively. The ratio of the allowance for loan
losses to nonaccrual loans past due 90 days or more was 136.94%, 58.74% and
81.34% at December 31, 1994, 1993 and 1992, respectively.
The following table sets forth the number and remaining gross balances
of all loans in the combined loan portfolio (which do not reflect reserves for
loan losses) that were more than 30 days delinquent at December 31, 1994, 1993
and 1992.
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AT DECEMBER 31, 1994
PRESIDENTIAL PACIFIC COMBINED
Loan Principal Amount Principal Amount Principal Amount Percent of
Delinquencies Loans Delinquent Loans Delinquent Loans Delinquent Total Loans
------------- ---------------- ---------------- ---------------- -----------
30 to 59 days $ 10 $ 513,191 $ 513,201 .87%
60 to 89 days 342,239 790,677 1,132,916 1.93%
90 days or more 3,053,613 2,695,109 5,748,722 9.78%
---------- ---------- ---------- -----
TOTAL $3,395,862 $3,998,977 $7,394,839 12.58%
========== ========== ========== =====
AT DECEMBER 31, 1993
PRESIDENTIAL PACIFIC COMBINED
Loan Principal Amount Principal Amount Principal Amount Percent of
Delinquencies Loans Delinquent Loans Delinquent Loans Delinquent Total Loans
------------- ---------------- ---------------- ---------------- -----------
30 to 59 days $1,705,555 $1,118,064 $ 2,823,619 3.16%
60 to 89 days 1,211,248 1,310,969 2,522,217 2.82%
90 days or more 6,855,650 3,224,410 10,080,060 11.26%
---------- ---------- ----------- -----
TOTAL $9,772,453 $5,653,443 $15,425,896 17.24%
========== ========== =========== =====
AT DECEMBER 31, 1992
PRESIDENTIAL PACIFIC COMBINED
Loan Principal Amount Principal Amount Principal Amount Percent of
Delinquencies Loans Delinquent Loans Delinquent Loans Delinquent Total Loans
------------- ---------------- ---------------- ---------------- -----------
30 to 59 days $2,591,342 $1,501,447 $4,092,789 3.85%
60 to 89 days 1,885,353 786,090 2,671,442 2.51%
90 days or more 6,327,849 2,514,182 8,842,031 8.32%
----------- ---------- ----------- -----
TOTAL $10,804,544 $4,801,719 $15,606,262 14.68%
=========== ========== =========== =====
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NONACCRUAL AND RESTRUCTURED LOANS. The following table sets forth the
aggregate amount of loans at December 31, 1994, 1993 and 1992 which were (i)
accounted for on a nonaccrual basis; (ii) accruing loans which are
contractually past due 90 days or more as to principal and interest payments;
and (iii) troubled debt restructurings. The Partnership and Pacific Thrift
follow a practice of extending or modifying loans in certain circumstances.
However, interest rates are not reduced below market rates, amounts due at
maturity are not reduced and accrued interest is not reduced. There are no
commitments to loan additional funds to borrowers whose loans have been
modified. Accordingly, no loans are considered "troubled debt restructurings"
as defined in Statement of Financial Accounting Standards No. 15 ("FAS 15").
At December 31, 1994 At December 31, 1993 At December 31, 1992
-------------------- -------------------- --------------------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
Presidential Pacific Combined Presidential Pacific Combined Presidential Pacific Combined
------------ ------- -------- ------------ ------- -------- ------------ ------- --------
Accruing loans past $1,612 $991 $2,603 $2,627 $2,137 $4,764 $3,392 $2,197 $5,589
due 90 days or more
Nonaccruing loans 1,442 1,704 3,146 4,229 1,087 5,316 2,936 317 3,253
past due 90 days or
more
Troubled Debt 0 0 0 0 0 0 0 0 0
------ ---- ------ ------ ------ ------ ------ ------ ------
Restructurings
TOTAL $3,054 $2,695 $5,749 $6,856 $3,224 $10,080 $6,328 $2,514 $8,842
====== ====== ====== ====== ====== ======= ====== ====== ======
The following table sets forth information concerning interest accruals
and interest on nonaccrual loans as of December 31, 1994, 1993 and 1992.
At December 31, 1994 At December 31, 1993 At December 31, 1992
-------------------- -------------------- --------------------
(Dollars in Thousands) (Dollars in Thousands) (Dollars in Thousands)
Presidential Pacific Combined Presidential Pacific Combined Presidential Pacific Combined
------------ ------- -------- ------------ ------- -------- ------------ ------- --------
Interest $962 $562 $1,524 $1,377 $429 $1,806 $1,824 $754 $2,578
Contractually Due on
Loans past due 90
days or more
Interest Accrued on $187 $ 75 $ 262 $617 $188 $805 $486 $255 $741
Loans past due 90
days or more
Interest not $775 $487 $1,262 $760 $241 $1,001 $1,338 $499 $1,837
recognized on
Nonaccrual Loans past
due 90 days or more
Upon request of a borrower, the Partnership or Pacific Thrift has
generally granted one to two months extensions of payments during the term of a
loan. In 1994, the Partnership and Pacific Thrift extended 37 loans with an
aggregate principal balance of $5,532,814. No loan was extended for a term of
more than six months. In addition, the Partnership or Pacific Thrift may modify
a loan by allowing temporary reductions in the amount of principal or interest
payable on a loan for up to twelve months. In 1994, the Partnership and Pacific
Thrift modified 24 loans with aggregate principal balances of $365,603. The
Partnership and Pacific Thrift rewrote 22 delinquent loans in 1994 in amounts of
$3,120,101 which represented approximately 3.68% of the average loans
outstanding in 1994. The Partnership and Pacific Thrift apply the same
documentation standards on a rewritten loan as on an original loan. The
Partnership and Pacific Thrift make these accommodations only if it can be
determined that the borrower has the ability to repay the loan on the modified
terms. Management believes that these accommodations are a reasonable and
necessary response to the increased level of delinquencies experienced during
the past three years. The Partnership and Pacific Thrift have had generally
favorable experience with repayment of loans extended, modified or rewritten on
this basis.
Procedures upon delinquency of home improvement loans vary from the
foreclosure procedures ordinarily used to collect other loans. Upon 10 days'
delinquency, the borrower is contacted and an attempt to schedule
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payments is made; if this is not possible, a determination is made whether the
proceeds of a foreclosure sale would result in a recovery of all or part of the
loan amount, after costs of foreclosure. In almost every case, there is
insufficient equity to foreclose on a home improvement loan, and the loan is
charged off when it becomes five payments delinquent. In addition to losses on
its retained interest in home improvement loans, Pacific Thrift may be required
to repurchase participation interests sold in Title I Loans if Pacific Thrift is
found to have breached its warranties that such loans complied with insurance
requirements. Pacific Thrift has never been required to repurchase any loan
participation interests. However, no assurance can be given that Pacific Thrift
will not be required to repurchase any loan participation interests in the
future.
The initiation of foreclosure proceedings against a borrower does not
suggest that the recovery of the loan is dependent solely on the underlying
collateral. In fact, many borrowers will bring payments current or undertake
other remedies so that foreclosure is not required.
At December 31, 1994, the Partnership and Pacific Thrift held OREO of
$7,620,800 (inclusive of senior liens of $2,312,604). In accordance with the
policy for recognizing losses upon acquisition of OREO, the Partnership and
Pacific Thrift charge off those portions of the loans with respect to which OREO
has been acquired to the extent of the difference between the loan amount and
the estimated fair value of the OREO. Included in OREO at December 31, 1994 are
32 single family residences with an aggregate net book value of $5,194,884
(inclusive of $2,312,604 senior liens); 17 commercial properties with an
aggregate net book value of $2,248,905 (with no senior liens); and 3 undeveloped
properties with an aggregate net book value of $177,011 (with no senior liens).
For the year ended December 31, 1994, total expenses on operation and sale of
OREO were $1,155,000 and gains on sale of OREO were $423,000 for a total expense
of $732,000. There can be no assurance that net losses on the sale of OREO will
not be experienced in the future.
ALLOWANCE FOR LOAN LOSSES. The following is a summary of the changes in
the consolidated allowance for loan losses of the Partnership and Pacific Thrift
for each of the three years ended December 31, 1994:
Year ending Year ending Year ending
December 31, 1994 December 31, 1993 December 31, 1992
----------------- ----------------- -----------------
Balance, beginning of year $3,123,000 $ 2,646,000 $ 1,821,000
Provision charged to 6,096,000 4,655,000 3,887,000
expenses
Loans charged off (4,912,000) (4,179,000) (3,062,000)
Recoveries on loans
previously
charged off -0- -0- -0-
---------- ----------- -----------
Balance, end of year $4,307,000 $ 3,122,000 $ 2,646,000
========== =========== ===========
Ratio of chargeoffs during
year to average loans
outstanding 5.79% 4.12% 2.67%
==== ==== ====
Management performed an extensive review and analysis of the entire
combined loan portfolio at year end 1992, including performing and nonperforming
loans. Over 300 new independent or in-house appraisals were performed at that
time, resulting in a significant adjustment to the allowance for loan losses in
the fourth quarter of 1992. In 1993, new management of Pacific Thrift
implemented new policies and procedures for determining the allowance for loan
losses. In connection with the implementation of these new policies and
procedures, new outside appraisals were ordered for almost every loan delinquent
60 days or more with a balance of $75,000 or more as
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to which an outside appraisal had not been performed for at least six months. As
a result of that review and analysis, additional charge offs and reserves were
taken by Pacific Thrift during the fourth quarter of 1993.
In December 1993, Pacific Thrift engaged an independent consulting firm
to assist Pacific Thrift in devising a comprehensive asset classification system
for the purpose of analyzing the allowance on a monthly basis. Effective in
March 1994, the Board of Directors adopted an asset classification system
pursuant to which every delinquent loan and every performing loan which exhibits
certain risk characteristics is graded monthly, and a general reserve percentage
is assigned to each classification level. Management also reviews every
delinquent loan on a monthly basis and reviews the current estimated fair market
value of the property securing that loan. To the extent that the amount of the
delinquent loan exceeds the estimated fair market value of the property, an
additional reserve is made for that loan.
At year end 1994, due to the continuing declines in California real
estate values which occurred in 1994, management of the Partnership determined
that additional reserves were necessary. Accordingly, management analyzed the
amount of loans charged off throughout 1993 and 1994, and obtained broker price
opinions on a substantial number of loans. As a result of this analysis, the
Partnership determined to make a significant adjustment to the provision for
loan losses for the forth quarter of 1994.
Pacific Thrift's current general policy is to maintain an allowance for
loan losses equal to the amount determined necessary based upon Pacific Thrift's
asset classification policy, which is written to conform with generally accepted
accounting principles and FDIC requirements. The Partnership's current general
policy is to maintain an allowance for loan losses determined in accordance with
generally accepted accounting principles.
The allowance for loan losses was 5.08%, 3.08% and 2.31% of the average
loans outstanding in the combined loan portfolio during 1994, 1993 and 1992 and
7.33%, 3.49% and 2.49% of the total loans outstanding at December 31, 1994, 1993
and 1992, respectively. The allowance for loan losses was 58.24%, 20.24% and
16.95% of the total amount of delinquent loans at December 31, 1994, 1993 and
1992, respectively. Based upon management's review of the risk characteristics
of the combined loan portfolio, the allowance was considered adequate at
December 31, 1994 to absorb losses arising from all known and inherent risks.
Management utilizes its best judgment in providing for possible loan
losses and establishing the allowance for loan losses. However, the allowance is
an estimate which is inherently uncertain and depends on the outcome of future
events. In addition, regulatory agencies, as an integral part of their
examination process, periodically review Pacific Thrift's allowance for loan
losses. Such agencies may require Pacific Thrift to recognize additions to the
allowance based upon their judgment of the information available to them at the
time of their examination.
Implicit in lending activities is the fact that losses will be
experienced and that the amount of such losses will vary from time to time,
depending upon the risk characteristics of the portfolio. The allowance for loan
losses is increased by the provision for loan losses charged to expense. The
conclusion that a loan may become uncollectible, in whole or in part, is a
matter of judgment.
Adverse economic conditions and a declining real estate market in
California have adversely affected certain borrowers' ability to repay loans. A
continuation of these conditions or a further decline in the California economy
could result in further deterioration in the quality of the loan portfolio and
continuing high levels of nonperforming assets and charge-offs, which would
adversely effect the financial condition and results of operations of the
Partnership and Pacific Thrift.
INVESTMENT ACTIVITIES
Except for Pacific Thrift, neither the Partnership nor any of the
operating subsidiaries maintain an investment portfolio. Pacific Thrift's
investment portfolio is used primarily for liquidity purposes and secondarily
for investment income. Effective January 1, 1994, Pacific Thrift's policy is to
invest cash in short-term U.S. government securities or federal funds sold due
in less than 30 days. Overnight federal funds sold are limited to no more than
100% of total capital at any single financial institution that is either
adequately or well capitalized. If the financial institution is neither
adequately nor well capitalized, then the limit is $100,000. As of December 31,
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15
1994, Pacific Thrift held investments in federal funds totaling $12,500,000. As
of December 31, 1993 and 1992, Pacific Thrift held excess cash in
interest-earning bank accounts and there were no investments.
SOURCES OF FUNDS
DEPOSITS. Pacific Thrift's major source of funds is FDIC-insured
deposits, including passbook savings accounts, money market accounts and
investment certificates (similar to certificates of deposit). Pacific Thrift
attracts customers for its deposits by offering rates that are slightly higher
than rates offered by commercial banks and savings and loans. Pacific Thrift
does not accept brokered deposits. Management believes its deposits are a stable
and reliable funding source. At December 31, 1994, Pacific Thrift had
outstanding 1,650 deposit accounts of approximately $69.5 million.
The following table sets forth the average balances and average rates
paid on each category of Pacific Thrift's deposits for the three years ended
December 31, 1994.
DEPOSIT ANALYSIS
At December 31, 1994 At December 31, 1993 At December 31, 1992
-------------------- -------------------- --------------------
(Dollars in (Dollars in (Dollars in
Thousands) Thousands) Thousands)
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
Savings Deposits $23,868 3.79% $4,451 3.59% $3,298 4.75%
Deposits under $100,000 $43,828 4.59% $46,609 5.92% $38,157 6.66%
Deposits over $100,000 $ 415 6.68% $4,621 6.58% $4,208 7.09%
------- ---- ------ ---- ------ ----
Total $68,111 4.32% $55,681 5.78% $45,663 6.55%
======= ==== ======= ==== ======= ====
The following schedule sets forth the time remaining until maturity for
all certificates at December 31, 1994, 1993 and 1992.
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16
DEPOSIT MATURITIES
At As of As of
December 31, December 31, December 31,
1994 1993 1992
(Dollars in (Dollars in (Dollars in
Thousands) Thousands) Thousands)
Passbook/Money Market $11,443 $21,004 $ 3,170
------- ------- -------
Accounts under $100,000
3 months or less $25,522 $ 5,886 $6,173
Over 3 months through 6 months 17,201 7,663 4,663
Over 6 months through 12 months 10,654 12,634 7,330
Over 12 months 4,579 13,441 24,699
------- ------- -------
Total $57,956 $39,624 $42,865
------- ------- -------
Accounts over $100,000
3 months or less $102 $ 300 $ 300
Over 3 months through 6 months - 100 600
Over 6 months through 12 months - 1,092 200
Over 12 months - 300 3,426
------- ------- -------
Total $102 $ 1,792 $ 4,526
---- ------- -------
TOTAL DEPOSITS $69,501 $62,420 $50,561
======= ======= =======
OTHER BORROWINGS. The Partnership has historically used bank financing
to increase the amount of funds available to it for lending operations. The
Partnership currently has borrowings outstanding under a Loan Agreement (the
"Loan Agreement") with National Westminster Bank USA (the "Bank"), dated August
30, 1990, as amended and restated May 20, 1992, and as further amended and
restated as of September 28, 1994. (as amended and currently in effect, the
"Loan Agreement").
The Bank originally offered a revolving credit line of $105 million to
the Partnership in 1990, under which the Partnership borrowed a maximum of $82
million during 1990. The credit line was reduced by mutual agreement in 1991 to
$48 million with an $18 million interim loan, which interim loan was fully
repaid by April 1992. In March 1992, the Partnership was informed that the
Bank's management had determined to reduce its exposure to California real
estate secured lending due to the general decline in California real estate
values and increasing delinquency rates. Accordingly, the Loan Agreement
provided for continuing monthly pay downs of from $1 million to $1.5 million,
which reduced the available credit line to $30.3 million by March 31, 1993.
Further paydowns of $1 million per month were required from April 30 to June 30,
1993, and $300,000 per month from July 1, 1993 through June 30, 1994. At June
28, 1995, the Partnership owed a total balance of $10.4 million under the Loan
Agreement.
The Partnership exceeded the scheduled monthly pay down requirements
through December 31, 1994, from a combination of cash flow from operations and
loan sales, including sales of approximately $3.8 million, $6.4 million and
$12.6 million of loans during 1994, 1993 and 1992, respectively. However, due to
an increase in loan delinquencies, management determined that the Partnership
was not in compliance with loan eligibility requirements in December 1993. Under
the terms of the Loan Agreements, this required the Partnership to make
additional prepayments, which it was unable to make. The Partnership informed
the Bank of this event of default on December 8, 1993. All events of default
identified by the Partnership to the Bank, including the failure to meet certain
financial ratios and the failure to make prepayments required as a result, were
automatically waived when
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the amended and restated Loan Agreement was closed on September 30, 1994. As of
June 20, 1995, the Partnership was in compliance with all paydown requirements
and financial ratios required under the amended and restated Loan Agreement, but
certain technical conditions have not been satisfied. The Company has informed
NatWest of those events which it considers to be events of default, including
the "going concern" qualification of the report of independent public
accountants of its financial statements for the year ended December 31, 1994 and
the late delivery of such financial statements, and NatWest has agreed to waive
these events of default.
Under the current terms of the Loan Agreement, the Partnership has
until June 30, 1996, to fully repay the outstanding balance owed to the Bank.
The Loan Agreement requires the Partnership to utilize 100% of its net cash flow
to pay down the loan. Net cash flow is defined as total cash receipts less
collection costs, loan servicing expenses and general and administrative
expenses, subject to certain maximum levels based upon projected expenses
prepared by the Partnership. The loan balance bears interest at prime plus 1%.
Mandatory pay down levels require reduction of the loan balance by approximately
$2.2 million per quarter through March 31, 1996, and a final payment of
approximately $4.7 million by June 30, 1996. In the event the Partnership does
not meet any minimum quarterly reduction level beginning June 30, 1995, a $1
million fee note will be incurred for each quarter, up to a maximum penalty of
$5 million. The fee notes would bear interest at prime plus 1%, and would be due
on the earlier of payment in full or maturity, provided that if the Partnership
repaid the loan in full before maturity, the amount owed under any fee notes
would be reduced to the higher of $500,000 or 25% of the aggregate of such notes
and interest thereon. The Partnership is further required to maintain a
collateral coverage ratio of performing loans relative to its loan balance equal
to 1.1:1, increasing to 1.2:1 after June 30, 1995. In addition, the Partnership
is required to maintain a total collateral coverage ratio of total loans
receivable relative to its loan balance equal to 1.6:1, increasing to 1.8:1
after June 30, 1995. Cash distributions by the Partnership to the General
Partner are restricted to the General Partner's overhead expenses, and all
distributions and withdrawal payments are and will remain restricted for the
full term of the loan. The General Partner and the three managing officers of
the Partnership reaffirmed their personal guarantees of the loan in connection
with the amendment of the Loan Agreement dated as of September 28, 1994.
Borrowings under the Loan Agreement are secured by the Partnership's
loans receivable and other assets. As additional security for the bank debt, the
General Partner has pledged its Class A and B Units in the Partnership. Further,
the General Partner made an unsecured loan to the Partnership of $600,000 on May
15, 1992, which accrues interest at the Bank's prime rate (currently 9.00%), but
which will not be repaid as to principal or interest without consent of the
Bank.
COMPETITION
The Partnership and Pacific Thrift have significant competition in
California for the origination of mortgage loans from banks, savings and loans,
other thrift and loans and mortgage companies. Some of the these companies are
headquartered in California, and have extensive branch systems and advertising
programs which the Partnership and Pacific Thrift do not have. The Partnership
and Pacific Thrift compensate for competitive disadvantages by seeking niche
lending markets underserved by other lenders and by providing a higher level of
personal service to borrowers.
Pacific Thrift faces competition for depositors' funds from other
thrift and loans, banks, savings and loans, credit unions and, increasingly,
from mutual funds and life insurance annuity products. Pacific Thrift does not
offer checking accounts, travelers' checks or safe deposit boxes and thus has a
competitive disadvantage to commercial banks and savings associations in
attracting depositors. Pacific Thrift compensates for the lack of a full array
of services by offering slightly higher interest rates for deposits than most of
its competitors while remaining interest rate competitive with smaller savings
and loan associations.
EMPLOYEES
As of December 31, 1994, the Partnership had no employees, but received
full time services from four full-time employees of the General Partner.
Consolidated and Lenders received the services of 32 full time and 3 part time
employees on the payroll of the General Partner. As of the same date, Pacific
Thrift had 122 of its own full time employees and two part time employees.
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18
SUPERVISION AND REGULATION
Pacific Thrift is subject to regulation, supervision and examination by
the DOC and, as an insured depository institution, by the FDIC. Pacific Thrift
is not regulated or supervised by the Office of Thrift Supervision, which
regulates savings and loan institutions. The Partnership is regulated by the DOC
but is not, under current law and applicable regulations, directly regulated or
supervised by the FDIC, the Federal Reserve Board or any other bank regulatory
authority, except with respect to the general regulatory and enforcement
authority of the DOC and the FDIC over transactions and dealings between the
Partnership and Pacific Thrift, and except with respect to both the specific
limitations regarding ownership of the capital stock of the parent corporation
of any thrift and loan, and the specific limitations regarding the payment of
dividends from Pacific Thrift.
CALIFORNIA LAW
The thrift and loan business conducted by Pacific Thrift is governed by
the California Industrial Loan Law and the rules and regulations of the DOC
which, among other things, regulate collateral requirements and maximum
maturities of the various types of loans that are permitted to be made by
California-licensed industrial loan companies, better known as thrift and loan
companies.
Subject to restrictions imposed by applicable California law, Pacific
Thrift is permitted to make secured and unsecured consumer and non-consumer
loans. The maximum term of repayment of loans made by thrift and loan companies
ranges up to 40 years and 30 days depending upon collateral and priority of the
secured position, except that loans with repayment terms in excess of 30 years
and 30 days may not in the aggregate exceed 5% of the total outstanding loans
and obligations of the company. Although secured loans may generally be
repayable in unequal periodic payments during their respective terms, consumer
loans secured by real property with terms in excess of three years must be
repayable in substantially equal periodic payments unless such loans are covered
under the Garn-St. Germain Depository Institutions Act of 1982 (primarily
one-to-four family residential mortgage loans).
California law limits loans by thrift and loan companies to persons who
do not reside in California to no more than 20% of total assets, or up to 30% of
total assets with approval of the DOC. California law contains extensive
requirements for the diversification of the loan portfolio of thrift and loan
companies. A thrift and loan with outstanding investment certificates may not,
among other things, have more than 25% of its loans or other obligations in
loans or obligations which are secured only partially, but not primarily, by
real property; may not make any one loan secured primarily by improved property
which exceeds 20% of its paid-up and unimpaired capital stock and surplus not
available for dividends; may not lend an amount in excess of 5% of its paid-up
and unimpaired capital stock and surplus not available for dividends upon the
security of the stock of any one corporation; may not make loans to, or hold the
obligations of, any one person or control group as primary obligor in an
aggregate principal amount exceeding 20% of its paid-up and unimpaired capital
stock and surplus not available for dividends; and may have no more than 70% of
its total assets in loans which have remaining terms to maturity in excess of
seven years and are secured solely or primarily by real property.
A thrift and loan generally may not make any loan to, or hold an
obligation of, any of its directors or officers or any director or officer of
its holding company or affiliates, except in specified cases and subject to
regulation by the DOC. A thrift and loan may not make any loan to, or hold an
obligation of, any of its shareholders or any shareholder or its holding company
or affiliates, except that this prohibition does not apply to persons who own
less than 10% of the stock of a holding company or affiliate which is listed on
a national securities exchange. There are currently no outstanding loans made by
either the Partnership or Pacific Thrift to any officers or directors of the
Partnership or any of its affiliates. Any person who wishes to acquire 10% or
more of the capital stock of a California thrift and loan company or 10% or more
of the voting capital stock or other securities giving control over management
of its parent company must obtain the prior written approval of the DOC.
A thrift and loan is subject to certain leverage limitations which are
not generally applicable to commercial banks or savings and loan associations.
In particular, thrift and loans may not have outstanding at any time investment
certificates that exceed 20 times paid-up and unimpaired capital and surplus.
Under California law, thrift and loans that desire to increase their leverage
must meet specified minimum standards for liquidity reserves in cash, loan loss
reserves, minimum capital stock levels and minimum unimpaired paid-in surplus
levels. As approved by
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19
the DOC, Pacific Thrift can currently operate with a ratio of deposits to
unimpaired capital and unimpaired surplus of 15:1.
At December 31, 1994, Pacific Thrift's total deposits were 22.3 times
its paid-up and unimpaired capital and unimpaired surplus not available for
dividends, which was in violation of its authorized thrift ratio. Pacific Thrift
returned to compliance with the 15:1 thrift ratio as of April 30, 1995. As of
May 31, 1995, Pacific Thrift had a 13.4:1 thrift ratio, which was in compliance
with regulatory requirements.
Under provisions of the FDIC Improvement Act and regulations issued by
the FDIC, additional limitations have been imposed with respect to depository
institutions' authority to accept, renew or rollover brokered deposits. Pacific
Thrift does not accept brokered deposits.
Thrift and loan companies are not permitted to borrow, except by the
sale of investment or thrift certificates, in an amount exceeding 300% of
tangible net worth, surplus and undivided profits, without the DOC's prior
consent. All sums borrowed in excess of 150% of tangible net worth, surplus and
undivided profits must be unsecured borrowings or, if secured, approved in
advance by the DOC, and be included as investment or thrift certificates for
purposes of computing the maximum amount of certificates a thrift and loan may
issue. However, collateralized Federal Home Loan Bank advances are excluded for
this test of secured borrowings and are not specifically limited by California
law. Pacific Thrift had no borrowed funds other than deposits at December 31,
1994.
Under California law, thrift and loan companies are generally limited
to investments, other than loans, that are legal investments for commercial
banks. California commercial banks are prohibited from investing an amount
exceeding 15% of shareholders' equity in the securities of any one issuer,
except for specified obligations of the United States, California and local
governments and agencies. A thrift and loan company may acquire real property
only in satisfaction of debts previously contracted, pursuant to certain
foreclosure transactions or as may be necessary for the transaction of its
business, in which case such investment, combined with all investments in
personal property, is limited to one-third of a thrift and loan's paid-in
capital stock and surplus not available for dividends. For the period between
September 30, 1994 and February 28, 1995, Pacific Thrift was not in compliance
with these restrictions due to the reduction in its capital. However, by March
31, 1995 Pacific Thrift had returned to compliance with the restrictions.
Although investment authority and other activities that may be engaged
in by Pacific Thrift generally are prescribed under the California Industrial
Loan Law, certain provisions of FDIC Improvement Act may limit Pacific Thrift's
ability to engage in certain activities that otherwise are authorized under the
California Industrial Loan Law. See "Governmental Policies and Recent
Legislation -- "Federal Deposit Insurance Corporation Improvement Act of 1991"
under this heading.
FEDERAL LAW
Pacific Thrift's deposits are insured by the FDIC to the full extent
permissible by law. As an insurer of deposits, the FDIC issues regulations,
conducts examinations, requires the filing of reports and generally supervises
the operations of institutions for which it provides deposit insurance. Among
the numerous applicable regulations are those issued under the Community
Reinvestment Act of 1977 ("CRA") to encourage insured state nonmember banks,
such as Pacific Thrift, to meet the credit needs of local communities, including
low and moderate income neighborhoods consistent with safety and soundness, and
a rating system to measure performance. Inadequacies of performance may result
in regulatory action by the FDIC. Pacific Thrift received a satisfactory rating
with respect to its CRA compliance in its most recent FDIC compliance
examination completed in March 1994.
Pacific Thrift is subject to the rules and regulations of the FDIC to
the same extent as all other state banks that are not members of the Federal
Reserve System. The approval of the FDIC is required prior to any merger,
consolidation or change in control, or the establishment or relocation of any
branch office of Pacific Thrift. This supervision and regulation is intended
primarily for the protection of the deposit insurance funds.
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Pacific Thrift is subject to certain capital adequacy guidelines issued
by the FDIC. See "Governmental Policies and Recent Legislation -- Capital
Adequacy Guidelines" under this heading.
RESTRICTIONS ON TRANSFERS OF FUNDS TO THE PARTNERSHIP BY PACIFIC THRIFT
There are statutory and regulatory limitations on the amount of
dividends which may be paid to the Partnership by Pacific Thrift. Under
California law, a thrift and loan is not permitted to declare dividends on its
capital stock unless it has at least $750,000 of unimpaired capital plus
additional capital of $50,000 for each branch office maintained. In addition, no
distribution of dividends is permitted unless: (i) such distribution would not
exceed a thrift's retained earnings; or, (ii) in the alternative, after giving
effect to the distribution, (a) the sum of a thrift's assets (net of goodwill,
capitalized research and development expenses and deferred charges) would be not
less than 125% of its liabilities (net of deferred taxes, income and other
credits), or (b) current assets would be not less than current liabilities
(except that if a thrift's average earnings before taxes for the last two years
had been less than average interest expenses, current assets must not be less
than 125% of current liabilities).
In addition, a thrift and loan is prohibited from paying dividends from
that portion of capital which its board of directors has declared restricted for
dividend payment purposes. The amount of restricted capital maintained by a
thrift and loan provides the basis of establishing the maximum amount that a
thrift may lend to a single borrower and determines the amount of capital that
may be counted by the thrift for purposes of calculating the thrift to capital
ratio. Pacific Thrift has, in the past, restricted as much capital as necessary
to achieve its maximum thrift ratio limit. The board of directors of Pacific
Thrift may unrestrict all or any portion of its equity in the future for
dividends to the Partnership, provided that Pacific Thrift remains adequately
capitalized.
The FDIC also has authority to prohibit Pacific Thrift from engaging in
what, in the FDIC's opinion, constitutes an unsafe or unsound practice in
conducting its business. It is possible, depending upon the financial condition
of the bank in question and other factors, that the FDIC could assert that the
payment of dividends or other payments might, under some circumstances, be such
an unsafe or unsound practice. Further, the FDIC has established guidelines with
respect to the maintenance of appropriate levels of capital by banks under their
jurisdiction. Compliance with the standards set forth in such guidelines and the
restrictions that are or may be imposed under the prompt corrective action
provisions of the FDIC Improvement Act could limit the amount of dividends which
Pacific Thrift may pay to the Partnership. See "Federal Deposit Insurance
Corporation Improvement Act of 1991 -- Prompt Corrective Regulatory Action" and
"Governmental Policies and Recent Legislation -- Capital Adequacy Guidelines"
under this heading for a discussion of these additional restrictions on capital
distributions.
Pacific Thrift is subject to certain restrictions imposed by federal
law on any extensions of credit to, or the issuance of a guarantee or letter of
credit on behalf of, the Partnership or other affiliates, the purchase of or
investments in stock or other securities thereof, the taking of such securities
as collateral for loans and the purchase of assets of the Partnership or other
affiliates. Such restrictions prevent the Partnership and other affiliates from
borrowing from Pacific Thrift unless the loans are secured by marketable
obligations of designated amounts. Further, such secured loans and investments
by Pacific Thrift to or in the Partnership or to or in any other affiliate is
limited to 10% of Pacific Thrift's capital and surplus (as defined by federal
regulations) and such secured loans and investments are limited, in the
aggregate, to 20% of Pacific Thrift's capital and surplus (as defined by federal
regulations). In addition, any transaction with an affiliate of Pacific Thrift
must be on terms and under circumstances that are substantially the same as a
comparable transaction with a non-affiliate. Additional restrictions on
transactions with affiliates may be imposed on Pacific Thrift under the prompt
corrective action provisions of the FDIC Improvement Act. See "Governmental
Policies and Recent Legislation -- Federal Deposit Insurance Corporation
Improvement Act of 1991" under this heading.
REGULATORY ACTIONS
As a result of an FDIC examination conducted as of June 15, 1993, the
FDIC and the DOC requested Pacific Thrift to enter into a stipulated Cease and
Desist Order (the "1993 Order") issued November 10, 1993. The Order primarily
required Pacific Thrift to (i) adopt a written policy acceptable to the FDIC and
the DOC governing Pacific Thrift's relationships with its affiliates; (ii)
reduce its volatile liability deposits to specified maximum levels;
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(iii) increase its liquidity to specified minimum levels; and (iv) develop a
comprehensive asset/liability management policy. The Order did not require any
increase in capital or loan loss reserves, or a decrease in adversely classified
assets. In order to comply with the Order, Pacific Thrift terminated its
personnel services and facilities arrangements with the Partnership.
Substantially all of the requirements of the Order were met by January 31, 1994,
well in advance of the required dates for compliance specified in the Order.
At the end of August 1994, the FDIC requested Pacific Thrift to enter
into a supplemental stipulated Cease and Desist Order (the "Supplemental Order")
issued October 13, 1994. The Supplemental Order required Pacific Thrift to
obtain the prior consent of the FDIC before opening any new offices and to
design, file and implement plans to increase its net earnings. The Supplemental
Order did not require any increase in capital or loan loss reserves. The
Supplemental Order also required that detailed budgets and comparisons of
budgets with actual results of operations be filed with the FDIC and DOC.
In December 1994, the FDIC notified Pacific Thrift that it was
classified as "critically undercapitalized" as of October 31, 1994. Pacific
Thrift had sufficiently restored its regulatory capital ratios from net
operating profits and capital contributions as of April 30, 1995 to be
classified as "adequately capitalized" under FDIC regulations. The FDIC
confirmed Pacific Thrift's adequate capitalization by letter dated May 8, 1995.
Pacific Thrift has agreed to the issuance of a new cease and desist
order (the "1995 Order") with the FDIC replacing the 1993 Order and Supplemental
Order. The terms of the 1995 Order require Pacific Thrift to: have and retain
qualified management; increase and maintain Tier 1 capital (consisting of
shareholders' equity) at 8% of its total assets; eliminate assets classified
"loss" as of September 26, 1994; reduce the level of adversely classified
assets; in certain instances, refrain from extending additional credit to
borrowers whose prior credits have been adversely classified; maintain a fully
funded allowance for loan losses; implement Pacific Thrift's capital restoration
and business/profitability plans; correct a past violation of the thrift ratio
requirement and comply with all applicable laws and regulations; file reports of
condition and income which accurately reflect its financial condition; obtain
FDIC approval prior to payment of any cash dividends; continue to comply with
its Policy for Transactions and Relationships Between Affiliates; obtain FDIC
approval before opening additional offices; and furnish written quarterly
progress reports to the FDIC detailing actions taken to comply with the 1995
Order.
Management of Pacific Thrift believes that it is already in full
compliance with the terms of the 1995 Order which require immediate action, and
that it will be in compliance with all terms and conditions which require future
performance as of the dates such performance is required as specified in the
1995 Order.
GOVERNMENTAL POLICIES AND RECENT LEGISLATION
Banking is a business that depends on interest rate differentials.
Although in 1994 fee income from loans originated for sale by Pacific Thrift
exceeded interest income, interest income constitutes a significant portion of
the income from the Partnership's lending operations. The difference between the
interest rate paid by Pacific Thrift on its thrift deposits and its other
borrowings and the interest rates received by Pacific Thrift on portfolio loans
constitutes the net interest margin earned on portfolio loans. These margins are
highly sensitive to many factors that are beyond the control of Pacific Thrift.
Accordingly, and just as with any other regulated financial institution which
accepts deposits, the earnings and growth of Pacific Thrift will be subject to
the influence of local, domestic and foreign economic conditions, including
recession, unemployment and inflation.
Pacific Thrift's business, just like that of any other financial
institution, is not only affected by general economic conditions but is also
influenced by the monetary and fiscal policies of the federal government and the
policies of regulatory agencies, particularly the Federal Reserve Board. The
Federal Reserve Board implements national monetary policies (with objectives
such as curbing inflation and combating recession) by its open-market operations
in United States Government securities, by adjusting the required level of
reserves for financial intermediaries subject to its reserve requirements and by
varying the discount rates applicable to borrowings by depository institutions.
The actions of the Federal Reserve Board in these areas influence the growth of
bank loans, investments and deposits and also affect interest rates charged on
loans and paid on deposits. The nature and impact of any future changes in
monetary policies cannot be predicted.
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From time to time, legislation is enacted which has the effect of
increasing the cost of doing business, limiting or expanding permissible
activities or affecting the competitive balance between banks and other
financial intermediaries. Proposals to change the laws and regulations governing
the operations and taxation of banks, bank holding companies and other financial
intermediaries are frequently made in Congress, in the California legislature
and before various bank regulatory and other professional agencies. The
likelihood of any major changes and the impact such changes might have on the
Partnership are impossible to predict. Certain of the potentially significant
changes which have been enacted and proposals which have been made recently are
discussed below.
FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991. On
December 19, 1991, the FDIC Improvement Act was enacted into law. Set forth
below is a brief discussion of certain portions of this law and implementing
regulations that have been adopted or proposed by the Federal Reserve Board, the
Comptroller of the Currency, the Office of Thrift Supervision and the FDIC
(collectively, the "Federal Banking Agencies").
BIF RECAPITALIZATION. The FDIC Improvement Act provides the FDIC with
three additional sources of funds to protect deposits insured by the Bank
Insurance Fund (the "BIF") administered by the FDIC, The FDIC is authorized to
borrow up to $30 billion from the U.S. Treasury; borrow from the Federal
Financing Bank up to 90% of the fair market value of assets of institutions
acquired by the FDIC as receiver, and borrow from financial intermediaries that
are members of the BIF. Any borrowings not repaid by asset sales are to be
repaid through insurance premiums assessed to member institutions. Such premiums
must be sufficient to repay any borrowed funds within 15 years and provide
insurance fund reserves of $1.25 for each $100 of insured deposits.
IMPROVED EXAMINATIONS. All insured depository institutions must undergo
a full-scope, on-site examination by their appropriate Federal Banking Agency at
least once every 12 months. The cost of examinations of insured depository
institutions and any affiliates may be assessed by the appropriate Federal
Banking Agency against each institution or affiliate as it deems necessary or
appropriate.
STANDARDS FOR SAFETY AND SOUNDNESS. Pursuant to the FDIC Improvement
Act, the FDIC has issued proposed safety and soundness standards on matters such
as loan underwriting and documentation, internal controls and audit systems,
interest rate risk exposure and compensation and other employee benefits. The
proposal also establishes the maximum ratio of classified assets to total
capital at 100% and the minimum level of earnings sufficient to absorb losses
without impairing capital. The proposal provides that a bank's earnings are
sufficient to absorb losses without impairing capital if the bank is in
compliance with minimum capital requirements and the bank would, if its net
income or loss over the last four quarters continued over the next four
quarters, remain in compliance with minimum capital requirements. Any
institution which failed to comply with these standards would be required to
submit a compliance plan. A failure to submit a plan or to comply with an
approved plan would subject the institution to further enforcement action. No
assurance can be given as to the final form of the proposed regulations or, if
adopted, the impact of such regulations on Pacific Thrift.
In December 1992, the Federal Banking Agencies issued final regulations
prescribing uniform guidelines for real estate lending. The regulations, which
became effective March 19, 1993, require insured depository institutions to
adopt written policies establishing standards, consistent with such guidelines,
for extensions of credit secured by real estate. The policies must address loan
portfolio management, underwriting standards and loan-to-value limits that do
not exceed the supervisory limits prescribed by the regulations.
PROMPT CORRECTIVE REGULATORY ACTION. The FDIC Improvement Act requires
each Federal Banking Agency to take prompt corrective action ("PCA") to resolve
the problems of insured depository institutions that fall below one or more
prescribed minimum capital ratios. The purpose of this law is to resolve the
problems of insured depository institutions at the least possible long-term cost
to the appropriate deposit insurance fund.
The law required each Federal Banking Agency to promulgate regulations
defining the following five categories in which an insured depository
institution will be placed, based on the level of its capital ratios:
well-capitalized (significantly exceeding the required minimum capital
requirements), adequately capitalized (meeting the required capital
requirements), undercapitalized (failing to meet any one of the capital
requirements), significantly undercapitalized (significantly below any one
capital requirement) and critically undercapitalized (failing to meet all
capital requirements).
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In September 1992, the Federal Banking Agencies issued uniform final
regulations implementing the PCA provisions of the FDIC Improvement Act. Under
the regulations, an insured depository institution will be deemed to be:
- - "well capitalized" if it (i) has a total risk-based capital ratio of 10% or
greater, a Tier 1 risk-based capital ratio of 6% or greater and a leverage ratio
of 5% or greater and (ii) is not subject to an order, written agreement, capital
directive or PCA directive to meet and maintain a specific capital level for any
capital measure;
- - "adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, a Tier 1 risk-based capital ratio of 4% or greater and a leverage ratio
of 4% or greater (or a leverage ratio of 3% or greater if the institution is
rated composite 1 under the applicable regulatory rating system in its most
recent report of examination);
- - "undercapitalized" if it has a total risk-based capital ratio that is less
than 8%, a Tier 1 risk-based capital ratio that is less than 4% or a leverage
ratio that is less than 4% (or a leverage ratio that is less than 3% if the
institution is rated composite 1 under the applicable regulatory rating system
in its most recent report of examination);
- - "significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6%, a Tier 1 risk-based capital ratio that is less than 3% or
a leverage ratio that is less than 3%; and
- - "critically undercapitalized" if it has a ratio of tangible equity to total
assets that is equal to or less than 2%.
An institution that, based upon its capital levels, is classified as
well capitalized, adequately capitalized or undercapitalized may be reclassified
to the next lower capital category if the appropriate Federal Banking Agency,
after notice and opportunity for hearing, (i) determines that the institution is
in an unsafe or unsound condition or (ii) deems the institution to be engaging
in an unsafe or unsound practice and not to have corrected the deficiency. At
each successive lower capital category, an insured depository institution is
subject to more restrictions and Federal Banking Agencies are given less
flexibility in deciding how to deal with it.
The law prohibits insured depository institutions from paying
management fees to any controlling persons or, with certain limited exceptions,
making capital distributions, including dividends, if after such transaction the
institution would be undercapitalized. If an insured depository institution is
undercapitalized, it will be closely monitored by the appropriate Federal
Banking Agency, subject to asset growth restrictions and required to obtain
prior regulatory approval for acquisitions, branching and engaging in new lines
of business. Any undercapitalized depository institution must submit an
acceptable capital restoration plan to the appropriate Federal Banking Agency 45
days after becoming undercapitalized. The appropriate Federal Banking Agency
cannot accept a capital plan unless, among other things, it determines that the
plan (i) specifies the steps the institution will take to become adequately
capitalized, (ii) is based on realistic assumptions and (iii) is likely to
succeed in restoring the depository institution's capital. In addition, each
company controlling an undercapitalized depository institution must guarantee
that the institution will comply with the capital plan until the depository
institution has been adequately capitalized on an average basis during each of
four consecutive calendar quarters and must otherwise provide adequate
assurances of performance. The aggregate liability of such guarantee is limited
to the lesser of (a) an amount equal to 5% of the depository institution's total
assets at the time the institution became undercapitalized or (b) the amount
which is necessary to bring the institution into compliance with all capital
standards applicable to such institution as of the time the institution fails to
comply with its capital restoration plan. Finally, the appropriate Federal
Banking Agency may impose any of the additional restrictions or sanctions that
it may impose on significantly undercapitalized institutions if it determines
that such action will further the purpose of the PCA provisions.
An insured depository institution that is significantly
undercapitalized, or is undercapitalized and fails to submit, or in a material
respect to implement, an acceptable capital restoration plan, is subject to
additional restrictions and sanctions. These include, among other things: (i) a
forced sale of voting shares to raise capital or, if grounds exist for
appointment of a receiver or conservator, a forced merger; (ii) restrictions on
transactions with affiliates; (iii) further limitations on interest rates paid
on deposits; (iv) further restrictions on growth or required shrinkage; (v)
modification or termination of specified activities; (vi) replacement of
directors or senior executive officers, subject to certain grandfather
provisions for those elected prior to enactment of the FDIC Improvement Act;
(vii) prohibitions on the receipt of deposits from correspondent institutions;
(viii) restrictions on capital distributions by the holding companies of such
institutions; (ix) required divestiture of subsidiaries by the institution;
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or (x) other restrictions as determined by the appropriate Federal Banking
Agency. Although the appropriate Federal Banking Agency has discretion to
determine which of the foregoing restrictions or sanctions it will seek to
impose, it is required to force a sale of voting shares or merger, impose
restrictions on affiliate transactions and impose restrictions on rates paid on
deposits unless it determines that such actions would not further the purpose of
the PCA provisions. In addition, without the prior written approval of the
appropriate Federal Banking Agency, a significantly undercapitalized institution
may not pay any bonus to its senior executive officers or provide compensation
to any of them at a rate that exceeds such officer's average rate of base
compensation during the 12 calendar months preceding the month in which the
institution became undercapitalized.
Further restrictions and sanctions are required to be imposed on
insured depository institutions that are critically undercapitalized. For
example, a critically undercapitalized institution generally would be prohibited
from engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming critically undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate Federal Banking
Agency, not later than 90 days after an insured depository institution becomes
critically undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's shareholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
OTHER ITEMS. The FDIC Improvement Act also, among other things, (1)
limits the percentage of interest paid on brokered deposits and limits the
unrestricted use of such deposits to only those institutions that are
well-capitalized; (ii) requires the FDIC to charge insurance premiums based on
the risk profile of each institution; (iii) eliminates "pass through" deposit
insurance for certain employee benefit accounts unless the depository
institution is well-capitalized or, under certain circumstances, adequately
capitalized; (iv) prohibits insured state chartered banks from engaging as
principal in any type of activity that is not permissible for a national bank
unless the FDIC permits such activity and the bank meets all of its regulatory
capital requirements; (v) directs the appropriate Federal Banking Agency to
determine the amount of readily marketable purchased mortgage servicing rights
that may be included in calculating such institution's tangible, core and
risk-based capital; and (vi) provides that, subject to certain limitations, any
federal savings association may acquire or be acquired by any insured depository
institution.
The FDIC has adopted final regulations implementing the risk-based
premium system mandated by the FDIC Improvement Act. Under the final regulations
insured depository institutions are required to pay insurance premiums within a
range of 23 cents per $100 of deposits to 31 cents per $100 of deposits
depending on their risk classification. To determine the risk-based assessment
for each institution, an institution will be categorized as well capitalized,
adequately capitalized or undercapitalized based on its capital ratios. A
well-capitalized institution is one that has at least a 10% total risk-based
capital ratio, a 6% Tier 1 risk-based capital ratio and a 5% Tier 1 leverage
capital ratio. An adequately capitalized institution has at least an 8% total
risk-based capital ratio, a 4% Tier 1 risk-based capital ratio and a 4% Tier 1
leverage capital ratio. An undercapitalized institution will be one that does
not meet either of the above definitions. The FDIC will also assign each
institution to one of three subgroups based upon reviews by the institution's
primary federal or state regulator, statistical analyses of financial statements
and other information relevant to evaluating the risk posed by the institution.
As a result, the assessment rates within each of three capital categories are as
follows (expressed as cents per $100 of deposits):
Supervisory Subgroup
--------------------
A B C
Well capitalized 23 26 29
Adequately capitalized 26 29 30
Undercapitalized 29 30 31
Supervisory subgroups are set once every six months, based upon an
institution's last supervisory and capital classification. Pacific Thrift is
currently paying deposit insurance premiums at the rate of 31 cents per $100 of
deposits because it was categorized as "undercapitalized" and was in supervisory
subgroup 3C at December 31, 1994. Pacific Thrift has since been classified as
"adequately capitalized" as of March 31, 1995, and expects its supervisory
subgroup to be changed effective January 1, 1996.
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In addition, the FDIC has issued final regulations implementing
provisions of the FDIC Improvement Act relating to powers of insured state banks
(which for this purpose includes Pacific Thrift). Final regulations issued in
October 1992 prohibit insured state banks from making equity investments of a
type, or in an amount, that are not permissible for national banks. In general,
equity investments include equity securities, partnership interests and equity
interests in real estate. Under the final regulations, non-permissible
investments must be divested by no later than December 19, 1996. Pacific Thrift
has no non-permissible investments as of December 31, 1994.
The FDIC has recently approved final regulations which prohibit insured
state banks from engaging as principal in any activity not permissible for a
national bank, without FDIC approval. The regulations also provide that
subsidiaries of insured state banks may not engage as principal in any activity
that is not permissible for a subsidiary of a national bank, without FDIC
approval. To management's best knowledge, Pacific Thrift is not engaging in any
activity that would not be permissible under FDIC regulations.
The impact of the FDIC Improvement Act on Pacific Thrift is uncertain,
especially since many of the regulations promulgated thereunder have only been
recently adopted and certain of the law's provisions still need to be defined
through future regulatory action. Certain provisions, such as the recently
adopted real estate lending standards and the limitations on investments and
powers of state banks and the rules to be adopted governing compensation, fees
and other operating policies, may affect the way in which Pacific Thrift
conducts its business, and other provisions, such as those relating to the
establishment of the risk-based premium system, may adversely affect Pacific
Thrift's results of operations. Furthermore, if Pacific Thrift were to become
undercapitalized in the future, which management does not anticipate, the actual
and potential restrictions and sanctions that apply to or may be imposed on
undercapitalized institutions under the prompt corrective action and other
provisions of the FDIC Improvement Act could significantly adversely affect
operations and liquidity of Pacific Thrift, and the ability of the Partnership
to raise funds in the financial markets.
CAPITAL ADEQUACY GUIDELINES.
The FDIC has issued guidelines to implement new risk-based capital
requirements. The guidelines are intended to establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations, take off-balance sheet
items into account in assessing capital adequacy and minimize disincentives to
holding liquid, low-risk assets. Under these guidelines, assets and credit
equivalent amounts of off-balance sheet items, such as letters of credit and
outstanding loan commitments, are assigned to one of several risk categories,
which range from 0% for risk-free assets, such as cash and certain U.S.
government securities, to 100% for relatively high-risk assets, such as loans
and investments in fixed assets, premises and other real estate owned. The
aggregated dollar amount of each category is then multiplied by the risk-weight
associated with that category. The resulting weighted values from each of the
risk categories are then added together to determine the total risk-weighted
assets.
On and after December 31, 1992, the guidelines require a minimum ratio
of qualifying total capital to risk-weighted assets of 8%, of which at least 4%
must consist of Tier 1 capital. Higher risk-based ratios are required to be
considered well capitalized.
A banking organization's qualifying total capital consists of two
components: Tier 1 capital (core capital) and Tier 2 capital (supplementary
capital). Tier 1 capital consists primarily of common stock, related surplus and
retained earnings, qualifying noncumulative perpetual preferred stock and
minority interests in the equity accounts of consolidated subsidiaries.
Intangibles, such as goodwill, are generally deducted from Tier 1 capital;
however, purchased mortgage servicing rights and purchase credit card
relationships may be included, subject to certain limitations. At least 50% of
the banking organization's total regulatory capital must consist of Tier 1
capital.
Tier 2 capital may consist of (i) the allowance for possible loan and
lease losses in an amount up to 1.25% of risk- weighted assets; (ii) cumulative
perpetual preferred stock and long-term preferred stock and related surplus;
(iii) hybrid capital instruments (instruments with characteristics of both debt
and equity), perpetual debt and mandatory convertible debt securities; and (iv)
eligible term subordinated debt and intermediate-term preferred stock with an
original maturity of five years or more, including related surplus, in an amount
up to 50% of Tier 1 capital.
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The inclusion of the foregoing elements of Tier 2 capital are subject to certain
requirements and limitations of the Federal Banking Agencies.
The FDIC has also adopted a minimum leverage ratio of Tier 1 capital to
average total assets of 3% for banks that have a uniform composite ("CAMEL")
rating of 1. All other institutions and institutions experiencing or
anticipating significant growth are expected to maintain capital at least 100 to
200 basis points above the minimum level. Furthermore, higher leverage ratios
are required to be considered well capitalized or adequately capitalized.
As of December 31, 1994, Pacific Thrift had a total risk-based capital
ratio of 6.66%, a Tier 1 risk-based capital ratio of 5.41% and a leverage
capital ratio of 3.87%, which resulted in Pacific Thrift being classified as
"undercapitalized" as of that date. As of May 31, 1995, Pacific Thrift had
improved its total risk-based capital ratio to 9.96%, its Tier 1 risk-based
capital ratio to 8.71% and its leverage capital ratio to 6.19%, which resulted
in its reclassification to "adequately capitalized." Although there can be no
assurance of future results of operations, management of Pacific Thrift believes
that, if Pacific Thrift continues through the end of 1995 to be at least as
profitable as it has been for the first five months of 1995, it will increase
its capital ratios to "well capitalized" levels.
In addition, the Federal Reserve Board and the FDIC have issued
proposed rules, in accordance with the FDIC Improvement Act, seeking public
comment on methods for measuring interest rate risk, and two alternative methods
for determining what amount of additional capital, if any, a bank may be
required to have for interest rate risk. Pacific Thrift cannot yet determine
whether such proposals will be adopted or the impact of such regulations, if
adopted, on Pacific Thrift.
POTENTIAL ENFORCEMENT ACTIONS
Insured depository institutions, such as Pacific Thrift, and their
institution-affiliated parties, which include the Partnership, may be subject to
potential enforcement actions by the FDIC and the DOC for unsafe or unsound
practices in conducting their businesses or for violations of any law, rule,
regulation or any condition imposed in writing by the agency or any written
agreement with the agency. Enforcement actions may include the imposition of a
conservator or receiver, the issuance of a cease-and-desist order that can be
judicially enforced, the termination of insurance of deposits and with respect
to Pacific Thrift and the Partnership, could also include the imposition of
civil money penalties, the issuance of directives to increase capital, the
issuance of formal and informal agreements, the issuance of removal and
prohibition orders against institution-affiliated parties and the imposition of
restrictions and sanctions under the PCA provisions of the FDIC Improvement Act.
Management knows of no pending or threatened enforcement actions against Pacific
Thrift; however, Pacific Thrift is currently operating under a Cease and Desist
Order, as described on pages 20-21 hereof. See "Supervision and Regulation --
Regulatory Actions" above.
ITEM 2. PROPERTIES
The Partnership, Pacific Thrift, Consolidated and Lenders do business
at their main office in Woodland Hills, California. Pacific Thrift also does
business at five loan production offices in Costa Mesa, West Covina, Walnut
Creek and San Jose, California and, as of June 27, 1994, Bellevue, Washington.
All of the offices at which the Partnership and its subsidiaries
conduct business are leased. Information with respect to each of the offices as
of December 31, 1994 is as follows:
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Floor Space Annual Expiration
Location in Square Ft. Rental(1) Date
- -------- -------------- ------ ----------
Woodland Hills, CA(2) 19,600 $487,570 07/31/03
Costa Mesa, CA 6,331 150,728 11/14/96
West Covina, CA 3,877 67,460 05/30/99
Walnut Creek, CA(3) 2,544 49,037 12/31/97
San Jose, CA 1,483 24,914 02/28/97
Bellevue, WA 2,027 33,444 06/20/97
(1) Subject to annual adjustment in accordance with customary escalation
clauses, except as provided in footnote 2 below with respect to the
Woodland Hills lease, which only provides for escalation of expense
sharing obligations.
(2) Pursuant to a lease entered January 11, 1993, annual rental shall
increase to $505,680 from March 1, 1996 to July 31, 1998, to $517,440
from August 1, 1998 through January 31, 2001, to $529,200 from February
1, 2001 through July 31, 2003. The lease is accounted for on the
straight line average method of accounting, in accordance with generally
accepted accounting principles.
(3) Effective March 15, 1995, this lease was amended to add 2,138 square
feet and extend the lease term to March 1, 2000. The annual base rent
became approximately $101,131 as a result, subject to periodic
adjustment.
ITEM 3. LEGAL PROCEEDINGS
The Partnership and Pacific Thrift are parties to certain legal
proceedings incidental to its lending business, some of which seek unspecified
damages or substantial monetary damages in the form of punitive damages. The
ultimate outcome of such litigation cannot presently be determined. Management,
after review and consultation with counsel, and based upon historical experience
with prior collection actions, has determined that the outcome of such
proceedings would not have a material adverse impact on the Partnership or
Pacific Thrift's business, financial condition or results of operations, except
with respect to the actions described below.
ENVIRONMENTAL ACTIONS. The Partnership and Pacific Thrift acquired two
properties in foreclosure which were used by borrowers unaffiliated with the
Partnership for metal plating operations involving hazardous materials. After
acquisition of the two properties, the Partnership and Pacific Thrift each
received notices from local government authorities requiring removal of
hazardous materials left by the prior owners of each of the properties and
remediation of soil contamination.
The Partnership and Pacific Thrift engaged an independent environmental
consulting firm to determine the extent of soil contamination of each of the
properties, and to prepare proposed remediation plans for each site. The
proposed remediation plans, which were completed in September 1994, had an
estimated cost of $674,000 to the Partnership and $820,000 to Pacific Thrift,
including consulting and special counsel fees. These amounts were accrued at
December 31, 1993 and reserved for payment as expenses were incurred. In April
1995, Pacific Thrift obtained a revised estimate for the cost of environmental
remediation of the Whittier property it acquired in foreclosure. The new
estimated cost is significantly lower than the original estimate. Therefore, on
April 30, 1995, Pacific Thrift reversed $300,000 of the reserve which had been
set aside to pay for remediation. A contractor has been hired to perform the
required remediation, and it is presently anticipated that remediation will be
completed by June 30, 1995. The Partnership is in the process of obtaining
competitive bids for environmental remediation of the San Bernardino property it
acquired in foreclosure, and anticipates that this may reduce the original
estimated cost. It is presently anticipated that remediation of this property
will be completed by September 30, 1995. When remediation is complete, the
Partnership and Pacific Thrift will actively market both properties for sale.
On January 2, 1994, the Partnership and Pacific Thrift implemented a
comprehensive environmental policy which requires environmental risk assessment
by appraisers of every new loan made by the Partnership or Pacific Thrift and a
full environmental risk report on any commercial or industrial property used as
collateral for a loan of $250,000 or more. The policy provides that no loan will
be made in the event an environmental risk assessment
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or report indicates the possible presence of environmental contamination. In
addition, the policy provides that no property will be acquired in foreclosure
if facts are discovered indicating the existence of significant environmental
contamination. If the Partnership or Pacific Thrift determines not to foreclose
on a secured property due to environmental contamination, the collectability of
a loan could be substantially reduced.
SPITZER ACTION. Although they have never been served, in October 1993,
the Partnership and its Chief Executive Officer (CEO) received a complaint
naming them as defendants, along with four other unaffiliated named defendants.
The complaint contains allegations in connection with an alleged securities
fraud and breach of fiduciary duty by companies affiliated with Alexander
Spitzer (who until 1984 but not thereafter was an affiliate of the Partnership
and the CEO), which companies filed petitions in bankruptcy in 1989. The
complaint was filed by two long time business associates of Spitzer, including
one individual who was a general partner of a Spitzer-affiliated entity and
another individual who owned another Spitzer-affiliated entity. The primary
facts alleged against the Partnership and the CEO are alleged to have occurred
in 1984. The Partnership and the CEO deny the merits of all allegations stated
against them in the complaint.
Counsel for the Partnership and the CEO, in a letter dated October 20,
1993, advised counsel for the plaintiffs that the complaint appeared to state no
claim on the merits against the Partnership or the CEO and that no claim could
be stated because of statute of limitations problems. The only response of
plaintiffs' counsel, by letter dated November 16, 1993, was to notify all
defendants that they had an open extension of time to answer. No action has been
taken to date by anyone since the extension of time was unilaterally granted by
plaintiff's counsel in November 1993. Management does not believe that the
outcome of this action would have a material adverse impact on the Partnership's
business, financial condition or results of operations.
FORECLOSURE PUBLICATION FEES ACTION. On June 6, 1995, Consolidated
Reconveyance Company and Lenders Posting and Publishing were served with a
complaint by Consumer Action and two consumers suing both individually and on
behalf of the general public in a purported class action filed in the Superior
Court of Contra Costa County, California. The complaint names Consolidated and
Lenders, along with thirteen other foreclosure service and foreclosure
publishing companies, and alleges that all named defendants charge fees in
excess of the statutorily permitted amount for publication of notices of trustee
sales. The complaint seeks restitution of all excess charges, an injunction
against the charging of excessive fees in the future and attorneys fees. As the
case has only recently been filed and served, no response has yet been filed by
Consolidated or Lenders in the action.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No proposals for the written consent of Limited Partners were presented
by the Partnership during 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information. There is no public trading market for
the Limited Partnership Units of the Partnership and there are restrictions on
the transferability of such interests. For the past four years, there have been
four transfers of a total of $57,500 Limited Partnership Units. Each of these
sales was private, and management is not aware of the price at which the Units
were sold.
(b) Holders. As of December 31, 1994, the Partnership's total
Capital Contributions were $41,087,723, consisting of $1,748,125 held by seven
Class A Limited Partners, including $1,469,375 invested by the General Partner
in Class A Units, $2,892,000 held by 205 Class B Limited Partners, including
$311,000 invested by the General Partner in Class B Units, $13,234,375 held by
1,258 Class C Limited Partners, $12,030,500 held by 814 Class D Limited
Partners, including $50,000 invested by the General Partner in Class D Units;
$10,527,000 held by 623 Class E Limited partners, including $30,000 invested by
the General Partner in Class E Units; $255,723 held by 98 Limited Partners in
DRP Units and $400,000 invested by the General partner for its General Partner's
Interest. During 1994 and 1993, limited partners holding approximately $.9
million and $8.2 million, respectively, of capital requested withdrawal of
capital, which requests were denied in accordance with the terms of the
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Partnership Agreement and the requirements of the Partnership's loan agreement
with NatWest. The Partnership does not anticipate that it will be possible to
approve any capital withdrawal requests for the foreseeable future due to the
restrictions under the loan agreement and the Partnership's current financial
condition.
(c) Dividends. The Partnership paid regularly quarterly
distributions to the Partners in accordance with the provisions of the
Partnership Agreement until June 1993. The total amount of distributions was
based upon the Partnership Agreement, which provided for distributions based
upon the Net Profits of the Partnership, defined as net profits calculated in
accordance with generally accepted accounting principles, except that loan
origination fees are allowed to be treated as income in the year in which loans
are originated, whereas generally accepted accounting principles require that
such income be deferred over the life of the loan. To the extent that
distributions paid out between 1981 and 1993 exceed net profits under generally
accepted accounting principles, such distributions represented a return of
capital under generally accepted accounting principles.
For the year ended December 31, 1992, the Partnership distributed
$1,730,385 to the Partners in excess of Net Profits as determined under the
Partnership Agreement. Such distributions constituted a return of capital. The
General Partner voluntarily contributed a $1,730,385 Capital Note to the
Partnership, payable over three years, which was intended to make up the capital
distributed in excess of Net Profits. However, the payment of the note was
subject to certain loan volume conditions, which have not been met for the past
two years. Therefore, only $266,213 of the Capital Note has been paid. See Item
13. "Certain Relationships and Related Transactions -- General Partner Capital
Note."
For the year ended December 31, 1993, the Partnership distributed cash
in anticipation of Net Profits of $916,309. At year end 1993, the Partnership
determined that a Net Loss had been sustained for the year, such that all 1993
distributions represented a return of capital.
No distributions were paid to the Partners for the year ended December
31, 1994.
Information respecting the payment of distributions to the Limited
Partners of the Partnership for the past five years is as follows:
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First Quarter Second Quarter Third Quarter Fourth Quarter
-------------------- -------------------- -------------------- --------------------
Class of Quarterly Quarterly Quarterly Quarterly
Limited Distribu- Quarterly Distribu- Quarterly Distribu- Quarterly Distribu- Quarterly
Partners tions Returns tions Returns tions Returns tions Returns
-------- --------- --------- --------- --------- --------- --------- --------- ---------
1994
Class A -- -- -- -- -- -- -- --
Class B -- -- -- -- -- -- -- --
Class C -- -- -- -- -- -- -- --
Class D -- -- -- -- -- -- -- --
Class E -- -- -- -- -- -- -- --
DRP Units -- -- -- -- -- -- -- --
1993
Class A 51,725 2.959 -- -- -- -- -- --
Class B 73,603 2.517 -- -- -- -- -- --
Class C 298,289 2.244 -- -- -- -- -- --
Class D 279,867 2.244 -- -- -- -- -- --
Class E 197,583 1.866 -- -- -- -- -- --
DRP Units 3,404 1.376 -- -- -- -- -- --
1992
Class A $ 54,330 3.125% $ 54,330 3.125% $ 54,927 3.125% $ 54,927 3.125%
Class B 82,447 2.625% 80,571 2.625% 80,539 2.625% 78,784 2.625%
Class C 352,009 2.500% 348,356 2.500% 344,269 2.500% 329,694 2.375%
Class D 337,460 2.500% 330,490 2.500% 325,920 2.500% 310,862 2.375%
Class E 222,171 2.020% 209,099 1.916% 210,119 1.937% 209,003 1.937%
DRP Units 2,536 1.625% 2,886 1.625% 3,199 1.625% 3,481 1.625%
1991
Class A $ 64,657 3.750% $ 65,375 3.750% $ 66,094 3.750% $ 66,094 3.750%
Class B 107,556 3.250% 106,204 3.250% 105,987 3.250% 105,044 3.250%
Class C 473,573 3.000% 469,951 3.000% 466,953 3.000% 456,281 3.000%
Class D 448,578 3.000% 448,211 3.000% 447,982 3.000% 439,004 3.000%
Class E 245,602 2.708% 264,268 2.708% 287,387 2.636% 273,833 2.466%
DRP Units 1,496 2.250% 2,024 2.250% 2,547 2.250% 3,027 2.250%
1990
Class A $ 75,497 4.000% $ 74,556 4.000% $ 72,214 4.000% $ 71,040 4.000%
Class B 121,298 3.500% 121,660 3.500% 122,512 3.500% 120,479 3.500%
Class C 561,713 3.250% 559,802 3.250% 551,322 3.250% 537,064 3.250%
Class D 524,226 3.250% 519,480 3.250% 509,832 3.250% 500,933 3.250%
Class E 99,456 3.120% 173,168 3.120% 230,747 3.120% 268,688 3.120%
DRP Units 59 2.500% 320 2.500% 729 2.500% 1,186 2.500%
Initial Return (1)
Fifth Total
Class of Level Fifth Annual
Limited Distri- Level Distribu- Annual
Partners butions Returns tions Returns
-------- ------- ------- --------- -------
1994
Class A -- -- -- --
Class B -- -- -- --
Class C -- -- -- --
Class D -- -- -- --
Class E -- -- -- --
DRP Units -- -- -- --
1993
Class A -- -- 51,725 2.959
Class B -- -- 73,603 2.517
Class C -- -- 298,289 2.244
Class D -- -- 279,867 2.244
Class E -- -- 197,583 1.866
DRP Units -- -- 3,404 1.376
1992
Class A $ 1,092 0.063% $ 219,606 12.5625%
Class B 1,919 0.063% 324,260 10.5625%
Class C 9,043 0.063% 1,383,371 9.5625%
Class D 9,491 0.063% 1,314,223 9.5625%
Class E 6,691 0.063% 857,083 7.8113%
DRP Units 116 0.063% 12,218 6.5625%
1991
Class A $ 2,185 .125% $ 264,406 15.125%
Class B 4,088 .125% 428,879 13.125%
Class C 19,960 .125% 1,886,718 12.125%
Class D 18,596 .125% 1,802,371 12.125%
Class E 15,175 .125% 1,086,265 10.643%
DRP Units 127 .125% 9,220 9.125%
1990
Class A $ 2,289 .125% $ 295,595 16.125%
Class B 4,332 .125% 490,281 14.125%
Class C 21,218 .125% 2,231,119 13.125%
Class D 19,726 .125% 2,074,196 13.125%
Class E 8,007 .125% 780,066 12.635%
DRP Units 27 .125% 2,320
Initial Return (1)
(1) Represents the lower initial investment return on Class E Units paid on new
subscriptions for Class E Units monthly in excess of $2 million per month, at a
rate equal to 0.125% above the Merrill Lynch Ready Asset Trust annualized
average rate of return after expenses for the past 30 days.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial information is based upon the financial
statements of the Partnership on a consolidated basis appearing elsewhere
herein. The consolidated financial statements for the year ended December 31,
1992 were audited by KPMG Peat Marwick, independent certified public
accountants. The consolidated financial statements for the years ended December
31, 1994 and 1993, were audited by Kenneth Leventhal & Company.
Years Ended December 31,
-----------------------------------------------------------------------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Total Assets(1) 103,747,000 $114,324,000 $120,216,000 $138,405,000 $138,388,000
Total Loans Receivable, gross 58,780,000 88,910,000 106,226,000 126,171,000 124,449,000
Allowance for Loan Losses (4,307,000) (3,122,000) (2,646,000) (1,821,000) (1,111,000)
Loans Receivable, net(1) 53,045,000 84,183,000 101,405,000 122,628,000 125,825,000
Total Liabilities 93,322,000 94,385,000 91,386,000 101,699,000 99,377,000
Total Partners' Capital 10,425,000 19,939,000 28,830,000 36,706,000 39,011,000
Net Interest Income 6,477,000 8,494,000 10,101,000 9,985,000 9,015,000
Provision for Loan Losses (6,096,000) (4,655,000) (3,887,000) (2,617,000) (2,033,000)
Net Interest Income After 381,000 3,839,000 6,214,000 7,368,000 6,982,000
provision for loan losses
Non-interest Income 6,002,000 5,305,000 5,315,000 4,865,000 4,064,000
Non-interest Expenses 15,897,000 15,013,000 11,381,000 8,398,000 6,425,000
Net Income (Loss) (9,514,000) (5,869,000) 148,000 3,835,000 4,621,000
Distributions to Partners and
Net Income Per Unit
Class A Limited Partners(2)(3) -0- 52,000 220,000 264,000 296,000
Net Income Per Unit --- (708) 17 756 806
Distributions Per Unit -0- 148 628 756 806
Class B Limited Partners(4) -0- 74,000 324,000 429,000 490,000
Net Income Per Unit --- (708) 17 448 706
Distributions Per Unit -0- 123 528 448 706
Class C Limited Partners(5) -0- 298,000 1,383,000 1,887,000 2,231,000
Net Income Per Unit --- (708) 17 414 656
Distributions Per Unit -0- 111 478 414 656
Class D Limited Partners(6) -0- 280,000 1,314,000 1,802,000 2,074,000
Net Income Per Unit --- (708) 17 414 656
Distributions Per Unit -0- 111 478 414 656
Class E Limited Partners(7) -0- 198,000 857,000 1,086,000 780,000
Net Income Per Unit --- (708) 17 363 631
Distributions Per Unit -0- 92 394 363 631
DRP Units -0- 3,000 12,000 9,000 2,000
Net Income Per Unit --- (708) 17 311 506
Distributions Per Unit -0- 74 328 311 506
General Partner(8) -0- 12,000 50,000 118,000 120,000
- --------------------
(1) These amounts include net deferred loan fees and costs and allowances
for loan losses, but do not include loans held for sale.
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(2) These amounts include income earned in the reported periods but not
distributed until 45 days after the end of each quarter and 90 days
after the end of each year, and also include interests of the General
Partner(s) in Class A, B, C and D Units.
(3) All per Unit information is reported on the basis of one Unit equalling
a $5,000 Capital Contribution.
(4) Distributions to Class B Limited Partners commenced on February 15,
1984.
(5) Distributions to Class C Limited Partners commenced on August 15, 1986.
(6) Distributions to Class D Limited Partners commenced on August 15, 1987.
(7) Distributions to Class E Limited Partners commenced on February 15,
1990.
(8) Includes distributions based on the General Partner's Interests only,
not on the Class A, B, C or D Units owned by the General Partner.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Company operates two business segments: (i) the real estate lending
business, which is conducted through the Partnership and Pacific Thrift and (ii)
the trust deed foreclosure services business, which is conducted through
Consolidated and Lenders. The Company reports its financial condition and
results of operations on a consolidated basis with Pacific Thrift, Consolidated
and Lenders.
The primary source of operating income of the Company's lending business
became fee income from origination and sale of residential loans in 1994. This
reflects a change from prior years in which the primary source of operating
income was net interest income, which is the difference between the interest
income earned on its real estate secured loan portfolio and investment portfolio
and the cost of funds, consisting primarily of interest and fees on the
Partnership's bank debt, and interest paid on deposits issued by Pacific Thrift.
The market for residential loans has undergone substantial consolidation over
the past three years, and competition for residential loans has caused lenders
to substantially reduce the net interest margins on these loans. As a result,
management of Pacific Thrift, the Company's primary operating subsidiary,
determined in 1994 that Pacific Thrift could operate more profitably in the
current residential loan market as a correspondent lender for larger mortgage
banking companies than by originating residential loans for its own portfolio.
Pacific Thrift has refocused its portfolio lending to emphasize
commercial loans, which are secured by retail, multi-family residential and
light manufacturing properties. Pacific Thrift is able to retain a higher net
interest margin on these loans than it can on residential loans, and is able to
require lower loan-to-value ratios, which management believes will improve the
collectability of the loans. Over the past two years, Pacific Thrift's ability
to originate portfolio loans has been limited by its capital levels. In 1994,
Pacific Thrift's capital was reduced by loan losses and expenses associated with
the changes in its lending business operations. In addition, certain differences
between regulatory accounting principles and generally accepted accounting
principles resulted in a reduction of Pacific Thrift's regulatory capital
levels. As a result of these factors, Pacific Thrift's regulatory capital
declined to levels which substantially restricted new portfolio lending.
However, between November 1994 and May 1995, Pacific Thrift has restored its
capital with fee income from its loan sale programs, capital contributions from
the Partnership and savings from staff reductions and changes in compensation
structure for loan representatives. If capital levels continue to increase
during the remainder of 1995, management anticipates that Pacific Thrift may
increase portfolio lending before the end of 1995.
For the last two years, the Company has experienced net operating losses
due to higher loan losses caused by substantial declines in California real
estate values. In addition, the Company has experienced a decline in net
interest income over the past four years as a result of the steady reduction of
its loan portfolio, which has been necessary to pay down its bank debt. Over the
past five years, the bank debt had been reduced from a high of $82 million in
1990 to $10.4 million as of June 22, 1995. The bank debt is required to be fully
repaid by June 1996. Management of the Company anticipates that the debt will be
paid off with a combination of interest and fee income and principal reductions
on the Partnership's existing loan portfolio (which had an aggregate principal
balance of $10.4 million as of June 28, 1995), and sales of portfolio loans as
necessary to augment interest and fee income. After the final pay off of the
bank debt (or the refinancing of such debt if possible), management anticipates
that the consolidated loan portfolio will begin to increase as Pacific Thrift
increases its portfolio lending.
The Company's goal for its lending business is to build core earnings
while serving customers in its market area. To accomplish this goal, management
has adopted a business strategy designed to: (i) build Pacific Thrift's capital
with fee income from loans originated for sale; (ii) gradually rebuild the loan
portfolio with higher quality loans; (iii) improve asset quality; and (iv)
maintain capital ratios in excess of regulatory requirements.
The primary source of operating income of the trust deed foreclosure
services business is fee income for services performed by Consolidated on behalf
of other lenders, including the Partnership and Pacific Thrift. Consolidated
currently provides foreclosure services nationwide for over 300 banks, thrifts,
mortgage companies, life insurance companies and federal regulatory agencies.
Neither Consolidated nor Lenders own substantial tangible assets or have
substantial operating expenses other than general and administrative and
personnel expenses.
The Partnership's basic goal for its trust deed foreclosure services
business is to increase fee income through growth of Consolidated's customer
base. Trust deed foreclosure services fees are limited by statute in
substantially all cases, and therefore the primary means of increasing fee
income is by increasing the volume of services provided and reducing the costs
of providing the services. Consolidated doubled its customer base between 1991
and 1993, from approximately 150 to 300 customers. However, during the past
year, some customers have been lost as a result of mergers and acquisitions.
While many of these customers were replaced with new accounts during the year,
they were not replaced soon enough to fully offset
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declines in revenues from accounts lost. Less than 5% of the revenues of each of
Consolidated and Lenders are provided by the Partnership and Pacific Thrift.
FINANCIAL CONDITION
GENERAL
Total consolidated assets decreased $16.5 million to $103.7 million at
December 31, 1994 from $120.2 million at December 31, 1992, a decrease of 13.7%.
The decrease in consolidated assets during this two year period was due
primarily to a decrease of $37 million in net loans of the Partnership and a
$11.4 million decrease in net loans of Pacific Thrift, for a net decrease of
$48.4 million in net loans receivable to $53.0 million at December 31, 1994 from
$101.4 million at December 31, 1992.
A substantial amount of the proceeds from loan payoffs and loan sales of
the Partnership have been used to pay down the bank debt over the past three
years. The bank debt has been reduced $18.6 million to $14.8 million at December
31, 1994 from $33.4 million at December 31, 1992. The bank debt has been further
reduced to $10.4 million at June 28, 1995.
Deposits taken by Pacific Thrift have increased $18.9 million to $69.5
million at December 31, 1994 from $50.6 million at December 31, 1992, an
increase of 37.4%.
Total Partnership capital decreased by $18.4 million to $10.4 million at
December 31, 1994 from $28.8 million at December 31, 1992. Reductions in capital
were due to capital withdrawals of $1.4 million paid in 1993 to withdrawing
Limited Partners in accordance with the terms of the Partnership Agreement, $1.9
million in distributions paid in 1993 (which were in excess of net profits and
were therefore a return of capital) and net losses on operations of $9.5 million
in 1994 and $5.9 million in 1993, partially offset by $.3 million in capital
contributions in 1993. See Item 5. "Market for Registrant's Common Equity and
Related Stockholder Matters -- Dividends." During 1994 and 1993, the Partnership
received additional requests to withdraw capital of approximately $.9 million
and $8.2 million which were not approved, in accordance with the restrictions
provided in the Partnership Agreement and the Loan Agreement with NatWest. The
Partnership does not expect to approve any requests to withdraw capital for the
foreseeable future due to current restrictions under the Loan Agreement and the
Partnership's financial condition.
AT DECEMBER 31, 1994 COMPARED WITH DECEMBER 31, 1993
Total consolidated assets decreased $10.6 million to $103.7 million at
December 31, 1994 from $114.3 million at December 31, 1993, a decrease of 9.3%.
The decrease in assets during the year was primarily due to reductions in the
Company's loans receivable and OREO, offset by an increase in cash and cash
equivalents held to maintain Pacific Thrift's required liquidity ratio. The
Partnership's loans receivable declined by $21.6 million, and Pacific Thrift's
loans receivable by $9.6 million, resulting in a net decline of $31.2 million in
1994, to $53.0 million at December 31, 1994 from $84.2 million at December 31,
1993, a net decline of 37.0%. OREO increased by $1.6 million in 1994 to $7.6
million at December 31, 1994 from $6.0 million at December 31, 1993, an increase
of 26.7%. Offsetting these declines was an increase in cash and cash
equivalents, which increased by $6.4 million in 1994, to $19.6 million at
December 31, 1994 from $13.2 million at December 31, 1993.
Total deposits taken by Pacific Thrift increased $7.1 million to $69.5
million at December 31, 1994 from $62.4 million at December 31, 1993, an
increase of 11.4%.
Total Partners' capital decreased $9.5 million to $10.4 million at
December 31, 1994 from $19.9 million at December 31, 1993, a decline of 47.7%.
Reductions in capital were due to a $9.5 million net operating loss for 1994.
During 1994, the Partnership received additional requests to withdraw capital of
approximately $0.9 million which were not approved, in accordance with the
restrictions provided in the Partnership Agreement and the Loan Agreement with
NatWest. The Partnership does not anticipate that it will be possible to approve
any capital withdrawal requests for the foreseeable future due to the
restrictions under the loan agreement and the Partnership's current financial
condition.
AT DECEMBER 31, 1993 COMPARED WITH DECEMBER 31, 1992
Total consolidated assets decreased $5.9 million to $114.3 million at
December 31, 1993 from $120.2 million at December 31, 1992, a decrease of 4.9%.
The decrease in assets during the year was primarily due to reductions in the
Partnership's loans receivable and OREO, offset by an increase in cash and cash
equivalents held to maintain Pacific Thrift's required liquidity ratio. The
Partnership's loans receivable declined by $17.7 million, while Pacific Thrift's
loans receivable
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increased by $.5 million, resulting in a net decline of $17.2 million in 1993,
to $84.2 million at December 31, 1993 from $101.4 million at December 31, 1992,
a net decline of 17.0%. OREO declined by $3.5 million in 1993 to $6.0 million at
December 31, 1993 from $9.5 million at December 31, 1992, a decline of 36.8%
Offsetting these declines was an increase in cash and cash equivalents, which
increased by $12.7 million in 1993, to $13.2 million at December 31, 1993 from
$0.5 million at December 31, 1992.
Total deposits taken by Pacific Thrift increased $11.8 million to $62.4
million at December 31, 1993 from $50.6 million at December 31, 1992, an
increase of 23.3%
Total Partners' capital decreased $8.9 million to $19.9 million at
December 31, 1993 from $28.8 million at December 31, 1992, a decline of 30.9%.
Reductions in capital were due to capital withdrawals of $1.4 million paid to
withdrawing Limited Partners in accordance with the terms of the Partnership
Agreement, $1.9 million in distributions, capital contributions of $.3 million
and a $5.9 million net operating loss for 1993. During 1993, the Partnership
received additional requests to withdraw capital of approximately $8.2 million
which were not approved, in accordance with the restrictions provided in the
Partnership Agreement and the Loan Agreement with NatWest. The Partnership does
not expect to approve any requests to withdraw capital for the foreseeable
future due to restrictions under the Loan Agreement and the Partnership's
financial condition.
RESULTS OF OPERATIONS
NET INTEREST INCOME ANALYSIS
The following table sets forth certain information concerning average
interest-earning assets and interest bearing liabilities and the yields and
rates thereon. Average balances are calculated on a quarterly basis and
nonaccrual loans have been included in interest earning assets for the
computations. Fee income on loans included in interest income and in the
calculation of average yields was $1,678,494 and $2,709,813 for 1994 and 1993,
respectively.
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36
YIELDS AND RATES ON INTEREST-EARNING ASSETS AND INTEREST-BEARING LIABILITIES
Year Ended Year Ended
December 31, 1994 December 31, 1993
----------------- -----------------
Average Yield/ Average Yield/
Balance Interest Rate Balance Interest Rate
------- -------- ------ ------- -------- ------
Assets (Dollars in Thousands) (Dollars in Thousands)
Interest-earning assets:
Loans $84,776 11,003 12.98% $98,147 14,209 14.48%
Interest-bearing deposits in
other financial institutions
and securities purchased under
agreements to sell 10,138 401 3.96% 58 3 5.17%
-------- ------ ----- -------- ------ -----
Total interest-earning assets 94,914 11,404 12.02% 98,205 14,212 14.47%
======== ====== ===== ======== ====== =====
Noninterest-earning assets:
Cash and due from banks 3,782 4,016
Premises & equipment, net 1,452 764
Real estate acquired in settlement 6,276
of loans 7,325
Other Assets 6,734 9,165
-------- --------
Total noninterest-earning assets 18,244 21,270
-------- --------
Less allowance for loan losses 3,085 2,617
-------- --------
110,073 11,404 116,858 14,212
======= ====== ======== ======
Liabilities & Partners' Capital
Interest-bearing liabilities:
Notes payable 18,734 1,982 10.58% 30,165 2,497 8.28%
Savings deposits 23,867 904 3.79% 4,451 160 3.59%
Time CDs 44,241 2,041 4.61% 51,230 3,061 5.98%
-------- ------ ----- -------- ------ -----
Total interest-bearing liabilities 86,842 4,927 5.67% 85,846 5,718 6.66%
-------- ------ ----- -------- ------ -----
Noninterest-bearing liabilities:
Accounts payable & accrued
expenses 8,047 5,360
-------- --------
Total liabilities 94,889 91,206
Partners' Capital 15,184 25,652
-------- ------ --------
$110,073 4,927 $116,858 5,718
======== ====== ======== ======
Net interest income/spread 6,477 6.34% 8,494 7.81%
====== ===== ====== -----
Net interest margin 6.82% 8.65%
=====
Net Income (9,514) (5,869)
====== ======
Average interest earning assets to average 1.093% 1.144
interest bearing liabilities
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37
Interest income and interest expense can fluctuate widely based on
changes in the level of interest rates in the economy. The Partnership and
Pacific Thrift attempt to minimize the effect of interest rate fluctuations on
net interest margin by matching as nearly as possible interest sensitive assets
and interest sensitive liabilities. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Asset/Liability
Management."
Net interest income can also be affected by a change in the composition
of assets and liabilities, such as when higher yielding loans replace lower
yielding loans. Net interest income is affected by changes in volume and changes
in rates. Volume changes are caused by differences in the level of earning
assets and interest-bearing liabilities. Rate changes result from differences in
yields earned on assets and rates paid on liabilities.
The following table presents the dollar amount of changes in interest
income and interest expense for major components of interest-earning assets and
interest-bearing liabilities due to changes in volume and interest rates. For
each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume; (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e. changes
in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume which cannot be segregated, have been
allocated proportionately to changes due to volume and changes due to rate.
Rate Volume Analysis
(Dollars in Thousands)
--------------------------------------------------------------------------
1994 compared to 1993 1993 compared to 1992
Increase (decrease) Increase (decrease)
due to change in due to change in
----------------------------------- --------------------------------
Volume Yield/ Net Volume Yield/ Net
Rate Change Rate Change
Interest-earning assets:
Loans (1,821) (1,385) (3,206) (2,421) (160) (2,580)
Interest-bearing deposits in
other financial institutions
and securities purchased
under agreements to sell 399 (1) 398 (47) 12 (35)
------ ------ ------ ------ ---- ------
Total interest-earning assets (1,422) (1,386) (2,808) (2,468) (148) (2,615)
====== ====== ====== ====== ==== ======
Liabilities & Partners'
Capital
Interest-bearing liabilities:
Notes payable (1,243) 722 (515) (1,153) (78) (1,231)
Savings deposits 734 10 744 47 (43) 3
Time CDs (382) (638) (1,020) 551 (332) 220
------ ------ ------ ------ ---- ------
Total interest-bearing
liabilities (891) 100 (791) (555) (454) (1,008)
====== ====== ====== ====== ==== ======
Change in net interest income (531) (1,486) (2,017) (1,913) 306 (1,607)
====== ====== ====== ====== ==== ======
FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1993
GENERAL
The Company incurred a net operating loss of $9.5 million for the year
ended December 31, 1994, compared with a net loss of $5.9 million for the year
ended December 31, 1993. The increase in net loss in 1994 from 1993 was due
primarily to a $3.4 million decline in net interest income after provision for
loan losses to $.4
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38
million in 1994 from $3.8 million in 1993, and a $.9 million increase in
non-interest expense to $15.9 million in 1994 from $15.0 million in 1993 offset
by a $.7 million increase in non-interest income.
NET INTEREST INCOME
Net interest income before provision for loan losses for the year ended
December 31, 1994 was $6.5 million, a decrease of $2.0 million from the year
ended December 31, 1993. This decrease resulted primarily from the decrease in
average interest earning assets, which declined by $3.3 million, or 3.4%, to
$94.9 million in 1994 from $98.2 million in average interest earning assets in
1993.
TOTAL INTEREST INCOME
Total interest income decreased $2.8 million, or 19.7%, to $11.4
million in 1994 from $14.2 million in 1993 due to the reduction of $3.3 million
in average interest earning assets.
TOTAL INTEREST EXPENSE
Total interest expense decreased $0.8 million to $4.9 million in 1994
from $5.7 million in 1993. The decline in interest expense was due primarily to
a substantial reduction in the bank debt balance, which was partially offset by
an increase in deposits, principally time certificates of deposit, issued by
Pacific Thrift at lower rates of interest than the rate payable on the bank
debt.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $6.1 million in 1994 compared with
$4.6 million in 1993. The provision for loan losses remained high in 1994 and
1993 due to the continuing high levels of loan delinquencies and declines in
California real estate values over the past five years. The total allowance for
loan losses has increased as a percentage of the total loan portfolio to 7.33%
of the combined portfolio at December 31, 1994 compared with 3.49% of the
combined portfolio at December 31, 1993. New policies and procedures were
initiated by Pacific Thrift in 1993, which included obtaining new outside
appraisals for most delinquent loans when the most recent outside appraisal was
over six months old. In the last quarter of 1993, new management was hired for
Pacific Thrift, and it determined to make changes in the method of determining
the allowance for loan losses, which resulted in significant adjustments to the
provision for loan loss in the fourth quarter of 1993. In 1994, management of
the Partnership conducted a further review of its portfolio, which included
review appraisals of many properties. As a result, a substantial adjustment to
the provision for loan losses of the Partnership was made in the fourth quarter
of 1994. "Business -- Classified Assets and Loan Losses."
Although the Partnership maintains its allowance for loan losses at a
level which it considers to be adequate to provide for potential losses, there
can be no assurance that such losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations. The calculation of the
adequacy of the allowance for loan losses is based on a variety of factors,
including loan classifications and underlying loan collateral values, and is not
directly proportional to the level of nonperforming loans. See Item 1. "Business
- -- Classified Assets and Nonperforming Loans. -- Allowance for Loan Losses." The
ratio of nonaccrual loans past due 90 days or more to total loans was 5.35% at
December 31, 1994 and 5.94% at December 31, 1993. The ratio of the allowance for
loan losses to nonaccrual loans past due 90 days or more was 136.94% at December
31, 1994 and 58.74% at December 31, 1993. Management of the Partnership and
Pacific Thrift will continue to monitor and adjust their provisions for loan
losses as warranted by the condition of the loan portfolio and economic
conditions.
NONINTEREST INCOME
Noninterest income increased by $0.7 million to $6.0 million in 1994
compared to $5.3 million in 1993. Noninterest income was primarily provided by
trustee and reconveyance fees earned by Consolidated and Lenders. Trustee and
reconveyance fees decreased by $0.5 million in 1994 to $3.3 million in 1994
compared to $3.8 million in 1993, due to a reduction in loan default levels in
1994. It is possible that trustee and reconveyance income could further decrease
as the general economy improves, but management will attempt to retain or
increase such income with further geographic expansion of the customer bases of
Consolidated and Lenders.
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39
Gain on sale of loans increased by $0.8 million (800%) in 1994, to $0.9
million in 1994 from $0.1 million in 1993. The increase is the result of the
steady increase in loan originations for sale in 1994. A total of $58 million in
loans were sold in 1994, including $29.6 million of loans originated for sale by
Pacific Thrift. Management anticipates that gains on sale of loans will further
increase in 1995, as loans originated and sold have continued to increase during
1995. Pacific Thrift has sold a total of $49.6 million of loans during the first
five months of 1995, resulting in gains of $538,537.
NONINTEREST EXPENSE
Noninterest expense increased by $0.9 million to $15.9 million in 1994
from $15.0 million in 1993. The major components of this increase included a
$1.4 million increase in salaries and employee benefits, a $1.6 million increase
in general and administrative expenses and a $.5 million increase in
depreciation and amortization, offset by a decrease of $2.6 million in operation
of OREO. The increase in salaries and benefits was due to increased staffing at
Pacific Thrift in 1994 and reduced deferred loan origination costs pursuant to
FASB 91. The increase in general and administrative expenses was due to
increased professional fees.
FOR THE YEARS ENDED DECEMBER 31, 1993 AND 1992
GENERAL
The Partnership incurred a net operating loss of $5.9 million for the
year ended December 31, 1993, compared with net income of $.1 million for the
year ended December 31, 1992. The net loss in 1993 was due primarily to a $2.4
million decline in net interest income after provision for loan losses to $3.8
million in 1993 from $6.2 million in 1992, and a $3.6 million increase in
non-interest expense to $15.0 million in 1993 from $11.4 million in 1992.
NET INTEREST INCOME
Net interest income before provision for loan losses for the year ended
December 31, 1993 was $8.5 million, a decrease of $1.6 million from the year
ended December 31, 1992. This decrease resulted primarily from the decrease in
average interest earning assets, which declined by $17.7 million, or 15.3%, to
$98.2 million in 1993 from $115.9 million in average interest earning assets in
1992.
TOTAL INTEREST INCOME
Total interest income decreased $2.6 million, or 15.5%, to $14.2
million in 1993 from $16.8 million in 1992 due to reductions in loans
receivable. Reductions in the Partnership's loans receivable were partially
offset by increases in Pacific Thrift's average loans receivable to $57.3
million in 1993 from $50.6 million in 1992. Although there was no increase in
interest rates on loans made in 1993, loans that paid off in 1993 were at lower
average interest rates than existing loans that did not pay off in 1993,
resulting in a higher average rate of interest on the average portfolio in 1993.
TOTAL INTEREST EXPENSE
Total interest expense decreased $1.0 million to $5.7 million in 1993
from $6.7 million in 1992. The decline in interest expense was due primarily to
a substantial reduction in the bank debt balance, which was partially offset by
an increase in deposits, principally time certificates of deposit, issued by
Pacific Thrift at lower rates of interest than the rate payable on the bank
debt.
PROVISION FOR LOAN LOSSES
The provision for loan losses was $4.7 million in 1993 compared with
$3.9 million in 1992. The provision for loan losses remained high in 1993 and
1992 due to the continuing high levels of loan delinquencies and declines in
California real estate values over the past three years. The total allowance for
loan losses has increased as a percentage of the total loan portfolio to 3.49%
of the combined portfolio at December 31, 1993 compared with 2.49% of the
combined portfolio at December 31, 1992. New policies and procedures were
initiated by Pacific
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40
Thrift in 1993, which included obtaining new outside appraisals for most
delinquent loans when the most recent outside appraisal was over six months old.
In the last quarter of 1993, new management was hired for Pacific Thrift, and it
determined to make changes in the method of determining the allowance for loan
losses, which resulted in significant adjustments to the provision for loan loss
in the fourth quarter of 1993. "Business -- Classified Assets and Loan Losses."
Although the Partnership maintains its allowance for loan losses at a
level which it considers to be adequate to provide for potential losses, there
can be no assurance that such losses will not exceed the estimated amounts,
thereby adversely affecting future results of operations. The calculation of the
adequacy of the allowance for loan losses is based on a variety of factors,
including loan classifications and underlying loan collateral values, and is not
directly proportional to the level of nonperforming loans. See Item 1. "Business
- -- Classified Assets and Nonperforming Loans. -- Allowance for Loan Losses." The
ratio of nonaccrual loans past due 90 days or more to total loans was 5.35% at
December 31, 1994, compared to 5.94% and 3.06% at December 31, 1993 and 1992,
respectively. The ratio of the allowance for loan losses to nonaccrual loans
past due 90 days or more was 136.94% at December 31, 1994, compared to 58.74%
and 81.34% at December 31, 1993 and 1992, respectively. Management of the
Partnership and Pacific Thrift will continue to monitor and adjust their
provisions for loan losses as warranted by the condition of the loan portfolio
and economic conditions.
NONINTEREST INCOME
Noninterest income remained the same at $5.3 million in 1993 and in
1992. Noninterest income was primarily provided by trustee and reconveyance fees
earned by Consolidated and Lenders in 1993. Trustee and reconveyance fees
increased $.7 million in 1993 to $3.8 million in 1993 compared to $3.1 million
in 1992. Trustee and reconveyance fee income has increased due to generally
higher loan default levels in California over the past two years and increases
in the customer bases of Consolidated and Lenders. It is possible that trustee
and reconveyance income could decrease as the general economy improves, but
management expects to retain or increase such income with further geographic
expansion of the customer bases of Consolidated and Lenders.
The increase in trustee and reconveyance fee income was entirely offset
by decreases in other income and gain on sale of home improvement loans. Gain on
sale of home improvement loans decreased to $15,177 from $.4 million in 1992.
The decrease in gain on sale of home improvement loans was due to the
discontinuation of the home improvement loan division in March 1993, which
management determined was necessary because of the lack of resources available
to support the volume expansion of the program necessary to make it profitable.
NONINTEREST EXPENSE
Noninterest expense increased by $3.6 million to $15.0 million in 1993
from $11.4 million in 1992. The major components of this increase included a
$1.4 million increase in salaries and employee benefits, a $1.8 million increase
in expenses on operation of OREO and a $.5 million increase in net loss on sale
of OREO. The increase in salary and employee expenses is due to a reduction in
loan originations in 1993, which reduced the amount of employee expenses which
could be deferred under FASB 91 over the life of loans originated in 1993.
Therefore, although the total amount of salaries and benefits paid in 1993
declined by $.1 million from 1992, the Partnership recognized $1.3 million more
in expense in 1993. Similar costs had been deferred in 1992. The increase in
expenses on operation of OREO was due to an increase in the number of properties
acquired and held as OREO.
In 1993, the General Partner voluntarily reduced the base compensation
it receives for providing personnel services to the Partnership and Pacific
Thrift from 35% of loan origination fees to 30% of such fees, which resulted in
a reduction of $.1 million in 1993 from the amount that otherwise would have
been paid to the General Partner.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of funds are principal and interest
payments on loans, whereas Pacific Thrift's primary sources of funds are
deposits and principal and interest payments on loans. While scheduled principal
amortization on loans and deposit flows are a reasonably predictable source of
funds, and mortgage loan prepayments are greatly influenced by the level of
interest rates, economic conditions and competition.
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41
The primary lending and investment activities of the Partnership and
Pacific Thrift are the origination of fixed and adjustable rate real estate
loans. Since November 1991, substantially all new loans (other than loan
rewrites of existing loans) have been originated by Pacific Thrift. Effective
January 1, 1994, Pacific Thrift began to invest in short-term investment
securities, primarily federal funds sold and U.S. Treasury Notes, which provides
income from those assets required for liquidity. The levels of these assets
depend on Pacific Thrift's operating, financing, lending and investing
activities during any given period.
For the past four years, the Partnership has reduced its lending
activities as a result of the need to reduce its borrowings under the bank debt.
Beginning in 1991, the Partnership began to pay down the bank debt, which has
been reduced by $42.8 million to $14.8 million at December 31, 1994 from $57.6
million at December 31, 1991. Pacific Thrift has increased its lending
activities over the same period with funding from deposits and payments on
loans. Deposits issued by Pacific Thrift have increased $51.8 million to $69.5
million at December 31, 1994 from $17.7 million at December 31, 1990.
Pacific Thrift maintains minimum levels of liquid assets as required
under the liquidity policy adopted by the board of directors of Pacific Thrift.
The relationship between short-term liquid assets and total deposits at December
31, 1994 was 26.9%, which exceeded the 10% minimum established by the board. The
liquidity ratio was substantially increased in 1993 from the prior levels
maintained in 1992. At December 31, 1992, the relationship between short-term
liquid assets and total deposits was 2.04%, respectively. The Partnership is not
required to and does not maintain significant liquid assets.
Pacific Thrift is subject to certain leverage and risk-based capital
adequacy standards applicable to FDIC-insured institutions. At December 31,
1994, Pacific Thrift was classified by the FDIC as "undercapitalized." However,
as of March 31, 1995, Pacific Thrift was reclassified by the FDIC as "adequately
capitalized." See Item 1. "Business -- Supervision and Regulation --
Governmental Policies and Recent Legislation -- Capital Adequacy Guidelines."
At December 31, 1994, neither the Partnership nor Pacific Thrift had
any material outstanding commitments to fund loans. Certificates of deposit
which are scheduled to mature in one year or less from December 31, 1994
totalled $53.5 million. Based upon historical experience, management believes
that a significant portion of such deposits will be renewed and will remain with
Pacific Thrift, and the others will be replaced as needed.
As indicated in the Partnership's Statements of Cash Flows included in
the Consolidated Financial Statements of the Partnership included elsewhere
herein, the Partnership has utilized $5.0 million in cash from operating
activities from January 1, 1992 through December 31, 1994. Uses of cash from
operations included primarily the $9.5 million net loss in 1994 and the $5.9
million loss in 1993.
The Partnership has realized cash flow from investing activities of
$45.9 million from January 1, 1992 through December 31, 1994, primarily from
proceeds of loan sales and sales of OREO. Combined loan sales of the Partnership
and Pacific Thrift provided $28.4 million, $25.9 million and $26.9 million in
proceeds in 1994, 1993 and 1992, respectively. Proceeds from sales of OREO
provided $6.0 million, $7.0 million and $2.1 million in 1994, 1993 and 1992,
respectively.
The Partnership has used $23.0 million from financing activities from
January 1, 1992 through December 31, 1994. Cash has been used primarily to pay
off the bank debt, to make distributions to the Partners and to pay capital
withdrawals to withdrawing Limited Partners. The Partnership paid off $8.4
million, $10.2 million and $24.1 million of the bank debt in 1994, 1993 and
1992, respectively. The primary source of cash provided by financing activities
was the increase in deposits by Pacific Thrift, which increased a total of $30.4
million between January 1, 1992 and December 31, 1994, including increases of
$7.0 million in 1994, $11.9 million in 1993 and $24.1 million in 1992. The funds
provided from deposit activities by Pacific Thrift were used to fund loan
originations by Pacific Thrift during these respective periods, which were
offset by net decreases in loans receivable held by the Partnership.
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42
The Partnership is required under the current Loan Agreement to utilize
100% of its net cash flow to pay interest and reduce principal on the
outstanding balance owed to NatWest. The Loan Agreement requires quarterly
reductions of approximately $2.2 million through March 31, 1996, and a final
payment of approximately $5 million by June 30, 1996. The Loan Agreement
prohibits any distributions or withdrawal payments to the Partners, and any
payments to the General Partner other than overhead expenses until the bank debt
is repaid in full.
The Partnership is also obligated to pay an additional $1,120,379 to
Limited Partners whose capital withdrawal requests were previously approved and
not paid as of December 31, 1993. These Limited Partners are currently general
unsecured creditors of the Partnership whose right to payment is subordinated to
the Bank's rights under the Loan Agreement. The Partnership will be unable to
pay these amounts until the bank debt is repaid in full.
ASSET/LIABILITY MANAGEMENT
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap". An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
anticipated, based upon certain assumptions, to mature or reprice within a
specific time period and the amount of interest-bearing liabilities anticipated,
based upon certain assumptions, to mature or reprice within that same time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would generally tend to adversely affect net
interest income while a positive gap would generally tend to result in an
increase in net interest income. During a period of declining interest rates, a
negative gap would generally tend to result in increased net interest income
while a positive gap would generally tend to adversely affect net interest
income. At December 31, 1994, total interest-bearing liabilities maturing or
repricing during each period exceeded total interest-earning assets maturing or
repricing in the same periods by $14.1 million, representing a negative
cumulative interest rate sensitivity gap ratio of 25%. However, because interest
rates for different asset and liability products offered by depository
institutions respond differently to changes in the interest rate environment,
the gap is only a general indicator of interest rate sensitivity.
The Partnership does not actively originate new loans, and has not done
so in approximately four years. Therefore, the Partnership does not actively
monitor its interest rate risk at this time.
Pacific Thrift actively monitors its interest rate risk. Pacific Thrift
has an asset/liability committee which includes its President, Executive Vice
President, Chief Financial Officer and Deposit Operations Manager. The committee
meets regularly to review Pacific Thrift's interest rate risk position and make
whatever adjustments are necessary. In addition, the board of directors of
Pacific Thrift reviews its asset/liability position on a quarterly basis.
To the extent consistent with its interest rate spread objectives,
Pacific Thrift attempts to reduce its interest rate risk and has taken a number
of steps to match its interest sensitive assets and liabilities to minimize the
potential negative impact of changing interest rates. Pacific Thrift has focused
on making adjustable rate real estate loans, virtually all of which adjust
quarterly, and focuses its investment activity on short-term obligations of
banks and U.S. government securities.
The following table sets forth the interest rate sensitivity of Pacific
Thrift's assets and liabilities at December 31, 1994 on the basis of certain
assumptions. Except as stated below, the amounts of assets and liabilities shown
which reprice or mature during a particular period were determined in accordance
with the earlier of the repricing timing or contractual term of the asset or
liability. Pacific Thrift has assumed that its savings accounts, which totalled
$11.4 million at December 31, 1994 reprice immediately. Certificates of deposit
are included in the table below at their dates of maturity.
Certain shortcomings are inherent in the method of analysis presented
in the following table. For example, interest rate floors on some adjustable
rate loans can have the effect of increasing the net interest income as interest
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43
rates decline or, conversely, limiting net interest income as interest rates
rise. Also, loan prepayments and early withdrawal of certificates of deposit
could cause the interest sensitivities to vary from what appears in the table.
Finally, the ability of many borrowers to service their adjustable rate debt may
be adversely affected by an interest rate increase.
INTEREST RATE SENSITIVITY GAP AS OF DECEMBER 31, 1994
(Dollars in Thousands)
After One
Day But After Three After One
Within Months But Year
Assets or Liabilities Which Three Within But Within After
Mature or Reprice Months One Year Five Years Five Years Total
--------------------------- --------- ----------- ---------- ---------- -----
Cash and Investments . . . . . . . . . . . 12,500 -0- -0- -0- 12,500
Loans Receivable . . . . . . . . . . . . . 34,190 1,007 5,690 2,036 42,923
Total interest-earning assets . . . . . . 46,690 1,007 5,690 2,036 55,423
Certificates of deposit . . . . . . . . . . 25,624 27,855 4,579 -0- 58,058
Savings accounts . . . . . . . . . . . . . 11,443 -0- -0- -0- 11,443
Total interest-bearing liabilities . . . 37,067 27,855 4,579 -0- 69,501
Interest rate sensitivity gap . . . . . . . 9,623 (26,848) 1,111 2,036 (14,078)
Cumulative interest rate sensitivity gap
Interest rate sensitivity ratio (1) . . . . 1.26 .04 1.24 -0- .80
Cumulative interest rate sensitivity .21 (.36) (.30) (.25) (.25)
gap ratio (2) . . . . . . . . . . . . . .
(1) The interest rate sensitivity gap ratio represents total
interest-earning assets divided by total interest-bearing liabilities.
(2) The cumulative interest rate sensitivity gap ratio represents the
cumulative interest rate sensitivity gap divided by total
interest-earning assets.
EFFECT OF FEDERAL LAWS AND REGULATIONS
Pacific Thrift's operating results are impacted by Federal laws and
regulations.
For a discussion of certain provisions that impact Pacific Thrift, see
Item 1. "Business -- Supervision and Regulation."
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and notes thereto presented herein have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without considering the change in the relative purchasing
power of money over time due to inflation. The impact of inflation is reflected
in the increased cost of operations of the Partnership and its
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44
subsidiaries. Like most mortgage companies and industrial loan companies, nearly
all the assets and liabilities of the Partnership and Pacific Thrift are
monetary. As a result, interest rates have a greater impact on the Partnership's
consolidated performance than do the effects of general levels of inflation.
Interest rates do not necessarily move in the same direction or to the same
extent as the price of goods and services.
EFFECT OF NEW ACCOUNTING STANDARDS
In May 1993, the Financial Accounting Standards Board ("FASB"), issued
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." SFAS No. 115 changes the accounting treatment afforded fixed
maturity investments by segregating fixed maturity securities held by financial
institutions into three categories: held to maturity, available for sale, and
trading. Securities may be designated as held to maturity only if a company has
the positive intent and ability to hold these securities to maturity. An
enterprise may not classify a security as held-to-maturity if the enterprise has
the intent to hold the security only for an indefinite period. Accounting for
securities held to maturity will be unchanged and these securities will continue
to be carried at amortized cost. Trading account and available for sale
securities are to be carried at fair value (i.e., market value). Unrealized
gains and losses on trading account securities are to be charged/credited in the
income statement while unrealized gains and losses on available for sale
securities (net of applicable deferred taxes) are to be charged/credited
directly to stockholders' equity, much the same as the current accounting for
equity securities. Transfers between categories are severely restricted. SFAS
No. 115 is effective for fiscal years beginning after December 15, 1993 although
the Partnership and Pacific Thrift have the option of adopting this standard on
December 31, 1993. Retroactive application of SFAS No. 115 is not permitted. The
Partnership and Pacific Thrift currently are studying the new standard and
planning for its implementation. The Partnership and Pacific Thrift do not
expect the implementation of the new standard to have a significant impact on
their financial condition or results of operations.
In May 1993, the FASB also issued SFAS No. 114, "Accounting by
Creditors for Impairment of a Loan." SFAS No. 114 applies to all loans except
large groups of smaller balance homogeneous loans that are collectively
evaluated for impairment, loans measured at fair value or a lower of cost or
fair value, leases, and debt securities as defined in SFAS No. 115. SFAS No. 114
requires that impaired loans be valued at the present value of expected future
cash flows discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair market value of the
collateral if the loan is collateral dependent. SFAS No. 114 is effective for
fiscal years beginning after December 15, 1994, with earlier adoption
encouraged. SFAS No. 114 applies primarily to the Partnership's combined
mortgage loan portfolio. The Partnership and Pacific Thrift actively monitor
this portfolio and evaluate the net realizable value of any loan which is deemed
to be impaired. Net realizable value is assessed based upon current appraised
value of the underlying collateral. If carrying value exceeds this estimated
realizable value, carrying value is reduced to the estimated realizable value by
a charge to earnings. As such, SFAS No. 114 does not represent a material change
from the Partnership's and Pacific Thrift's current accounting practices and
neither the Partnership nor Pacific Thrift expect implementation of SFAS No. 114
to have any material effect on their reported financial results.
In November 1992, FASB issued SFAS No. 112, "Accounting for
Postemployment Benefits," which requires the accrual of postemployment benefits,
such as the continuation of health care benefits and life insurance coverage.
SFAS No. 112 is effective for fiscal years beginning after December 15, 1992.
Neither the Partnership nor any of its subsidiaries currently offers
postemployment benefits to its employees and therefore the implementation of
SFAS No. 112 is not expected to have a material effect on the Partnership or its
operations. The Partnership does not offer postemployment benefits.
In December 1990, FASB issued SFAS No. 106, "Employers' Accounting for
Post Retirement Benefits Other Than Pensions," which focuses primarily on
postretirement health care benefits. SFAS No. 106 will significantly change the
prevalent current practice of accounting for postretirement benefits on a cash
basis. The Statement requires accrual, during the years that the employee
renders the necessary service, of the expected cost of providing postretirement
benefits to an employee and the employee's beneficiaries and covered dependents.
SFAS No. 106 is effective for fiscal years beginning after December 15, 1992,
and adoption is required on a prospective basis. Neither the Partnership nor any
of its subsidiaries offers post retirement benefits other than a 401(k) plan
(which is not covered by SFAS No. 106) , and the Partnership therefore does not
expect the implementation of the new standard to have any impact on its
consolidated financial condition or results of operations.
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PART III
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Item 14(a)1-2.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On July 29, 1993, KPMG Peat Marwick terminated its relationship as
independent accountants of the Partnership and its subsidiaries. The
consolidated financial statements for the year ended December 31, 1993 were
audited by Kenneth Leventhal & Company.
KPMG Peat Marwick's report for the two years ended December 31, 1992
did not contain an adverse opinion or a disclaimer of opinion, and was not
qualified or modified as to audit scope or accounting principles. The report for
the two years ended December 31, 1992 contained explanatory paragraphs
concerning the uncertainties regarding the ultimate outcome of litigation
arising in the normal course of the Partnership's business, the financial
impact, if any, of any regulatory actions that might be taken by the FDIC in
connection with a review of the compliance of Pacific Thrift with the terms of a
Memorandum of Understanding with the FDIC, and the financial impact, if any, of
any regulatory actions that might be taken by the Department of Housing and
Urban Development ("HUD") in connection with a notice of violation sent by HUD
regarding certain of Pacific's Title I federally insured loan origination
activities. See "Item 1. Business - Supervision and Regulation" and "Item 3.
Litigation."
During the Partnership's two most recent fiscal years and subsequent
interim period through the date of KPMG Peat Marwick's termination, there was
one disagreement between the Partnership and its independent auditor with
respect to the amount of the allowance for loan losses which should be recorded
by the Partnership for the year ended December 31, 1992. The disagreement with
the independent auditor was resolved by the Partnership's increase in the
allowance for loan losses, as reported in the Partnership's Annual Report on
Form 10-K for the year ended December 31, 1992.
On September 15, 1993, the Partnership engaged Kenneth Leventhal &
Company, a nationally recognized accounting firm, as its independent certified
public accountants to audit the Partnership's financial statements. The
Partnership did not, at any time prior to engaging Kenneth Leventhal & Company,
consult it regarding the application of accounting principles to a specified
transaction; the type of audit opinion that might be rendered on the
Partnership's financial statements; any matter that was the subject of a
disagreement with the Partnership's former independent accountant; or any
reportable event.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The managing officers (the "Managing Officers") of the Partnership are
Joel R. Schultz, Norman A. Markiewicz, Richard B. Fremed, Richard D. Young and
Charles J. Siegel. The Partnership is managed, and its investment decisions are
made, by the Managing Officers, who are directly responsible to the General
Partner. The General Partner, as a limited partnership, is controlled and
managed by its general partner, Presidential Services Corporation ("PSC").
The Managing Officers are required to devote only so much of their time
to the Partnership's affairs as is necessary or required for the effective
conduct and operation of the Partnership's business. The Managing Officers
currently devote all of their time to the Partnership and its subsidiaries, but
may participate in other ventures in the future.
Messrs. Schultz and Markiewicz are employed by the Partnership under
written employment agreements automatically renewable for successive one year
terms unless terminated by either party. Messrs. Fremed, Young and Siegel
provide services to the Partnership, but do not receive any direct compensation
from the Partnership. Messrs. Schultz, Fremed and Markiewicz are salaried
employees of the General Partner, and Messrs. Young and
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Siegel are salaried employees of Pacific Thrift. Following is a summary of their
respective backgrounds and experience.
Joel R. Schultz, age 58, has had substantial experience in the lending
business over the past 18 years, primarily as a managing officer of a former
affiliate of the Partnership licensed as an industrial loan company from 1974 to
1986, when the affiliate's operations were merged with a third party. In
addition, Mr. Schultz has been Chief Managing Officer of the Partnership since
its formation in 1981. He is an attorney at law licensed to practice by the
State Bar of California, a certified public accountant, a California licensed
real estate broker and a qualified securities broker dealer principal. Mr.
Schultz has been President and a director of PSC since 1986. Mr. Schultz has
been Chief Executive Officer of the Partnership since 1981. Mr. Schultz was
President and Chief Executive Officer of Pacific Thrift from 1988 to September
1993, when a new President and Chief Operating Officer was appointed at Pacific
Thrift. He has remained Chief Executive Officer and a director of Pacific Thrift
from 1988 to the present.
Mr. Richard D. Young, age 55, was President and Chief Executive Officer
of Topa Thrift and Loan from 1983 to 1993. He was also President of the Thrift
Guaranty Corporation, the California corporation which guaranteed accounts
issued by all California thrift and loan companies, from 1984 to 1988. He has
also been a director of the Thrift Guaranty Corporation from 1983 to 1988 and
from 1989 to the present. Mr. Young was named President of Pacific Thrift in
November 1993 and Chief Operating Officer of the Partnership in May 1994. Mr.
Young is currently the Vice President and Chair of the regulatory and
legislative committees of the California Association of Thrift and Loans
("CATL").
Mr. Charles J. Siegel, age 45, was Chief Financial Officer of Topa
Thrift and Loan from 1983 to 1993. He was named Chief Financial Officer of
Pacific Thrift in December 1993, Assistant Secretary of Pacific Thrift in
October 1994, and Chief Financial Officer of the Partnership in May 1994. Mr.
Siegel has over 22 years' experience in auditing and accounting, including 17
years in financial institutions' accounting, and is a certified public
accountant. He received a B.S. degree in accounting from Syracuse University in
1972.
Mr. Norman A. Markiewicz, age 47 has had substantial experience in the
lending business for the past 21 years and has been a senior officer of the
Partnership since its formation in 1981. He became associated with a former
affiliate of the Partnership in 1974, initially as a branch manager and, after
several promotions, as Executive Vice President/Chief Operating Officer until
1986, when the affiliate's operations were merged with a third party. Mr.
Markiewicz was Chief Operating Officer of the Partnership from 1981 to May 2,
1994. Mr. Markiewicz has been Chief Operating Officer, Executive Vice President
and a director of PSC since 1986. Mr. Markiewicz was Executive Vice President
and Chief Operating Officer of Pacific from 1988 to September 1993. He has
remained Executive Vice President and a director and of Pacific Thrift from 1988
to the present.
Mr. Richard B. Fremed, age 52, has been employed by financial
institutions for more than 26 years and has been a senior officer of the
Partnership since its formation in 1981. He received a B.S. degree in Accounting
from California State University at Northridge in 1965. He is also a California
licensed real estate salesperson and a qualified securities broker dealer
principal. He began his employment with a former affiliate of the Partnership in
1978, initially as Controller and, after several promotions, as a Senior Vice
President, Chief Financial and Accounting Officer and Corporate Secretary, until
1986 when the affiliate's operations were merged with a third party. Mr. Fremed
was Chief Financial Officer of the Partnership from 1981 to May 2, 1994. Mr.
Fremed has been Senior Vice President, Treasurer, Chief Financial Officer and a
director of PSC since 1986. He was Chief Financial Officer of Pacific Thrift
from 1988 to December 1993. Mr. Fremed is now Secretary and Treasurer of Pacific
Thrift. In addition, Mr. Fremed has been a director of Pacific Thrift from 1988
to the present.
The sole shareholders of PSC, the general partner of the General
Partner of the Partnership, are Joel R. Schultz and John DeRosa, each of whom
own 50% of the outstanding stock of PSC. Messrs. Schultz and DeRosa have entered
into a shareholder's agreement providing that Mr. Schultz shall have sole voting
control over the day-to-day management decisions of PSC for so long as the
General Partner meets certain minimum profit distribution levels to its limited
partners. At any time that the General Partner fails to meet such minimum profit
distribution levels for two or more consecutive quarters, Mr. DeRosa may elect
to assume sole voting control over the day-to-day management decisions of PSC.
However, Mr. Schultz would be entitled to reclaim sole voting control over the
day-to-day management decisions at any time that the General Partner resumed
payment of the
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minimum profit distribution levels for at least two consecutive calendar
quarters. Upon the death or disability of either Mr. Schultz or Mr. DeRosa, the
remaining shareholder of PSC would assume sole voting control over all matters
concerning PSC. An amendment to the agreement was entered in August 1993
providing that Mr. DeRosa would not exercise his proxy for so long as Mr.
Schultz was a personal guarantor of the Partnership's bank debt. The background
and experience of Mr. DeRosa is summarized below.
John A. DeRosa, age 49 is a Certified Financial Planner and a Vice
President of Kidder Peabody & Co., Inc. (Mr. DeRosa is not active in the
management of the Partnership or its affiliates; his ownership interest and
participation in PSC, the General Partner and the Partnership are personal
business ventures, wholly independent of his association with Kidder Peabody &
Co., and Kidder Peabody & Co. is in no way associated or involved in the
business or affairs of PSC, the General Partner or the Partnership.) He began
his securities and personal financial planning career in 1970 with Eastman
Dillon Union Securities (now a part of Paine Webber), initially as an account
executive and, after two promotions, as a Vice President. In January 1981, he
became a Vice President of Kidder, Peabody & Co., Inc. Mr. DeRosa received a
B.S. degree from the University of Southern California. He became an insurance
broker in 1972 and a Certified Financial Planner in 1979. He has served as an
arbitrator with the Board of Arbitrators of the National Association of
Securities Dealers, Inc. ("NASD") for four years. He is a member of The Founders
of the Los Angeles Music Center, life member of The Associates, Cardinal & Gold,
and Spirit of Troy and member of The Committee for the University of Southern
California.
Following are the names of the officers and directors of PSC, all of
whom have held such positions since 1986. The directors of PSC hold office for
terms of one year or until their successors are elected and qualified and the
officers are appointed to serve at the will of the board of directors.
Joel R. Schultz President and a Director
Norman A. Markiewicz Executive Vice President and a Director
Richard B. Fremed Senior Vice President, Chief Financial
Officer, Secretary, and a Director
ITEM 11. EXECUTIVE COMPENSATION
Two of the Managing Officers of the Partnership, Mr. Schultz and Mr.
Markiewicz, received direct annual salaries from the Partnership of $20,000 and
$10,000, respectively, in 1993 for services rendered in 1992. No salaries were
paid directly by the Partnership in 1995, 1994 or 1993 for services rendered
from 1993 through 1995 under the terms of the employment agreements with Messrs.
Schultz and Markiewicz. With that exception, the Managing Officers received no
compensation directly from the Partnership for the three years ended December
31, 1994. Substantially all of the compensation paid to Messrs. Schultz,
Markiewicz and Fremed was paid by the General Partner. Messrs. Young and Siegel
received all of their compensation from Pacific Thrift.
The Partnership pays the General Partner an annual management fee
determined annually based on a sliding scale formula depending upon the annual
rates of return allocated to each Class of Limited Partners and the General
Partner, but not less than 10% of the total annual net profits of the
Partnership. No management fees were paid in 1994 or 1993. For year ended 1992,
management fees of $214,998 were paid to the General Partner. Up to 25% of the
management fee payable to the General Partner is subordinated to the Limited
Partners' receipt of their specified initial returns as provided in the
Partnership Agreement.
The Partnership also pays the General Partner a base fee for the
supervision services of the Managing Officers. In addition, the Partnership
reimburses the General Partner for employee salaries and related expenses for
each employee who devotes a portion of such employee's time to the business of
the Partnership and who does not own more than a 1% interest in the General
Partner. These fees and reimbursements are described in greater detail in "Item
13. Certain Relationships and Related Transactions."
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The General Partner and the other persons identified in the following
table are the only security holders of the Partnership known by management to
beneficially own, directly or indirectly, Capital Contributions in excess of
five percent of the total Capital Contributions of the Class A, Class B, Class
C, Class D and Class E Limited Partners, separately as a class or in the
aggregate, as of March 31, 1995. The General Partner owns no Class C Units and
no individual owns in excess of five percent of the Capital Contributions of the
Class C, D or E Limited Partners. The Managing Officers do not own any direct
interest in the Partnership, but each of them owns an interest in the General
Partner. All holders shown below have sole voting and investment power as to the
Units they own. The business address of the General Partner is 21031 Ventura
Boulevard, Woodland Hills, California 91364.
Amount of
Name of Beneficial Percent
Title of Class Beneficial Owner Ownership of Class
- -------------- ---------------- ---------- ---------
Class A Units The General Partner $1,469,375 84.1%
Class B Units The General Partner 311,000 10.8%
Class D Units The General Partner 50,000 .41%
Class E Units The General Partner 30,000 .28%
---------- ----
Total Units The General Partner $1,860,375 4.57%
========== ====
(All classes)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
MANAGEMENT FEES
Pursuant to the Partnership Agreement, the General Partner earns its
management fees based upon the amount of Net Profits allocated to each class of
Partners of the Partnership. The General Partner receives as a draw against
management fees an amount equal to 10% of the net pre-tax profits earned by the
Partnership each quarter. To the extent that this draw results in an overpayment
of management fees at the end of the year, the General Partner is required to
repay the excess amount paid within 30 days.
In 1991, the General Partner received an overpayment of the management
fee of $274,000 due to increases in the provision for loan losses and accounting
adjustments for a change in the method for determination of deferrable loan
origination costs. In addition, the General Partner determined voluntarily to
reduce the management fee by an additional $553,000, which allowed the
Partnership to make distributions of Net Profits equal to the initial allocation
rates of each class of Partners. The General Partner, therefore, repaid a total
of $827,000 to the Partnership in 1992 under a one-year note to the Partnership.
In 1992, the General Partner received an overpayment of the management
fee of $441,002 due to increases in the provision for Partnership loan losses.
The overpayment was repaid with interest at the NatWest prime rate plus 1% from
December 31, 1992 until full repayment on May 13, 1994.
In 1993, the General Partner received management fees of $440,530 in the
first and second calendar quarters, which is required to be repaid as a result
of the Partnership's net loss for 1993. As a result, the General Partner
delivered a promissory note to the Partnership for the balance owed, payable in
four equal quarterly principal installments commencing December 20, 1994. As of
December 31, 1994, the General Partner owed $330,000 on this note. No interest
was paid or accrued for 1993. However, interest at the NatWest prime rate plus
1% will be accrued from January 1, 1994, until this note is fully repaid.
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The General Partner received no management fees in 1994.
SUPERVISION FEES AND PERSONNEL REIMBURSEMENTS
The Partnership pays fees to the General Partner for supervision and
oversight of the lending and general business operations of the Company, up to a
maximum of 35% of the loan origination fee paid by the borrower of each loan
originated by the Partnership and Pacific Thrift (the "Base Fee"), plus 3/8ths
of 1% annually on the principal balance of each loan with an initial maturity of
over three years.
For the years ended December 31, 1994, 1993 and 1992, the General
Partner received supervision fees of $805,000, $845,508 and $1,432,139 from the
Partnership. The General Partner voluntarily reduced the amount of the base fee
for personnel services from 35% to 30% in 1993, which reduced the amount of fees
which otherwise would have been payable to the General Partner by $111,431.
The Partnership reimburses the General Partner for the employee salaries
and related expenses of each of the employees of the General Partner who devote
100% of their time to the business of the Partnership and who do not own more
than a 1% interest in the General Partner. There was an average of 135 full time
employees and one part time employee of the General Partner who met these
criteria in 1993, for which the Partnership reimbursed the General Partner a
total of $5,183,922, compared with $4,907,403 in 1992.
Effective January 1, 1994, in response to the demand of the FDIC, the
General Partner transferred all of its employees who worked for Pacific Thrift
directly to Pacific Thrift's payroll. The General Partner still provides
employees to the Partnership, Consolidated and Lenders, and the General Partner
receives reimbursement for the salaries and benefits of those employees. For the
year ended December 31, 1994, the Partnership, Consolidated and Lenders
reimbursed the General Partner a total of $90,000.
MANAGING OFFICERS' EMPLOYMENT AGREEMENTS
Two of the Managing Officers, Joel R. Schultz and Norman A. Markiewicz,
are under employment agreements with the Partnership originally entered into on
May 9, 1984. The employment agreement with Mr. Schultz provides that he will
serve as Chief Managing Officer of the Partnership for an initial term of three
years, which term shall be automatically extended for successive one year terms
thereafter unless either party notifies the other that he or it does not wish to
extend the agreement. Mr. Schultz receives incentive compensation from the
Partnership calculated annually as 2% of the net income of the Partnership, up
to a maximum of $40,000 per year. Mr. Markiewicz serves as Chief Operating
Officer of the Partnership under an employment agreement on substantially the
same terms as Mr. Schultz, and receives incentive compensation from the
Partnership calculated annually as 1% of the net income of the Partnership, up
to a maximum of $20,000 per year. Fifty percent of the total incentive
compensation payable to each of the Managing Officers is subject to the
Partnership's earning annual net income equal to at least 70% of the prior
years' net income. For the year ended December 31, 1994, Messrs. Schultz and
Markiewicz received no compensation under these agreements. For the years ended
December 31, 1993 and 1992, Messrs. Schultz and Markiewicz received $30,000 and
$30,000, respectively.
TRUSTEE AND FORECLOSURE SERVICES
Effective July 1, 1990, the Partnership purchased Consolidated from the
General Partner, for a total purchase price of $908,000, which was determined on
the basis of an independent appraisal of the fair market value of Consolidated.
The purchase price was paid $458,000 in cash and $450,000 by delivery of a
promissory note to the General Partner payable on February 15, 1991, bearing
interest at the Bank of America, NT & SA, reference rate. The note was repaid in
full at maturity. In addition, the Partnership has agreed to pay to the General
Partner an additional amount annually for five years, to be calculated as 50% of
the total annual net profits earned by Consolidated in excess of $465,396 (the
"Base Profit Amount"). Consolidated's net profits have exceeded the Base Profit
Amount every year since 1990. In 1994, 1993 and 1992, the Partnership paid the
General Partner $224,000, $465,551 and $514,924 pursuant to this provision. The
General Partner has guaranteed that Consolidated shall earn annual net profits
at least equal to the Base Profit Amount for 1990 through 1995. The guaranteed
income level has been exceeded from 1990 through 1994. For the years ended
December 31, 1994, 1993 and 1992, net income
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of $907,000, $1,396,000 and $1,436,000, from the combined operations of
Consolidated and Lenders, respectively, is included in the Partnership's income.
LOAN ACCOUNT SERVICES
Joel R. Schultz provides legal services in connection with the
Partnership's loan accounts (excluding home improvement loans), for which he
receives $100 from the fees paid by each borrower for legal services related to
loan origination. Total fees of $62,000, $56,400 and $64,400 were paid to Mr.
Schultz for the years ended December 31, 1994, 1993 and 1992.
PURCHASE OF EQUIPMENT
In 1990, the General Partner purchased certain computer equipment and
software from the Partnership at its net book value of $369,225, which was at
least equal to the fair market value of such assets. The Partnership received a
note from the General Partner, payable in increments of $11,000 per month plus
accrued interest at the Bank of America prime rate. The note was fully repaid as
of September 31, 1993.
Effective December 31, 1993, Pacific Thrift purchased certain computer
equipment, software and office furniture and equipment from the General Partner
and the Partnership in connection with its obligations to discontinue fee
arrangements with affiliates under the Cease and Desist Order issued by the FDIC
dated November 10, 1993. The value of the computer equipment and software (which
included upgrades and enhancements added since 1990) was determined by an
independent appraisal. The value of the office furniture and equipment was based
on estimates received from furniture and office equipment dealers to replace the
furniture and office equipment, less a 10% discount. Pacific Thrift paid
$547,500 to the General Partner and $497,000 to the Partnership in connection
with these purchases. As a result of a revaluation and reallocation of the
software purchased by Pacific, the purchase price of the software was reduced by
a total of $349,407. The General Partner repaid $176,793 of this amount to
Pacific Thrift on June 30, 1994, and the remaining $172,614 was repaid under a
one-year promissory note fully paid by June 15, 1995.
GENERAL PARTNER CAPITAL NOTE
As of December 31, 1992, after adjustments in the Partnership's
allowance for loan losses, the General Partner determined that the Partnership
had made distributions to the Partners in excess of Net Profits earned by the
Partnership in 1992 of $1,730,385. Such distributions constituted a return of
capital to the Partners. To make up for this unintended distribution of capital
of the Partnership, the General Partner voluntarily contributed a note (the
"Capital Note") to the Partnership, dated May 15, 1993. The Capital Note bears
interest at a rate equal to 1% above the NatWest prime rate. Payments made under
the Capital Note are added to the capital of the Partnership. As of February 28,
1994, the General Partner had made payments of $266,213 plus accrued interest
under the Capital Note.
The General Partner's obligation to pay the Capital Note is conditioned
upon the continuing operation of the Partnership at a level which generates loan
origination fees (from which the General Partner receives fees with which to pay
the Note) equal to at least $2.5 million per year for each of the years ending
December 31, 1994 and 1995, and at least $1.55 million for the period from
January 1 to August 15, 1996. The General Partner has not made any installment
payments since January 1994, because the loan origination condition has not been
met by the Partnership. The General Partner has committed to resume payment of
the Capital Note at such time as loan origination fees reach $2.5 million per
year, although there can be no assurance that this condition will be met, or
that any further payments will be made on the capital note.
GENERAL PARTNER LOAN TO THE PARTNERSHIP
In order to facilitate an extension of the Loan Agreement with the Bank,
the General Partner made an unsecured loan to the Partnership of $600,000 on May
15, 1992, which accrues interest at the Bank's prime rate. The loan may not be
repaid without the consent of the Bank.
PERSONAL GUARANTY OF PARTNERSHIP DEBT BY MANAGING OFFICERS
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Messrs. Joel R. Schultz, Norman A. Markiewicz and Richard B. Fremed have
personally guaranteed the collectability of the Partnership's bank debt.
CONSULTING AGREEMENT WITH DIRECTOR OF PACIFIC THRIFT
Effective August 31, 1992, Pacific Thrift and the Partnership entered
into an Advisory Agreement with Ermyas Amelga, a director of Pacific Thrift
which was amended under the terms of a restated Advisory Agreement dated
December 28, 1993. Under the current agreement, Mr. Amelga has been retained
to provide financial advisory services in connection with: (i) the
establishment of a $75 million securitization program with Aames Capital
Corporation; and (ii) an offering of debt or equity securities. The agreement
terminated on June 30, 1994. Mr. Amelga received compensation of $125 per
hour, provided that monthly billings relating to any transaction other than the
Aames securitization are limited to no more than $7,500 per month. In
addition, Mr. Amelga received incentive fees equal to the following amounts:
for the Aames securitization, .50% of the first $5 million of loans sold, .25%
of the next $10 million loans sold; .30% of the next $35 million loans sold;
and .35% of the next $25 million loans sold. In addition, Mr. Amelga is
entitled to reimbursement for all reasonable out-of-pocket expenses incurred in
connection with the performance of his services under the agreement. Mr.
Amelga received $111,000, $84,148 and $18,324 in compensation under the
Advisory Agreement in 1994, 1993 and 1992, respectively.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1.-2. Financial Statements and Schedules required to be filed
hereunder are indexed on page 54 hereof.
3. The exhibits required to be filed hereunder are
indexed on page S-1 hereof. All such exhibits except Exhibits 10.7 and 22.1
are incorporated by reference to other previously filed documents referred to
in the index. Exhibits 10.7 and 22.1 are included herewith.
(b) The Partnership filed no Reports on Form 8-K during the last
quarter of 1994.
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INDEX TO FINANCIAL STATEMENTS
Page
----
Presidential Mortgage Company
Successor Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . F-1
Predecessor Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of
December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Operations for the
years ended December 31, 1994, 1993
and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Consolidated Statements of Changes in Partners'
Capital for the years ended
December 31, 1994, 1993, and 1992 . . . . . . . . . . . . . . . . . . . . F-7
Consolidated Statements of Cash Flows
for the years ended
December 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . F-8
Notes to Consolidated Financial Statements
for the years ended December 31, 1994,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-11
Schedule II - Amounts Receivable From Related
Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-46
Schedule IX - Short Term Borrowings . . . . . . . . . . . . . . . . . . . . . . . F-47
53
Independent Auditors' Report
To the Partners
Presidential Mortgage Company
We have audited the accompanying consolidated balance sheets of
Presidential Mortgage Company (the Partnership) and subsidiaries
(collectively, the Company) as of December 31, 1994 and 1993, and the
related consolidated statements of operations, changes in partners'
capital, and cash flows for the years then ended. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of
Presidential Mortgage Company and subsidiaries as of December 31, 1994
and 1993, and the results of their operations and their cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
Our audit was made for the purpose of forming an opinion on the
consolidated financial statements taken as a whole. The consolidating
information in Schedules I and II is presented for the purpose of
additional analysis of the consolidated financial statements rather than
to present the financial position and results of operations of the
individual companies. The consolidating information in Schedules I and II
has been subjected to the auditing procedures applied to the audit of the
consolidated financial statements and, in our opinion, is fairly stated
in all material respects in relation to the consolidated financial
statements taken as a whole.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1, the Company has suffered losses from nonperforming loans that,
combined with other factors, resulted in significant recurring losses
from operations. As discussed in Note 7, the Partnership is subject to
substantial debt service and other requirements of the note payable to
its lender. As discussed in Notes 19 and 20, at October 31, 1994, the
Partnership's wholly owned subsidiary, Pacific Thrift and Loan Company
(Pacific Thrift), was considered to be "critically undercapitalized"
under the Prompt Corrective Action provisions of the Federal Deposit
F-1
54
Presidential Mortgage Company
Page 2
Insurance Corporation Improvement Act of 1991 because its tangible and
leverage capital ratios fell below 2%. As a result of such designation,
Pacific Thrift was subject to severe restrictions on its activities. At
December 31, 1994, Pacific Thrift was no longer considered to be
"critically undercapitalized," but still did not meet the minimum capital
requirements to be considered "adequately capitalized" by the Federal
Deposit Insurance Corporation (FDIC). Also at December 31, 1994, Pacific
Thrift had a deficiency in its net worth, based on requirements of the
California Financial Code and the California Department of Corporations
(DOC). As a result of its capital designation, Pacific Thrift was
required to submit a capital restoration plan, including a guarantee by
the Partnership, to the FDIC. In addition, Pacific Thrift consented to a
new comprehensive Order to Cease and Desist (the new C&D) by the FDIC and
DOC. The new C&D requires that Pacific Thrift take various actions,
including significantly increasing its leverage capital ratio to 8% by
September 30, 1995. Failure to implement the capital restoration plan and
meet the capital requirements of the new C&D would expose Pacific Thrift
to various regulatory actions, including the risk of regulatory takeover.
These matters raise substantial doubt about the ability of the Company to
continue as a going concern. Management's plans regarding these matters
are discussed in Notes 1 and 20.
Note 12 indicates management's description of certain litigation in which
allegations of securities fraud and aiding and abetting in the breach of
fiduciary duty have been made against the Partnership and its Chief
Executive Officer (CEO) by investors in companies affiliated with the
Partnership until 1984. Management denies these allegations, states that
they are without merit, and represents that any claims are barred by
applicable statutes of limitation. Counsel for both the Partnership and
CEO have stated that they are unable to provide an opinion as to the
outcome of the litigation.
The accompanying consolidated financial statements do not include any
provisions or adjustments which might result from the outcome of the
uncertainties discussed above.
ERNST & YOUNG LLP
April 7, 1995,
except as to Note 20 to the
consolidated financial statements,
which is as of May 30, 1995
F-2
55
KPMG PEAT MARWICK LLP
725 South Figueroa Street
Los Angeles, CA 90017
INDEPENDENT AUDITORS' REPORT
The General Partner
Presidential Mortgage Company:
We have audited the accompanying consolidated statements of operations, changes
in partners' capital and cash flows of Presidential Mortgage Company (a
California limited partnership) and subsidiaries for the year ended December
31, 1992. In connection with our audit of such consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index for the year ended December 31, 1992. These consolidated
financial statements and financial statement schedule are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these consolidated financial statements and financial statement schedule based
on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and the cash flows
of Presidential Mortgage Company and subsidiaries for the year ended December
31, 1992 in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
As discussed in note 13 to the consolidated financial statements, the
Partnership is involved in litigation arising in the normal course of business.
The ultimate outcome of the litigation cannot presently be determined.
Accordingly, no provision for any liability that may result upon adjudication
has been recognized in the accompanying consolidated financial statements.
F-3
56
As discussed in note 19 to the consolidated financial statements, the
Partnership's wholly owned subsidiary, Pacific Thrift and Loan Company (Pacific
Thrift), has entered into a Memorandum of Understanding (MOU) with the Federal
Deposit Insurance Corporation (FDIC) and the California Department of
Corporations (DOC). Pacific Thrift is in violation of one of the terms of the
MOU. In addition, subsequent to December 31, 1992, Pacific Thrift made certain
payments to the Partnership in excess of amounts authorized under a Personnel
Services Agreement. The FDIC and the DOC have been advised of the overpayments,
and the FDIC has advised Pacific Thrift that it will review the matter in the
course of its regularly scheduled annual field examination and determine if
Pacific Thrift is in compliance with the MOU and applicable regulatory
requirements at that time. Also, as discussed in note 19 to the consolidated
financial statements, Pacific thrift has been notified by the Department of
Housing and Urban Development (HUD) that it intends to seek civil money
penalties and is considering an administrative action against Pacific Thrift
relating to certain alleged violations identified during its recent examination
of Title I loan origination activities. At this time, the financial impact, if
any, on Pacific Thrift and ultimately the Partnership, of any regulatory
actions that may be taken in connection with the matters discussed in this
paragraph cannot be determined. Accordingly, the accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
KPMG PEAT MARWICK LLP
March 31, 1993, except as to notes 7 and 19
to the consolidated financial statements,
which are as of May 27, 1993.
F-4
57
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1994 and 1993
1994 1993
---------------- ----------------
ASSETS
CASH AND CASH EQUIVALENTS - Note 2C $ 19,628,000 $ 13,220,000
ACCOUNTS RECEIVABLE 5,071,000 3,340,000
ACCRUED INTEREST RECEIVABLE 1,125,000 2,091,000
LOANS RECEIVABLE - Notes 2D, 2E, and 3 53,045,000 84,183,000
LOANS HELD FOR SALE - Notes 2F and 3 12,011,000 572,000
RECEIVABLE FROM RELATED PARTY - Notes 9 and 10 478,000 794,000
EXCESS YIELD RECEIVABLE - Notes 2G and 3 888,000 895,000
OTHER REAL ESTATE - Notes 2H and 4 7,621,000 6,003,000
PROPERTY AND EQUIPMENT - Notes 2I and 5 1,322,000 1,215,000
GOODWILL - Notes 2J and 11 1,749,000 1,622,000
OTHER ASSETS 809,000 389,000
---------------- ----------------
$ 103,747,000 $ 114,324,000
================ ================
LIABILITIES AND PARTNERS' CAPITAL
THRIFT CERTIFICATES PAYABLE - Note 6
Full-paid certificates $ 58,058,000 $ 41,417,000
Installment certificates 11,443,000 21,004,000
---------------- ----------------
Total thrift certificates payable 69,501,000 62,421,000
ACCOUNTS PAYABLE AND
ACCRUED EXPENSES 4,471,000 4,508,000
ACCRUED INTEREST PAYABLE 405,000 182,000
PAYABLE TO RELATED PARTY - Note 10 134,000 576,000
MORTGAGE NOTES PAYABLE - Note 4 2,313,000 1,778,000
NOTE PAYABLE - Note 7 14,778,000 23,200,000
NOTE PAYABLE TO RELATED PARTY - Note 7 600,000 600,000
PARTNERSHIP WITHDRAWALS PAYABLE - Note 15 1,120,000 1,120,000
---------------- ----------------
Total liabilities 93,322,000 94,385,000
---------------- ----------------
COMMITMENTS AND CONTINGENCIES -
Notes 12, 13, 19, and 20 - -
PARTNERS' CAPITAL 10,425,000 19,939,000
---------------- ----------------
$ 103,747,000 $ 114,324,000
================ ================
See notes to the consolidated financial statements.
F-5
58
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidated Statements of Operations
Years Ended December 31, 1994, 1993, and 1992
1994 1993 1992
------------ ------------ ------------
INTEREST INCOME
Loans receivable - Notes 2D, 2E, and 3 $ 11,003,000 $ 14,209,000 $ 16,789,000
Deposits with financial institutions 401,000 3,000 38,000
------------ ------------ ------------
Total interest income 11,404,000 14,212,000 16,827,000
------------ ------------ ------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 28,000 304,000 308,000
Other thrift certificates 2,917,000 2,917,000 2,689,000
Notes payable 1,982,000 2,497,000 3,728,000
------------ ------------ ------------
Total interest expense 4,927,000 5,718,000 6,725,000
------------ ------------ ------------
Net interest income 6,477,000 8,494,000 10,102,000
PROVISION FOR LOAN LOSSES -
Notes 2D, 2E, and 3 6,096,000 4,655,000 3,888,000
------------ ------------ ------------
Net interest income after
provision for loan losses 381,000 3,839,000 6,214,000
------------ ------------ ------------
NONINTEREST INCOME
Trustee and reconveyance fees 3,344,000 3,781,000 3,107,000
Other income 1,712,000 1,381,000 1,819,000
Gain on sale of loans 946,000 143,000 390,000
------------ ------------ ------------
Total noninterest income 6,002,000 5,305,000 5,316,000
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits - Note 10 6,493,000 5,064,000 3,093,000
General and administrative - Note 10 7,090,000 5,491,000 5,353,000
Related party fees - Notes 9 and 10 805,000 847,000 1,647,000
Operations of other real estate - Note 4 732,000 3,307,000 1,014,000
Depreciation and amortization 776,000 303,000 274,000
------------ ------------ ------------
Total noninterest expense 15,896,000 15,012,000 11,381,000
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (9,513,000) (5,868,000) 149,000
INCOME TAXES - Notes 2K and 8 1,000 1,000 1,000
------------ ------------ ------------
NET INCOME (LOSS) $ (9,514,000) $ (5,869,000) $ 148,000
============ ============ ============
See notes to the consolidated financial statements.
F-6
59
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidated Statements of Changes in Partners' Capital
Years Ended December 31, 1994, 1993, and 1992
CAPITAL - December 31, 1991 $ 36,706,000
CONTRIBUTIONS 74,000
DISTRIBUTIONS (4,610,000)
WITHDRAWALS (3,488,000)
NET INCOME - 1992 148,000
------------
CAPITAL - December 31, 1992 28,830,000
CONTRIBUTIONS 301,000
DISTRIBUTIONS (1,943,000)
WITHDRAWALS (1,380,000)
NET LOSS - 1993 (5,869,000)
------------
CAPITAL - December 31, 1993 19,939,000
CONTRIBUTIONS --
DISTRIBUTIONS --
WITHDRAWALS --
NET LOSS - 1994 (9,514,000)
------------
CAPITAL - December 31, 1994 $ 10,425,000
============
See notes to the consolidated financial statements.
F-7
60
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31, 1994, 1993, and 1992
1994 1993 1992
------------ ------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss) income $ (9,514,000) $ (5,869,000) $ 148,000
Adjustments to reconcile net (loss)
income to net cash (used in) provided
by operating activities
Provision for loan losses 6,096,000 4,655,000 3,888,000
Provision for losses on other
real estate 202,000 1,069,000 572,000
Net (gain) on sale of other
real estate (625,000) (345,000) (295,000)
Proceeds from sale of loans 29,315,000 4,252,000 8,889,000
Originations of loans held for sale (41,055,000) (6,320,000) (11,914,000)
Depreciation and amortization 776,000 303,000 274,000
Net change in assets and liabilities
Accounts receivable (1,731,000) (359,000) (1,314,000)
Accrued interest receivable 966,000 122,000 1,081,000
Receivable from related party 316,000 (411,000) --
Excess yield receivable 7,000 117,000 (184,000)
Goodwill (127,000) (309,000) (627,000)
Other assets (420,000) (79,000) 120,000
Payable to related party (442,000) 576,000 --
Accounts payable, accrued expenses,
and accrued interest payable 186,000 2,200,000 655,000
------------ ------------ ------------
Net cash (used in) provided by
operating activities (16,050,000) (398,000) 1,293,000
------------ ------------ ------------
See notes to the consolidated financial statements.
F-8
61
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1994, 1993, and 1992
1994 1993 1992
------------ ------------ ------------
CASH FLOWS FROM INVESTING
ACTIVITIES
Proceeds from sale of loans 28,402,000 25,884,000 26,937,000
Increase in loans receivable (10,249,000) (16,069,000) (9,179,000)
Proceeds from sale of other real estate 5,994,000 7,001,000 2,125,000
Mortgages assumed (repaid) in
connection with other real estate 536,000 (730,000) (1,862,000)
Purchase of property and equipment (883,000) (853,000) (86,000)
------------ ------------ ------------
Net cash (used in) provided by
investing activities 23,800,000 15,233,000 17,935,000
------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES
Net increase in thrift certificates 7,080,000 11,860,000 11,606,000
Paydowns of note payable (8,422,000) (10,200,000) (24,150,000)
Proceeds from issuance of
partnership shares -- 35,000 74,000
Capital contribution from
general partner -- 266,000 --
Distributions to partners -- (1,943,000) (4,610,000)
Withdrawals of partnership shares -- (2,086,000) (2,557,000)
------------ ------------ ------------
Net cash used in financing
activities (1,342,000) (2,068,000) (19,637,000)
------------ ------------ ------------
Net increase (decrease) in cash
and cash equivalents 6,408,000 12,767,000 (409,000)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 13,220,000 453,000 862,000
------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 19,628,000 $ 13,220,000 $ 453,000
============ ============ ============
See notes to the consolidated financial statements.
F-9
62
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
Years Ended December 31, 1994, 1993, and 1992
1994 1993 1992
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURES OF
CASH FLOW INFORMATION
Cash paid during the year for
Interest $4,704,000 $5,838,000 $6,544,000
State franchise taxes 1,000 1,000 1,000
SUPPLEMENTAL SCHEDULE OF
NONCASH INVESTING AND
FINANCING ACTIVITIES
Loans transferred to other real estate $7,542,000 $7,270,000 $7,443,000
Mortgages payable assumed in
connection with other real estate 2,499,000 3,289,000 2,507,000
Loans to facilitate sales of other
real estate 898,000 3,344,000 4,129,000
See notes to the consolidated financial statements.
F-10
63
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1994 and 1993
NOTE 1 - GENERAL
Organization
Presidential Mortgage Company is a California limited partnership whose
principal purpose is to make loans secured by real estate. In these
financial statements, "the Partnership" refers to Presidential Mortgage
Company itself and "the Company" refers to Presidential Mortgage
Company and its subsidiaries.
The Partnership's general partner, Presidential Management Company, is
a California limited partnership. Presidential Management Company's
general partner, Presidential Services Corporation, is a California
corporation owned by Joel R. Schultz and John A. DeRosa.
The Partnership's limited partners consist of approximately 2,500
individuals and entities in classes A, B, C, D, and E. The differences
between the various classes primarily relate to the different offering
dates and unit prices as well as profit priorities and percentages. In
addition, certain partners have elected to reinvest their distributions
in Distribution Reinvestment Plan (DRP) Units.
In 1988, Pacific Thrift and Loan Company (Pacific Thrift), a California
corporation, was formed as a wholly owned subsidiary of the
Partnership. Pacific Thrift conducts business under the California
Industrial Loan Law and makes loans secured by real estate.
Pacific Thrift issues certificates to investors that are redeemable at
maturity at the option of investors, although penalties for early
withdrawal may be assessed. The California Industrial Loan Law
maintains provisions governing the amount of thrift certificates that
may be issued, the amount of funds that may be borrowed, and the types
of loans that may be made. During 1988, the Federal Deposit Insurance
Corporation approved Pacific Thrift for deposit insurance coverage.
Accordingly, Pacific Thrift is subject to annual assessments by the
FDIC.
In 1990, the Partnership purchased 100% of the limited partnership
interests (which constitutes 99% of all partnership interests) of
Consolidated Reconveyance Company (CRC) and Lenders Posting and
Publishing Company (LPPC). These entities provide trustee and related
foreclosure services to the Partnership, Pacific Thrift, and
unaffiliated lenders. Both CRC and LPPC were purchased from the
Partnership's general partner.
F-11
64
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - GENERAL (CONTINUED)
Partnership Agreement
The Partnership is governed by the Fifth Amended and Restated
Certificate and Agreement of Limited Partnership entered into as of
September 1989, as amended by the First Amendment, dated as of May
1993, and the Second Amendment, dated as of January 1, 1994. The First
Amendment provides for a special allocation of loss to the general
partner and income to the limited partners based on certain capital
contributions by the general partner from 1993 through 1996 (the
"Capital Plan"). The Second Amendment provides that Pacific Thrift will
directly hire its own employees and directly pay its own overhead and
that the Partnership will continue to pay the general partner for fees
in connection with loans of Pacific Thrift and the Partnership. The
agreement and amendments are collectively referred to as the
"Partnership Agreement."
In accordance with the Partnership Agreement, the net profits of the
Partnership (after deduction of the management fee) are allocated to
the partners, based on specified annual percentage rates for each class
of partners and the average daily balance of each partner's capital
contributions. Net losses are allocated to all partners in proportion
to their capital contributions. In addition, there is a special
allocation based on the Capital Plan.
The Partnership Agreement provides certain rights to the partners to
withdraw the balance in their capital accounts. Such withdrawal rights
are restricted by certain percentage limitations and a determination by
the general partner that such withdrawal will not impair the capital or
operations of the Partnership. Since July 1993, no distributions have
been made and no withdrawals have been permitted.
Upon dissolution of the Partnership, the Partnership Agreement provides
that the net assets will be distributed to the partners in proportion
to their capital accounts and that the general partner will fund any
deficit balance in its capital account as defined in the Partnership
Agreement.
Operating Results and Business Plan
The Company has suffered losses from operations of the Partnership and
Pacific Thrift from 1992 through 1994. These losses have resulted
primarily from significant amounts of nonperforming loans, large
provisions for loan losses, and relatively high levels of overhead and
have caused a substantial reduction in the capital of the Company.
These losses have also caused Pacific Thrift to become
"undercapitalized" at the end of 1994 and subject to certain regulatory
mandates. See Notes 19 and 20.
F-12
65
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 1 - GENERAL (CONTINUED)
Operating Results and Business Plan (Continued)
Management expects that stabilizing real estate values and general
economic conditions will result in reduced loan losses in 1995. In
connection with the Partnership, management is in the process of
evaluating alternative business strategies. In connection with Pacific
Thrift, management is taking certain steps to return the operations to
profitability and improve the financial condition. These steps include
an emphasis on originating residential real estate loans for sale in
order to generate fee income, a reduction in portfolio lending until
targeted capital ratios are achieved, and controlling overhead
expenses.
Management expects that Pacific Thrift, CRC, and LPPC will be
profitable in 1995 and that Pacific Thrift will substantially comply
with the regulatory mandates. Management also expects that, although
the Partnership will probably incur a loss, the Company will break even
or be profitable in 1995. In connection with the note payable to its
lender, management expects that the Partnership will be able to
generate sufficient cash flow from operations (including real estate
sales) and loan sales to satisfy its debt service requirements. See
Note 7.
There is no assurance that the Company will be successful. These
consolidated financial statements do not include any provisions or
adjustments that might result from the outcome of these uncertainties.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Basis of Accounting
These consolidated financial statements are prepared in accordance
with generally accepted accounting principles.
B. Consolidation
The consolidated financial statements include the accounts of the
Partnership, Pacific Thrift, CRC, and LPPC. All significant
intercompany balances and transactions have been eliminated.
Consolidating information is presented in Schedules I and II.
F-13
66
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
C. Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased
with a maturity of three months or less to be cash equivalents.
D. Loans Receivable
Loans receivable are stated at the principal amount outstanding,
less unamortized deferred fees and costs and the allowance for loan
losses. Loans receivable are primarily secured by first and second
trust deeds.
Interest income is accrued as earned and is based on the principal
balance outstanding. The Company's policy is to cease accruing
interest on loans that are more than two monthly payments past due
and for which there appears to be insufficient collateral to support
collectibility. In many cases, interest, late fees, and other
charges continue to accrue until the time management deems that such
amounts are not collectible.
Nonrefundable loan fees and direct costs associated with the
origination of loans are deferred and netted against outstanding
loan balances. The net deferred fees and costs are recognized in
interest income over the loan term as an adjustment to the yield,
using a method that approximates the effective interest (level
yield) method.
E. Allowance for Loan Losses
Loan losses are charged to the allowance for loan losses; recoveries
are credited to the allowance. The provision for loan losses charged
to expense and added to the allowance for loan losses is based upon
management's judgment and evaluation of the known and inherent risks
in the loan portfolio. Management's judgment takes into
consideration such factors as changes in the nature and volume of
the portfolio, continuing review of delinquent loans, current
economic conditions, risk characteristics of the various categories
of loans, and other pertinent factors that may affect the borrower's
ability to repay. While management uses available information to
recognize losses on loans, future additions to the allowance may be
necessary based on changes in economic conditions.
F-14
67
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. Allowance for Loan Losses (Continued)
The Financial Accounting Standards Board issued Statement No. 114,
"Accounting by Creditors for Impairment of a Loan," in May 1993.
Statement No. 114 requires that impaired loans be measured based on
the present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at the
loan's observable market price or fair value of the collateral if
the loan is collateral dependent. A loan is considered impaired
when, based on current information and events, it is probable that
the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Statement No. 114 is
effective for fiscal years beginning after December 15, 1994, with
early application encouraged. The Company has not yet adopted
Statement No. 114 and does not expect it to have a material impact
on the financial position or results of operations.
F. Loans Held for Sale
The Company has designated certain of its loans receivable as being
held for sale. In determining the level of loans held for sale, the
Company considers the extent to which loans will be required to be
sold in response to liquidity needs, regulatory capital needs,
asset/liability management requirements, and other factors.
Loans held for sale are recorded at the lower of cost or market
value. Any unrealized losses are recorded as a reduction in income.
Realized gains and losses from the sale of loans receivable are
based on the specific identification method.
G. Excess Yield Receivable
Excess yield receivable represents the excess of the estimated
present value of net amounts to be received over normal servicing
fees for loan sales for which the Company continues to service the
loans. Excess yield receivable also represents the estimated present
value of the excess interest income to be received over the yield
acquired by the investor for loan sales for which the Company does
not continue to service the loans. The receivable is amortized to
income based on a method which approximates the effective interest
method.
F-15
68
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
H. Other Real Estate
Other real estate is comprised of formally foreclosed property and
in-substance foreclosed property to which the Company does not have
legal title. These assets are recorded at the lower of the net
investment in the loan or the fair value of the property. At the
time of foreclosure, any excess of the net investment in the loan
over its fair value is charged to the allowance for loan losses.
Estimated selling costs and any subsequent declines in value are
charged to operations, and a valuation allowance is established.
Loans are classified as in-substance foreclosures when they exhibit
characteristics more closely associated with the risk of real estate
ownership than with loans. Collateral that has been classified as an
in-substance foreclosure is reported in the same manner as
collateral that has been formally foreclosed.
I. Property and Equipment
Property and equipment is stated at cost, less accumulated
depreciation. Depreciation of property and equipment is based on the
asset's estimated useful life, ranging from two to eight years, and
is computed using the straight-line method. Expenditures that
improve or extend the service lives of assets are capitalized.
Repairs and maintenance are charged to expense as incurred.
J. Goodwill
Goodwill represents the excess of the total purchase price
(consisting of the initial consideration and subsequent
consideration) of CRC and LPPC over the fair value of purchased net
assets. Goodwill is being amortized using the straight-line method
over approximately 20 years.
K. Income Taxes
Partnerships are generally not subject to income taxes; accordingly,
the Partnership income or loss is reported in the individual
partners' tax returns. However, Pacific Thrift, the Partnership's
wholly owned corporate subsidiary, is subject to federal income and
state franchise taxes.
In 1993, Pacific Thrift adopted Financial Accounting Standards Board
Statement No. 109, "Accounting for Income Taxes" (Statement No.
109). The new standard requires the use of the "asset and liability"
method of accounting for income taxes. Under the asset and liability
method, deferred income taxes are recognized for tax consequences of
"temporary differences" by applying enacted statutory tax rates to
differences between the financial statement carrying amount and the
tax basis of existing assets and liabilities. The effect on deferred
taxes of a change in tax rates is recognized in income in the period
that includes the enactment date.
F-16
69
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
K. Income Taxes (Continued)
Under Statement No. 109, the tax benefit of net operating loss
carryforwards is recorded if the tax benefit is more likely than not
to be realized.
In 1992, Pacific Thrift applied Accounting Principles Board Opinion
No. 11 (Opinion No. 11), which required the use of the "deferred
method" of accounting for income taxes. Under the deferred method,
deferred income taxes were recognized for income and expense items
that were reported in different years for financial reporting and
income tax purposes, using the tax rate applicable to the year of
the calculation. Deferred taxes were not adjusted for subsequent
changes in tax rates.
Under Opinion No. 11, the tax benefit of net operating loss
carryforwards was not recorded unless the tax benefit was assured
beyond any reasonable doubt.
L. Reclassifications
Certain reclassifications of balances from prior years have been
made to conform to the current year's reporting format.
F-17
70
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans Receivable
Loans receivable at December 31, 1994 and 1993 are summarized as
follows:
1994 1993
------------- -------------
Residential real estate loans $ 55,235,000 $ 84,129,000
Participations sold (16,129,000) (16,226,000)
------------- -------------
Residential real estate loans - net 39,106,000 67,903,000
------------- -------------
Commercial real estate loans 30,153,000 20,663,000
Participations sold (10,479,000) 344,000
------------- -------------
Commercial real estate loans - net 19,674,000 21,007,000
------------- -------------
Total loans receivable $ 58,780,000 $ 88,910,000
============= =============
Loans receivable held for investment $ 58,780,000 $ 88,910,000
Less net deferred loan fees and costs (1,428,000) (1,604,000)
Less allowance for loan losses (4,307,000) (3,123,000)
------------- -------------
$ 53,045,000 $ 84,183,000
============= =============
The components of the loan portfolio at December 31 were as follows:
1994 1993
------------- -------------
One-to-four family residential $ 20,088,000 $ 45,617,000
Five-or-more family residential 16,720,000 14,586,000
Home improvement 2,298,000 7,700,000
Commercial 17,869,000 17,117,000
Land and other 1,805,000 2,130,000
Multiproperties -- 1,760,000
------------- -------------
$ 58,780,000 $ 88,910,000
============= =============
During 1994 and 1993, the Company sold approximately $25,632,000 and
$25,884,000, respectively, of real estate loans to various outside
parties at the approximate book value of such loans.
F-18
71
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Significant Concentrations of Risk
The Company makes mortgage loans to its borrowers, primarily secured by
first or second trust deeds on Southern California real estate. The
loans are secured by single-family residential and other types of real
estate and collateralized by the equity in the borrowers' real estate.
Prior to the fourth quarter of 1993, these borrowers generally had a
credit standing such that the Company relied heavily on the value of
the underlying collateral in its lending practices. In the fourth
quarter of 1993, however, the Company began implementing a revised
policy to place more emphasis on the creditworthiness of the borrower.
Loans are expected to be repaid either by cash from the borrower at
maturity or by borrower refinancing.
Allowance for Loan Losses
Changes in the allowance for loan losses for the years ended December
31 are as follows:
1994 1993 1992
----------- ----------- -----------
Balance at beginning of year $ 3,123,000 $ 2,646,000 $ 1,821,000
Provision charged to expense 6,096,000 4,655,000 3,888,000
Loan charge-offs (4,912,000) (4,178,000) (3,063,000)
----------- ----------- -----------
Balance at end of year $ 4,307,000 $ 3,123,000 $ 2,646,000
=========== =========== ===========
At December 31, 1994 and 1993, loans with interest more than two
monthly payments past due and on nonaccrual status totaled $3,408,000
and $5,781,000, respectively. If interest on these loans had been
accrued, interest income would have increased by approximately $955,000
and $1,025,000 in 1994 and 1993, respectively. At December 31, 1994 and
1993, loans with interest more than two monthly payments past due and
on accrual status totaled $3,474,000 and $6,821,000, respectively.
Interest income recognized on these loans totaled approximately
$298,000 and $609,000 in 1994 and 1993, respectively.
Pledging of Partnership Loans Receivable
In connection with the origination of the line of credit, the
Partnership pledged all of its loans receivable as security to its
lender.
F-19
72
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 3 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Loans Held for Sale
Loans held for sale at December 31, 1994 and 1993 are summarized as
follows:
1994 1993
----------- ---------
Real estate loans $10,885,000 $ 572,000
Title I loans 1,126,000 -
----------- ---------
$12,011,000 $ 572,000
=========== =========
Accounts receivable of $1,713,000 at December 31, 1994 consisted of
proceeds from loan sales. These proceeds were received in early January
1995.
In December 1993, management developed a loan securitization program
under which the Partnership or Pacific Thrift may sell certain loans
receivable. The securitization agreements provide that the Partnership
or Pacific Thrift will offer to sell all newly originated qualifying
loans, up to $75,000,000, to the buyer through June 1995. The
agreement, as amended, also provides that the Partnership or Pacific
Thrift will earn a premium and retain a portion of the interest-income
cash flows from the loans. As of December 31, 1994, the Partnership had
not sold any loans under its loan securitization agreement. However, in
1994 and 1993, Pacific Thrift sold loans totaling $29,616,000 and
$3,838,000, respectively, and recognized gains, based on the premiums
and projected excess cash flows, of $865,000 and $128,000,
respectively.
Prior to March 31, 1993, Pacific Thrift originated Title I home
improvement loans that were 90% insured by the Federal Housing
Administration, provided that the total amount of claims did not exceed
10% of the amount of all Title I loans. During 1994, 1993, and 1992,
Pacific Thrift sold $2,770,000, $557,000, and $9,279,000, respectively,
of these loans and recorded gains (losses) totaling $(39,000), $15,000,
and $390,000, respectively. As of March 31, 1993, Pacific Thrift
discontinued the origination and sale of Title I and other similar
loans.
F-20
73
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 4 - OTHER REAL ESTATE
Other real estate consisted of the following at December 31:
1994 1993
----------- -----------
Foreclosed real estate $ 7,478,000 $ 6,266,000
In-substance foreclosures 545,000 520,000
Less allowance for losses on other real estate (402,000) (783,000)
----------- -----------
$ 7,621,000 $ 6,003,000
=========== ===========
Changes in the allowance for losses on other real estate for the years
ended December 31 are as follows:
1994 1993
----------- -----------
Balance at beginning of year $ 783,000 $ 867,000
Provisions for losses 202,000 1,069,000
Net (charge-offs) recoveries (583,000) (1,153,000)
----------- -----------
Balance at end of year $ 402,000 $ 783,000
=========== ===========
Operations of other real estate for the years ended December 31 consisted
of the following:
1994 1993 1992
----------- ----------- -----------
Provisions for losses $ 202,000 $ 1,069,000 $ 572,000
Net (gain) on sales (625,000) (345,000) (295,000)
Other expenses 1,155,000 2,583,000 737,000
----------- ----------- -----------
$ 732,000 $ 3,307,000 $ 1,014,000
=========== =========== ===========
Other expenses in 1993 included $1,494,000 of estimated costs for
remediation of toxic substances on other real estate. See Note 13.
Upon foreclosure of a junior lien, the Company takes title to the real
estate, subject to existing senior liens. These mortgage notes payable
totaled $2,313,000 and $1,778,000 at December 31, 1994 and 1993,
respectively.
F-21
74
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment was comprised of the following at December 31:
1994 1993
----------- -----------
Computer equipment and software $ 1,078,000 $ 1,083,000
Furniture and fixtures 583,000 334,000
Leasehold improvements 455,000 326,000
----------- -----------
2,116,000 1,743,000
Accumulated depreciation and amortization (794,000) (528,000)
----------- -----------
$ 1,322,000 $ 1,215,000
=========== ===========
As of December 31, 1993, Pacific Thrift purchased computer equipment
and software, and furniture and fixtures from the Partnership and the
general partner.
NOTE 6 - THRIFT CERTIFICATES PAYABLE
Thrift certificates are comprised of full-paid certificates and
installment certificates. The approximate weighted average interest
rate of full-paid and installment certificate accounts at December 31,
1994 was 5.4% and 3.9%, respectively. The interest payable on the
thrift certificates totaled $171,000 and $1,000 at December 31, 1994
and 1993, respectively.
At December 31, 1994 and 1993, full-paid thrift certificates consisted
of the following:
1994 1993
----------- -----------
Certificates greater than $100,000 $ 102,000 $ 1,792,000
Certificates less than $100,000 57,956,000 39,625,000
----------- -----------
$58,058,000 $41,417,000
=========== ===========
At December 31, 1994, scheduled maturities of full-paid thrift
certificates were as follows:
Less than 3 months $25,624,000
3 to 6 months 17,201,000
6 to 12 months 10,654,000
1 to 5 years 4,579,000
Over 5 years --
-----------
$58,058,000
===========
F-22
75
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - NOTE PAYABLE
In 1990, the Partnership obtained financing under a $105,000,000 line
of credit agreement with National Westminster Bank (NatWest), as agent
for a group of banks, which was modified on September 30, 1991 to
$56,000,000 and subsequently modified further. The amounts advanced
under the agreement were based upon a specified percentage of the
amount of eligible loans assigned as security. Under the agreement that
existed at December 31, 1991, the Partnership could elect any of three
interest rates: (i) 0.50% above NatWest's prime rate, (ii) 2.0% above
the certificate of deposit rate, or (iii) 1.875% above LIBOR. At
December 31, 1991, the Partnership had $56,250,000 outstanding on the
line of credit.
In April 1992, NatWest delivered a commitment letter to the
Partnership, followed by a formal amendment of the loan agreement, to
continue to provide a revolving loan of $48,000,000, decreasing to
$44,000,000 by May 15, 1992, and decreasing by $1,500,000 each month to
a new maximum of $36,500,000 by September 30, 1992.
In connection with the amendment, the general partner loaned the
Partnership $600,000 in subordinated debt, which bears interest at the
prime rate and may only be repaid upon consent by NatWest or at such
time as the Partnership repays all of its outstanding indebtedness to
NatWest. In addition, the general partner and the three managing
officers of the general partner personally guaranteed the performance
by the Partnership of all terms of the line of credit agreement.
On September 30, 1992, NatWest amended and extended the term of the
revolving loan through March 31, 1993, requiring further paydowns of
$1,000,000 per month for four of the months and $1,100,000 for two of
the months during the six-month extension period.
Under the terms of the September 30, 1992 amendment, the Partnership
could borrow, on a revolving credit basis, up to the lesser of (i) a
specified borrowing base equal to 93.75% of the aggregate principal
balance of all eligible mortgage loans secured by first or second trust
deeds on single-family residences, and 85% of the aggregate principal
balance of all eligible mortgage loans secured by first or second trust
deeds on multifamily residences or commercial properties; or (ii)
$36,500,000 as of September 30, 1992, reduced by required reductions
through March 31, 1993. Total loans secured by trust deeds on
multifamily residences and commercial properties that could be included
as eligible loans could not exceed 35% of all eligible loans.
Under the September 30, 1992 amendment, the interest rate charged on
new advances was based on (i) 1% above NatWest's prime rate; (ii)
3.125% over NatWest's certificate of deposit rate; or (iii) 3% over the
LIBOR rate. In addition, the Partnership paid a commitment fee equal to
0.50% per annum of the average daily unused portion of the aggregate
commitment. During 1993, the Partnership elected an interest rate of 1%
above the NatWest prime rate.
F-23
76
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - NOTE PAYABLE (CONTINUED)
On April 1, 1993, the line of credit agreement was further amended and
extended to June 30, 1993. The amendment required paydowns of
$1,000,000 per month to a new maximum of $27,300,000 as of June 30,
1993.
In June 1993, the line of credit was further amended and extended until
June 30, 1994. Under the terms of the extension, the Partnership was
required to make monthly payments of $300,000, plus the amount by which
80% of the Partnership's monthly net operating cash flow (after payment
of rent, salaries and employee benefits, interest under the line of
credit agreement, senior liens on mortgage loans and other real estate,
and up to $50,000 per month of office expenses) exceeded $300,000. In
addition, the Partnership was not allowed to make distribution or
withdrawal payments to the partners.
The line of credit agreement, as amended in June 1993, could terminate
upon certain customary events of default. Events of default included
failure to meet the following financial standards: (i) minimum excess
tangible financial assets not less than $15,000,000; (ii) a maximum
ratio of total liabilities to excess tangible financial assets not
greater than 3.25-to-1; and (iii) a minimum interest coverage ratio of
net income plus interest expense to interest expense of 1.5-to-1. Upon
the occurrence of an event of default under the agreement, NatWest had
the right, among other remedies, to declare all advances due
immediately, cease making any further advances, and sell the collateral
assigned as security. NatWest also had the right to charge a higher
interest rate (3% above prime) on amounts due and unpaid.
In December 1993, the Partnership notified NatWest that certain loans
in the borrowing base had become ineligible loans. Such reduction in
the eligible loans caused a payment of approximately $2,100,000 to
become immediately due. Subsequently, the Partnership notified NatWest
that other loans had become ineligible loans, resulting in a total
payment in excess of $6,000,000 being immediately due.
In May 1994, the Partnership notified NatWest of additional defaults on
the line of credit, including those pertaining to the financial
standards for excess tangible financial assets and interest coverage as
well as material litigation, environmental liabilities, and defaults
under other provisions.
During the period April 1994 through September 1994, the Partnership
and NatWest negotiated to restructure and renew the line of credit. In
September 1994, the line of credit was amended and extended through
June 30, 1996 under the following primary terms:
(1) the Partnership is required to make mandatory quarterly
principal payments sufficient to reduce the outstanding
balance to $15,410,000 by December 31, 1994; $13,222,000 by
March 31, 1995; $10,978,000 by June 30, 1995; $8,878,000 by
September 30, 1995; $6,883,000 by December 31, 1995;
$4,993,000 by March 31, 1996; and $0 by June 30, 1996;
F-24
77
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - NOTE PAYABLE (CONTINUED)
(2) the Partnership will incur interest on the line of credit
at the rate of prime plus 1%;
(3) the Partnership is required to pay 100% of its net cash
flow to NatWest;
(4) the Partnership is required to maintain a ratio, based on
the outstanding principal balance of performing loans
compared to the outstanding principal balance of the line
of credit, greater than or equal to 1.10 to June 30, 1995
and 1.20 from July 1, 1995 to June 30, 1996;
(5) the Partnership is required to maintain a ratio, based on
the outstanding principal balance of all loans and the
estimated fair value of other real estate compared to the
outstanding principal balance of the line of credit,
greater than or equal to 1.60 to June 30, 1995 and 1.80
from July 1, 1995 to June 30, 1996;
(6) the Partnership is allowed to make actual cash
disbursements equal to 110% of budgeted cash disbursements
for general and administrative expenses;
(7) the Partnership is allowed to make actual cash
disbursements equal to 120% of budgeted cash disbursements
for loan and real estate expenses, other than specified
environmental remediation costs;
(8) the Partnership is allowed to pay specified environmental
remediation costs up to $1,465,000;
(9) CRC and LPPC are required to pay cash balances in excess of
$250,000 as of January 31, 1995 and January 31, 1996 to the
Partnership;
(10) the Partnership is not allowed to pay any amounts to the
general partner, including fees, reimbursements, or
distributions, except to the extent of 110% of the budgeted
overhead of the general partner;
(11) the Partnership is not allowed to pay any distributions or
withdrawals to the limited partners;
(12) the Partnership is not allowed to make capital
contributions to Pacific Thrift, except for specified
environmental remediation costs of Pacific Thrift and other
limited purposes; and
(13) in the event that the Partnership does not reduce the
outstanding principal balance of the line of credit to
$10,455,000 by June 30, 1995, $8,455,000 by September 30,
1995, $6,555,000 by December 31, 1995, $4,755,000 by March
31, 1996, and $0 by June 30, 1996, the Partnership will
incur a nonperformance fee of $1,000,000 for each target,
up to a maximum of $5,000,000, payable on June 30, 1996;
however, if the Partnership incurs one or more
nonperformance fees and subsequently repays the entire line
of credit by June 30, 1996, the nonperformance fees are
reduced to the greater of 25% of the nonperformance fees or
$500,000.
In addition, the general partner and three managing officers reaffirmed
their guarantees.
F-25
78
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 7 - NOTE PAYABLE (CONTINUED)
As consideration for the September 1994 amended and restated loan
agreement, NatWest waived the defaults which existed under the previous
agreement. In addition, certain financial standards under the previous
agreement are no longer required, including the borrowing base and
eligible loan restrictions, a minimum amount of excess tangible
financial assets, a maximum ratio of total liabilities to excess
tangible financial assets, and a minimum interest coverage ratio.
Upon the occurrence of an event of default under the line of credit,
NatWest has the right, among other remedies, to charge prime plus 3% on
amounts due and unpaid. In addition, NatWest has the right to declare
all advances due immediately and sell the collateral assigned as
security.
As of December 31, 1994, the Partnership reduced the outstanding
balance of the note payable to $14,778,000 and was in compliance with
the principal reduction requirement of the new agreement. However, the
Partnership was not in compliance with certain technical conditions of
such agreement.
NOTE 8 - INCOME TAXES
The Partnership is not subject to income taxes. However, the
Partnership is still required to file partnership returns in order to
report its income or loss in total as well as the distributable share
of income or loss of each of the partners. These partnership returns,
as all tax returns, are potentially subject to examination by the
taxing authorities.
The cumulative differences between the total capital of the Partnership
for financial reporting purposes and the total capital reported for
federal income tax purposes at December 31, 1994 and 1993 are
summarized as follows:
1994 1993
----------- -----------
Total partners' capital for
financial reporting purposes $10,614,000 $20,128,000
Investment in Pacific Thrift,
syndication costs, bad debt and
real estate reserves, and various
other differences 17,336,000 13,682,000
----------- -----------
Total partners' capital for
federal income tax purposes $27,950,000 $33,810,000
=========== ===========
Pacific Thrift is subject to federal income and California franchise
taxes but has incurred net operating losses. Accordingly, the provision
for income taxes consists of the minimum California franchise taxes for
the years ended December 31, 1994, 1993, and 1992.
F-26
79
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 8 - INCOME TAXES (CONTINUED)
Pacific Thrift adopted Statement No. 109 as of January 1, 1993. The
adoption of the statement had no significant effect on the financial
position or results of operations.
The tax effects of temporary differences that give rise to the deferred
tax assets and liabilities on Pacific Thrift's books at December 31 are
as follows:
1994 1993
----------- -----------
Deferred tax assets
Net operating loss carryforward $ 2,457,000 $ 1,854,000
Loan loss reserves 477,000 267,000
Interest reserves 226,000 215,000
Write-down of other real estate 39,000 48,000
Loans held for sale 78,000 --
Deferred rent 59,000 --
Environmental remediation 270,000 336,000
Other 3,000 2,000
----------- -----------
Total deferred tax assets 3,609,000 2,722,000
----------- -----------
Less valuation allowance (2,946,000) (1,805,000)
----------- -----------
663,000 917,000
----------- -----------
Deferred tax liabilities
Depreciation 28,000 36,000
Deferred loan costs 433,000 573,000
Excess yield 202,000 308,000
----------- -----------
Total deferred tax liabilities 663,000 917,000
----------- -----------
Total net deferred tax asset $ - $ -
=========== ===========
A valuation allowance has been established to reduce the deferred tax
assets to the amount considered realizable at December 31, 1994 and
1993. The valuation allowance fully reserves the amount of income tax
benefit recognized that is dependent on future taxable income to be
realizable.
At December 31, 1994, Pacific Thrift has net operating loss
carryforwards for federal income tax purposes of $6,773,000 that are
available to offset future federal taxable income. These federal net
operating losses expire in the years 2004 through 2009. Pacific Thrift
has net operating loss carryforwards for California franchise tax
purposes of $2,209,000. These California carryforwards expire in the
years 1997 through 1999.
F-27
80
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 8 - INCOME TAXES (CONTINUED)
The following summarizes the difference between the 1994 and 1993
provision for income taxes and the federal statutory tax rate:
1994 1993
---- ----
Federal statutory tax rate (34)% (34)%
Nonrecognition of
net operating loss carryforward 34 34
--- ---
Effective tax rate 0% 0%
=== ===
NOTE 9 - ANNUAL MANAGEMENT FEE
The general partner receives an annual management fee based on the
proportion that net profits, before the effects of the management fee,
bear to the total capital contributions as defined in the Partnership
Agreement.
The Partnership Agreement permits the general partner to calculate the
management fee based on annual net income that includes loan
origination fees generated. During 1992, the annual management fee was
calculated on such basis. During 1994 and 1993, there was no management
fee because the Partnership incurred net losses in excess of loan
origination fees generated.
During 1993, the general partner received payments of $441,000 on the
anticipated annual management fees. Since the general partner
ultimately did not earn such fees, the general partner agreed to repay
these amounts to the Partnership under a promissory note. No interest
was paid or accrued for 1993. However, quarterly principal payments of
approximately $110,000 commenced in December 1994 and interest at prime
plus 1% will be accrued from January 1994 through September 1995.
NOTE 10 -RELATED PARTIES AND AFFILIATES
Accounts receivable from the general partner consisted of the following
at December 31:
1994 1993
-------- --------
Unearned annual management fees $330,000 $661,000
Capital contribution due under the Capital Plan -- 133,000
Amounts due for salaries, rent and overhead 148,000 --
-------- --------
$478,000 $794,000
======== ========
F-28
81
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 10- RELATED PARTIES AND AFFILIATES (CONTINUED)
Accounts payable to the general partner consisted of the following at
December 31:
1994 1993
-------- --------
Base fees and loan servicing fees $ 86,000 $ 39,000
Contingent consideration in connection with the
purchase of CRC and LPPC 48,000 166,000
Proceeds owed for the purchase of computer
equipment and software by Pacific Thrift -- 371,000
-------- --------
$134,000 $576,000
======== ========
The Partnership had various related party transactions with the
following entities:
- Presidential Management Company - The general partner received
specified fees for services performed and reimbursements of certain
expenses. Under the Partnership Agreement, the general partner
receives a base fee of up to 35% of the loan origination fees paid
by borrowers to the Company. The base fee was 35% of loan
origination fees for the Company in 1994 and 30% in 1993. The
general partner also received a loan servicing fee of 3/8 of 1% per
annum on loans with terms over three years.
Amounts charged by the general partner for services performed and
overhead- related expenses for the years ended December 31 were as
follows:
1994 1993 1992
---------- ---------- ----------
Base fee $ 589,000 $ 669,000 $1,240,000
Loan servicing fee 216,000 178,000 192,000
Annual management fee -- -- 215,000
---------- ---------- ----------
Total fees $ 805,000 $ 847,000 $1,647,000
========== ========== ==========
Salaries and overhead
reimbursements $ 90,000 $5,184,000 $4,908,000
========== ========== ==========
During 1992, the general partner absorbed certain expenses (data
processing, legal, and business promotion) related to the Company.
During 1994 and 1993, however, the general partner did not absorb
any such expenses for the Company.
F-29
82
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 10- RELATED PARTIES AND AFFILIATES (CONTINUED)
Effective January 1, 1994, in order for Pacific Thrift to comply
with a section of a regulatory agreement covering payments to
affiliates, Pacific Thrift commenced directly employing personnel
for loan origination, processing, and servicing. In addition,
Pacific Thrift revised its policies for payment of rent and other
overhead expenses. As a result, Pacific Thrift terminated
reimbursements to the Partnership and general partner for such
services and expenses. However, the Partnership is continuing to
pay the general partner for base fees and loan servicing fees of
Pacific Thrift and the Partnership in accordance with the
Partnership Agreement.
During 1994, Pacific Thrift paid and allocated certain salaries and
overhead for the Partnership, CRC, and general partner totaling
$495,000, $220,000 and $356,000, respectively, and was reimbursed on
a monthly basis.
The Company incurs salary and employee-related expenses for
individuals who perform services for the Partnership and Pacific
Thrift and do not own more than a 1% interest in the general
partner. The Company also incurs these expenses for all individuals
who perform services for CRC and LPPC, regardless of their ownership
interest in the general partner. The general partner, however,
incurs salary and employee-related expenses for three managing
officers who perform services for the Partnership and Pacific Thrift
and own more than a 1% interest in the general partner.
- Consolidated Reconveyance Company (CRC) serves as trustee on all
trust deeds obtained by the Company as security for portfolio loans
originated or purchased by the Company. Fees paid to CRC are paid by
the borrowers.
A managing officer of the Partnership and general partner provides
legal services in connection with the Company's loan accounts, for
which he receives $100 from the fees paid by each borrower for legal
services related to loan origination. Total fees of $62,000, $56,000,
and $64,000 were paid by the Partnership to the managing officer for
the years ended December 31, 1994, 1993, and 1992, respectively.
A limited partner of the Partnership and of the general partner is a
partner with a law firm that provides legal services to the Company.
Total fees for the services provided to the Company by the law firm
were approximately $716,000, $432,000, and $489,000 for the years ended
December 31, 1994, 1993, and 1992, respectively.
A member of the Board of Directors of Pacific Thrift was paid hourly
and contingent fees for services related to the sale of loans under the
loan securitization agreement entered into in December 1993. Total fees
for the services provided by the board member were approximately
$111,000 and $84,000 for the years ended December 31, 1994 and 1993,
respectively.
F-30
83
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 10- RELATED PARTIES AND AFFILIATES (CONTINUED)
Former officers of the Partnership have loans payable to the
Partnership, secured by real estate, totaling approximately $271,000
and $575,000 as of December 31, 1994 and 1993, respectively. These
loans are included in loans receivable.
Thrift certificates purchased by members of management totaled
approximately $236,000, $158,000, and $148,000 at December 31, 1994,
1993, and 1992, respectively, on terms slightly more favorable than the
terms for unrelated parties. Interest expense on these certificates
totaled approximately $11,000, $8,000, and $8,000 for the years ended
December 31, 1994, 1993, and 1992, respectively.
As of December 31, 1993, Pacific Thrift purchased various furniture and
office equipment from the Partnership. The replacement value was
determined by an experienced interior design consultant (a related
party) who obtained information from used furniture dealers, and the
purchase price of $223,000, 10% under the replacement value, was
approved by the Board of Directors of Pacific Thrift. The Partnership
realized a gain, including depreciation recapture, of $135,000 on the
sale of the furniture and office equipment; however, such gain was
eliminated upon consolidation.
The Partnership and general partner sold computer equipment and
software to Pacific Thrift as of December 31, 1993. Subsequently,
management obtained additional information about the value of the
software and the need to reallocate the price. As a result of the
additional information, management determined that Pacific Thrift had
overpaid for the software. To correct the situation, the general
partner repaid $177,000. In addition, the Partnership agreed to repay
$173,000 by causing CRC to issue an interest-bearing promissory note,
secured by CRC's accounts receivable, payable in monthly installments
through June 1995. As of December 31, 1993, the Partnership and the
general partner realized gains on the sale of $54,000 and $333,000,
respectively, including depreciation recapture and adjustment for the
subsequent refunds.
During 1994, the Partnership paid to Pacific Thrift a loan servicing
fee at the rate of 1.5% of the outstanding balances of the
Partnership's loans and other real estate. Such fees totaled $545,000
in 1994 and were eliminated in the consolidation.
Also during 1994, the Partnership had loans receivable, with balances
totaling $464,000, that were refinanced into two loans: one a Pacific
Thrift loan in first position and the remainder a Partnership loan in
second position. In order to satisfy regulatory requirements applicable
to affiliate transactions, such refinances were subject to certain
underwriting and performance requirements.
F-31
84
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 11- PURCHASE OF CONSOLIDATED RECONVEYANCE COMPANY (CRC) AND
LENDERS POSTING AND PUBLISHING COMPANY (LPPC)
Effective July 1, 1990, the Partnership purchased 100% of the limited
partnership interests in CRC and LPPC from the general partner for
their combined estimated fair market value of $908,000, as determined
by an independent appraiser. CRC serves as trustee on all trust deeds
obtained by the Company as security for portfolio loans originated or
purchased by the Company, as well as trust deeds for many unaffiliated
lenders. LPPC publishes information regarding sales of foreclosed
properties. The transaction was treated as a purchase and resulted in
goodwill of approximately $651,000.
The Partnership also agreed to pay the general partner an additional
amount (contingent consideration) annually for five years beginning
January 1, 1991. The contingent consideration, based on an amended
agreement, is calculated as 50% of the total annual net profits earned
by CRC and LPPC in excess of a base profit amount of $465,000. The
contingent consideration totaled $224,000 and $466,000 for the years
ended December 31, 1994 and 1993, respectively, and was treated as an
addition to goodwill. Accumulated amortization relating to the goodwill
totaled $253,000 and $157,000 at December 31, 1994 and 1993,
respectively.
NOTE 12- LITIGATION AND UNASSERTED CLAIMS
Although they have never been served, the Partnership and its Chief
Executive Officer (CEO) received a complaint in October 1993 that named
them as defendants, along with four other unaffiliated defendants. The
complaint contains allegations of securities fraud and breach of
fiduciary duty in connection with companies affiliated with Alexander
Spitzer (who, until ten years ago but not thereafter, was an affiliate
of the Partnership and CEO). The complaint was filed by two long-time
business associates of Spitzer, including one individual who was a
general partner of a Spitzer-affiliated entity and one individual who
owned another Spitzer-affiliated entity.
The complaint charges all defendants with participation in securities
fraud in connection with the sale of securities of the Spitzer entities
(although there are no allegations that either the Partnership or CEO
participated in the sale of such securities) and charges the
Partnership and CEO with aiding and abetting other defendants in a
violation of their fiduciary duties to the Spitzer-affiliated entities.
The primary facts alleged against the Partnership and CEO are alleged
to have occurred in 1984. The Partnership and CEO deny the merits of
all allegations stated against them in the complaint.
Counsel for both the Partnership and CEO, in a letter dated October 20,
1993, advised counsel for the plaintiffs that the complaint appeared to
state no claim on the merits against the Partnership or CEO and that no
claims could be stated because of statute of limitations problems. The
only response of plaintiffs' counsel, by letter dated November 16,
1993, was to notify all defendants that they had an open extension of
time to answer. No action has been taken to date by anyone since the
extension of time was unilaterally granted by plaintiffs' counsel in
November 1993.
F-32
85
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 12- LITIGATION AND UNASSERTED CLAIMS (CONTINUED)
An earlier class action involving Spitzer-affiliated entities was filed
in March 1990 by investors and certain lenders in the bankrupt
Spitzer-affiliated entities. Although the Partnership and CEO are
discussed in the complaint, neither the Partnership nor CEO has ever
been named as a defendant in that class action.
The allegations involving the Partnership and CEO in both complaints
concern the May 1984 sales of the general partnership interests in the
Partnership (which were owned at that time by entities owned by the CEO
and a relative of Spitzer) and of the stock of a former affiliated
thrift and loan company to a large, unaffiliated mortgage banking group
headquartered in the state of New York (the Buyer). The complaints
allege that, in connection with the sales to the Buyer, the CEO and
Spitzer agreed for the former affiliated thrift and loan company to
sell certain allegedly poor-quality loans to other Spitzer-affiliated
entities. The complaints further allege that Spitzer and his affiliates
engaged in a continuing scheme, both before and after the sales to the
Buyer, to lend money and sell real estate to nominees (which did not
include the Partnership or CEO), who assertedly purchased the real
estate at inflated prices and were guaranteed against loss.
Although not mentioned in either of the two complaints, but based on
hearsay contained in a document prepared in 1985, Spitzer allegedly
stated that in 1984 the CEO reimbursed Spitzer for the CEO's share of
funding such guarantees involving one Spitzer-affiliated entity in 1982
through 1984. The CEO acknowledges that he made payments to Spitzer but
has stated that they were for proper purposes.
Neither the Partnership nor CEO had any ownership interest in any
Spitzer-affiliated entity after the sales to the Buyer in May 1984.
However, as a result of loans made to Spitzer-affiliated entities prior
to the sales to the Buyer, the Partnership continued to be a creditor
to these entities. These loans were substantially performing in
accordance with their terms and were considered by management to be
well secured until 1989, shortly before certain Spitzer-affiliated
entities declared bankruptcy in November 1989. Ultimately, as
previously reported, the Partnership wrote off the loans not secured by
real estate, disposed of real estate collateral securing one of the
loans to the Spitzer-affiliated entities, and recorded losses on these
loans in 1990 and 1991 in excess of $3.7 million.
The Partnership and CEO deny the merits of the allegations stated
against them in the complaints. Management does not believe that any of
these matters will result in any material additional losses to the
Partnership or any material adjustments to these financial statements.
F-33
86
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13- COMMITMENTS AND CONTINGENCIES
In January and February 1993, the Partnership and Pacific Thrift
foreclosed on two loans secured by real estate that contained toxic
substances. The real estate was used by the former owners for
metal-plating purposes. Management commenced the process of obtaining
environmental studies.
In connection with the activities of the former owner of the
Partnership's property, the District Attorney's office filed a civil
complaint against the Partnership alleging violations of hazardous
waste control laws. In September 1994, the Partnership entered into a
consent agreement requiring the Partnership to pay a civil compromise
of $115,000 and to develop and implement a remedial action plan. Legal
counsel has stated that the likelihood of further civil or any criminal
action is remote if the Partnership complies with the terms of the
consent agreement. Management states that the Partnership intends to
comply with the consent agreement.
In July and September 1994, management obtained soil investigation
studies for the foreclosed properties to determine the extent of the
toxic substances. Management was completing proposed remediation plans
for approval by local government agencies. Based on the proposed
remediation plans, management estimated that the cost of remediation,
including consulting and legal expenses, would be approximately
$1,494,000. Accordingly, the Company recorded a provision for the
liability of $1,494,000 in the financial statements for 1993.
Management does not expect the extent of the liability to exceed
$1,494,000; however, such estimate is based on the assumption that the
appropriate government authorities will approve the remediation plans
and that no additional toxic substances will be discovered during the
remediation.
The Company conducts its operations from leased facilities. Rental
expenses of approximately $926,000, $908,000, and $776,000 have been
charged to general and administrative expenses in the consolidated
statements of operations for the years ended December 31, 1994, 1993,
and 1992, respectively. At December 31, 1994, the approximate minimum
rental commitments under all noncancelable operating leases (which are
subject to annual escalations based on the consumer price index) are as
follows:
Year Amount
-------------------- ----------
1995 $ 717,000
1996 967,000
1997 701,000
1998 687,000
1999 693,000
2000 and thereafter 2,100,000
----------
$5,865,000
==========
F-34
87
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 13- COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1994 and 1993, the Company was servicing Title I loans
for others totaling approximately $12,545,000 and $15,643,000,
respectively. In addition, the Company has filed claims with the
Federal Housing Administration that depleted the insurance on these
loans during 1994.
In connection with certain real estate loan sales by Pacific Thrift in
1994, the Partnership guaranteed one buyer against losses up to
$1,800,000. As security for the guarantee, the Partnership deposited
$180,000 with the buyer.
The California Franchise Tax Board is examining the California
corporate tax returns of Pacific Thrift for 1990, 1991, and 1992.
Although management does not expect that the examination will result in
any significant tax liability, the ultimate outcome cannot be
determined at the present time.
The Partnership, Pacific Thrift, CRC, and LPPC are involved in certain
lawsuits and there are claims pending against these entities which
management considers incidental to normal operations. The legal
responsibility and financial impact with respect to such litigation and
claims cannot presently be determined. However, management considers
that any ultimate liability which would likely arise from these
lawsuits and claims would not materially affect the financial position
or results of operations of the Company.
NOTE 14- RETIREMENT SAVINGS PLAN
The Company implemented a retirement savings plan (defined contribution
plan) in 1994. All full-time employees who have completed six months of
service and reached age 21 are eligible to participate in the plan.
Contributions are made from employee-elected salary deferrals. The
Company matched the first 6% of employee contributions to the plan at
the rate of $.50 on the dollar. During the year ended December 31,
1994, the Company's contribution to the plan totaled $111,000.
NOTE 15- DISTRIBUTIONS AND WITHDRAWALS
During 1993 and 1992, primarily as a result of significant fourth
quarter adjustments, the Partnership determined that distributions were
made significantly in excess of the net income and distributable net
profits under the Partnership Agreement. Distributions relating to 1993
were made to partners in the amount of $916,000, although there was a
net loss and no distributable profits for 1993. Distributions relating
to 1992 were made to limited partners in the amount of $4,111,000,
which exceeded distributable profits for 1992 by approximately
$1,730,000. The excess distributions represent a return of capital to
the limited partners. However, under the Capital Plan, the general
partner agreed to contribute, over a three-year period, additional
capital up to $1,730,000 if the Company generates certain levels of
loan origination fees. Pursuant to the agreement, the general partner
contributed $266,000 of the $1,730,000 in late 1993 and early 1994, but
does not expect to contribute any additional amounts based on the
current level of loan origination fees.
F-35
88
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 15- DISTRIBUTIONS AND WITHDRAWALS (CONTINUED)
Partnership withdrawals payable of $1,120,000 at December 31, 1994 and
1993 represent the capital withdrawals by limited partners that were
approved by the general partner but not paid by the Partnership. At
December 31, 1994 and 1993, respectively, other limited partners with
original capital contributions totaling $9,103,000 and $8,192,000 have
requested withdrawals; however, these requests have not been approved.
Withdrawals were not paid or approved after July 1993 due to
limitations on withdrawals in the Partnership Agreement and the
restriction on such withdrawals in the amendments to the line of credit
agreement with NatWest.
NOTE 16- CHANGES IN GENERAL AND LIMITED PARTNERS' CAPITAL (UNAUDITED)
The unaudited changes in general and limited partnership interests for
1994, 1993, and 1992 are as follows:
General Limited
Partnership Partnership
Interest Interests Total
------------ ------------ ------------
Capital (deficit) -
December 31, 1991 $ (228,000) $ 36,934,000 $ 36,706,000
Contributions -- 74,000 74,000
Distributions (50,000) (4,560,000) (4,610,000)
Withdrawals -- (3,488,000) (3,488,000)
Net income - 1992 1,000 147,000 148,000
------------ ------------ ------------
Capital (deficit) -
December 31, 1992 (277,000) 29,107,000 28,830,000
Contributions 266,000 35,000 301,000
Distributions (11,000) (1,932,000) (1,943,000)
Withdrawals -- (1,380,000) (1,380,000)
Net loss - 1993 (57,000) (5,812,000) (5,869,000)
Special allocation - 1993 (266,000) 266,000 --
------------ ------------ ------------
Capital (deficit) -
December 31, 1993 (345,000) 20,284,000 19,939,000
Contributions -- -- --
Distributions -- -- --
Withdrawals -- -- --
Net loss - 1994 (93,000) (9,421,000) (9,514,000)
------------ ------------ ------------
Capital (deficit) -
December 31, 1994 $ (438,000) $ 10,863,000 $ 10,425,000
============ ============ ============
F-36
89
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 16- CHANGES IN GENERAL AND LIMITED PARTNERS' CAPITAL(UNAUDITED)
(CONTINUED)
Presidential Management Company holds the entire general partnership
interest in the Partnership. In addition, Presidential Management
Company holds approximately 4.5% of the limited partnership interests.
NOTE 17- QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The unaudited quarterly results of operations for 1994 and 1993 are as
follows:
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
1994 1994 1994 1994
------------ ------------ ------------ ------------
Interest income $ 2,915,000 $ 3,514,000 $ 3,414,000 $ 1,561,000
Interest expense 1,185,000 1,200,000 1,182,000 1,360,000
------------ ------------ ------------ ------------
Net interest income 1,730,000 2,314,000 2,232,000 201,000
Provision for loan losses 217,000 468,000 2,064,000 3,347,000(1)
Other income 1,143,000 1,091,000 1,149,000 2,619,000
Other expense 3,684,000 4,738,000 4,139,000 3,336,000
------------ ------------ ------------ ------------
Net loss $ (1,028,000) $ (1,801,000) $ (2,822,000) $ (3,863,000)
============ ============ ============ ============
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
1993 1993 1993 1993
------------ ------------ ------------ ------------
Interest income $ 3,925,000 $ 4,031,000 $ 3,624,000 $ 2,632,000
Interest expense 1,474,000 1,436,000 1,399,000 1,409,000
------------ ------------ ------------ ------------
Net interest income 2,451,000 2,595,000 2,225,000 1,223,000
Provision for loan losses 384,000 464,000 575,000 3,232,000(1)
Other income 1,245,000 1,282,000 1,458,000 1,320,000
Other expense 2,977,000 3,224,000 3,692,000 5,120,000(2)
------------ ------------ ------------ ------------
Net income (loss) $ 335,000 $ 189,000 $ (584,000) $ (5,809,000)
============ ============ ============ ============
(1) The substantial increase in the provision for loan losses is due to
an increase in the level of nonperforming loans and the high level
of charge-offs. Management represents that it was not practical to
determine whether or not a portion of these substantial additional
provisions should have been recorded in earlier quarters.
(2) The substantial increase in other expense during the fourth quarter
of 1993 resulted from the $1,494,000 provision for the estimated
cost of environmental remediation for the foreclosed properties.
F-37
90
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 18- SEGMENT FINANCIAL REPORTING
The Company operates principally in two industries, real estate secured
lending (including the origination and sale of loans) and trustee and
foreclosure services. A summary of selected financial information by
industry segment is as follows:
1992
1994 1993 (Unaudited)
------------- ------------- -------------
Revenues
Interest and other income from
real estate secured lending $ 13,475,000 $ 15,210,000 $ 18,632,000
Fees from trustee
and foreclosure services 3,931,000 4,307,000 3,511,000
------------- ------------- -------------
Total revenues $ 17,406,000 $ 19,517,000 $ 22,143,000
============= ============= =============
Operating profit (loss)
Real estate secured lending $ (9,741,000) $ (6,737,000) $ (779,000)
Trustee and foreclosure services 811,000 1,319,000 1,396,000
General expenses (583,000) (450,000) (468,000)
------------- ------------- -------------
Income (loss) before
income taxes $ (9,513,000) $ (5,868,000) $ 149,000
============= ============= =============
Identifiable assets
Real estate secured lending $ 97,930,000 $ 108,966,000 $ 115,998,000
Trustee and foreclosure services 5,564,000 5,201,000 4,157,000
General assets 253,000 157,000 61,000
------------- ------------- -------------
Total assets $ 103,747,000 $ 114,324,000 $ 120,216,000
============= ============= =============
F-38
91
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 19- REGULATORY MATTERS AND CAPITAL ADEQUACY
Memorandum of Understanding and Initial Orders to Cease and Desist with
the Federal Deposit Insurance Corporation and California Department of
Corporations
In February 1993, Pacific Thrift, the FDIC, and the California
Department of Corporations (DOC) entered into a Memorandum of
Understanding (MOU). In connection with the MOU, Pacific Thrift was
required to maintain primary capital in an amount that equals or
exceeds 7.5% of its total assets; obtain and retain qualified
management; notify and obtain approval from the FDIC and the DOC prior
to adding any individual to the Board of Directors or employing any
individual as a senior executive officer of Pacific Thrift; eliminate
loans classified loss and reduce loans classified substandard to
specified levels within a specified period of time; revise, adopt, and
implement policies to provide effective guidance and control over
Pacific Thrift's lending function; develop, adopt, and implement
written policies governing relationships between Pacific Thrift, the
Partnership, and other affiliated companies; establish and maintain an
adequate reserve for loan losses and develop, adopt, and implement a
policy and methodology for determining the adequacy of the reserve for
loan losses; formulate and implement a budget for all categories of
income and expense; revise, adopt, and implement a written liquidity
and funds management policy; maintain assets within certain limits;
obtain written consent from the FDIC and DOC prior to paying any cash
dividends; refrain from extending additional credit to any borrower who
has a loan from Pacific Thrift that has been adversely classified,
unless the loan is classified as substandard or doubtful and the proper
approval has been obtained; and take certain other actions.
As of March 31, 1993, Pacific Thrift's total assets had moderately
exceeded the limitation provided in the MOU. In addition, Pacific
Thrift made certain payments in 1993 to the Partnership in excess of
the amounts authorized under the Personnel Services Agreement between
Pacific Thrift and the Partnership. The overpayment amount was repaid
by the Partnership in April 1993. The Audit Committee of the Board of
Directors of Pacific Thrift performed an investigation of the
circumstances that allowed the overpayments to occur and determined
that such overpayments reflected a weakness in the internal control
procedures of Pacific Thrift with respect to intercompany payments.
Accordingly, new control procedures were adopted by the Board of
Directors of Pacific Thrift to prevent overpayments of any kind by
Pacific Thrift to the Partnership in the future.
F-39
92
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 19- REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
Memorandum of Understanding and Initial Orders to Cease and Desist with
the Federal Deposit Insurance Corporation and California Department of
Corporations (Continued)
In November 1993, the FDIC and DOC terminated the MOU and issued an
Order to Cease and Desist (C&D) with the consent of Pacific Thrift. The
C&D prohibits Pacific Thrift from paying excessive fees to affiliates
in such a manner as to produce operating losses; prohibits Pacific
Thrift from including accrued interest in the carrying amount of a
property acquired by foreclosure on a loan; prohibits Pacific Thrift
from accepting or renewing brokered deposits unless it is adequately
capitalized and a waiver is obtained; requires Pacific Thrift to
disclose any extensions of credit to executive officers or principal
shareholders from a correspondent bank; requires Pacific Thrift to
prepare and display minimum information in its disclosure statement;
requires Pacific Thrift to comply with the limits specified in the
California Industrial Loan Company regulations on the amount of
outstanding thrift certificates, based on its unimpaired capital and
surplus; requires Pacific Thrift to develop a comprehensive
asset/liability management policy, including establishing a range for,
and reducing, the volatile liability dependency ratio; requires Pacific
Thrift to adopt and implement a written policy to increase its
liquidity; and requires Pacific Thrift to adopt and implement a
satisfactory policy governing the relationship between Pacific Thrift
and its affiliates and to reduce the payment of management, consulting,
and other fees to the affiliates to amounts that are reasonable and
necessary for the services. See Note 20.
In September 1994, the FDIC issued a second C&D with the consent of
Pacific Thrift. The second C&D prohibits Pacific Thrift from operating
in such a manner as to produce low earnings; requires Pacific Thrift to
refrain from opening any additional offices without the prior written
approval of the FDIC; requires Pacific Thrift to formulate and
implement a written profit plan; and requires Pacific Thrift to provide
the FDIC with a study of the operations and profitability of its loan
production office opened in June 1994. See Note 20.
Capital Adequacy
Pacific Thrift is subject to various regulatory capital requirements
administered by the FDIC. Failure to meet minimum capital requirements
can initiate certain mandatory - and possibly discretionary - actions
by the FDIC that, if undertaken, could have a direct material effect on
Pacific Thrift's financial statements. The regulations require Pacific
Thrift to meet specific capital adequacy guidelines that involve
quantitative measures of Pacific Thrift's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory
accounting practices. Pacific Thrift's capital classification is also
subject to qualitative judgements by the regulators about components,
risk weightings, and other factors.
F-40
93
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 19- REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
Capital Adequacy (Continued)
Quantitative measures established by regulation to ensure capital
adequacy require Pacific Thrift to maintain minimum amounts and ratios
of Tier 1 capital (as defined in the regulations) to total average
assets (as defined), and minimum ratios of Tier 1 and total capital (as
defined) to risk-weighted assets (as defined). To be considered
adequately capitalized as defined under the Prompt Corrective Action
(PCA) provisions of the Federal Deposit Insurance Corporation
Improvement Act of 1991, Pacific Thrift must maintain the minimum Tier
1 leverage, Tier 1 risk- based, and total risk-based ratios presented
in the table. Pacific Thrift's actual unaudited capital amounts and
ratios as of December 31, 1993 were as follows:
Capital Adequacy
as of December 31, 1993
(Unaudited)
------------------------------------------
Required Actual
Amount (Ratio) Amount (Ratio)
------------------ --------------------
Tier 1 capital (to average assets) $ 2,646,000 (4.0%) $ 4,654,000 (7.0%)
Tier 1 capital (to risk-weighted
assets) 2,161,000 (4.0%) 4,654,000 (8.6%)
Total capital (to risk-weighted
assets) 4,322,000 (8.0%) 5,330,000 (9.9%)
Pacific Thrift incurred losses in 1994 and, in December 1994, Pacific
Thrift was notified by the FDIC that its tangible capital ratio
(tangible capital compared to average total assets) as of October 31,
1994 was less than 2%. Based on the tangible and other capital ratios,
Pacific Thrift was considered to be "critically undercapitalized" as
defined under the PCA provisions. The PCA notice also stated that the
FDIC may be required to place Pacific Thrift in receivership in March
1995. See Subsequent Events, Note 20.
As a result of such PCA designation, Pacific Thrift became subject to
mandatory requirements as of October 31, 1994, including, but not
limited to, a requirement to submit a capital restoration plan to the
FDIC and various restrictions on asset growth, acquisitions, new
activities and branches, dividend payments, management fees, and
executive compensation.
F-41
94
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 19- REGULATORY MATTERS AND CAPITAL ADEQUACY (CONTINUED)
Capital Adequacy (Continued)
Subsequent to October 31, 1994, Pacific Thrift improved its capital
position from "critically undercapitalized" to "undercapitalized" as a
result of certain capital contributions and loan sales prior to
December 31, 1994. Pacific Thrift's actual unaudited capital amounts
and ratios as of December 31, 1994 were as follows:
Capital Adequacy
as of December 31, 1994
(Unaudited)
------------------------------------------------------
Required Actual
Amount(Ratio) Amount(Ratio)
-------------------- --------------------
Tier 1 capital (to average assets) $ 3,216,000 (4.0%) $ 3,112,000 (3.9%)
Tier 1 capital (to risk-weighted
assets) 2,301,000 (4.0%) 3,112,000 (5.4%)
Total capital (to risk-weighted
assets) 4,602,000 (8.0%) 3,831,000 (6.7%)
In addition, Pacific Thrift received an Order to Cure Deficiency of Net
Worth (Order) from the DOC in connection with a $1,414,000 deficiency
in its capital as of December 31, 1994. The Order requires that Pacific
Thrift increase its capital to a level where the ratio of its
outstanding thrift certificates compared to capital does not exceed the
permitted ratio of 15 to 1. Based on the applicable section of the
California Financial Code, failure to increase its capital within 120
days would require the DOC to take possession of the property and
business of Pacific Thrift. See Subsequent Events, Note 20.
Settlement with Department of Housing and Urban Development
In April 1993, Pacific Thrift was notified by the Mortgagee Review
Board of the Department of Housing and Urban Development (HUD) of
certain alleged violations of certain requirements in the origination
of 59 loans selected during its examination of Title I loan origination
activities. Pacific Thrift was advised that HUD intended to seek civil
money penalties and was considering an administrative action. Pacific
Thrift filed a response to the allegations affirming its compliance
with HUD requirements. On September 15, 1993, HUD and Pacific Thrift
entered into a settlement agreement in which Pacific Thrift agreed not
to seek claims for insurance on 24 loans that violated the prohibition
against subordinating Title I loans to non-Title I loans, as well as on
three loans in which the proceeds were used for ineligible purposes.
HUD did not impose any penalties or take any other action.
F-42
95
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 20- SUBSEQUENT EVENTS
During February 1995, Pacific Thrift submitted its original capital
restoration plan to the FDIC, but the FDIC denied approval of the plan
and required certain modifications. During March 1995, Pacific Thrift
submitted a revised capital restoration plan, including a guarantee by
the Partnership and, in May 1995, the revised capital restoration plan
was incorporated by reference in a new C&D (see below).
In May 1995, Pacific Thrift was informed by the FDIC that, based on
unaudited financial information in the Consolidated Report of Condition
and Income (Call Report) filed for the first quarter of 1995, Pacific
Thrift was "adequately capitalized" as of March 31, 1995. Based on such
Call Report, Pacific Thrift's unaudited capital ratios as of March 31,
1995 were as follows:
Capital Ratio
as of March 31, 1995
(Unaudited)
--------------------
Tier 1 capital (to average assets) 5.5%
Tier 1 capital (to risk-weighted assets) 7.2
Total capital (to risk-weighted assets) 8.5
In addition, Pacific Thrift was informed by the DOC that Pacific Thrift
had cured the deficiency in its net worth as of April 30, 1995 and had
complied with the Order.
Also in May 1995, the FDIC terminated the prior C&Ds, and the FDIC and
DOC issued a new comprehensive Order to Cease and Desist (the new C&D)
with the consent of Pacific Thrift. The new C&D:
(1) requires that Pacific Thrift have and retain qualified management;
(2) requires that Pacific Thrift have Tier 1 capital which equals or
exceeds 8% of total assets on or before September 30, 1995;
(3) requires that Pacific Thrift maintain at least the minimum
risk-based capital levels throughout the life of the new C&D;
(4) requires Pacific Thrift to eliminate from its books, through
charge-off or collection, all assets classified "loss" as of
September 1994 within 10 days from the effective date of the new
C&D;
(5) requires Pacific Thrift to reduce assets classified "substandard"
as of September 1994 to $6.5 million within 180 days and to $5
million within 365 days;
(6) prohibits Pacific Thrift from extending any additional credit to
any borrower who has a loan with Pacific Thrift which has been
charged off or classified "loss";
(7) requires Board of Directors or loan committee approval prior to the
extension of additional credit to a borrower who has a loan
classified "substandard";
(8) requires Pacific Thrift to establish within 10 days, and then to
maintain on a quarterly basis, an adequate allowance for loan
losses;
F-43
96
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
NOTE 20- SUBSEQUENT EVENTS (CONTINUED)
(9) requires that Pacific Thrift implement within 60 days the
provisions of the capital restoration and
business/profitability plans submitted to the FDIC in order to
control overhead and other expenses and restore profitability;
(10) requires that Pacific Thrift correct the violation of the
thrift-to-capital ratio required under California law within 60
days;
(11) requires that Pacific Thrift file with the FDIC amended Call
Reports as of December 31, 1993 and as of the end of the first
three quarters of 1994 which accurately reflect Pacific Thrift's
financial condition as of those dates;
(12) requires that throughout the life of the new C&D, Pacific Thrift
shall file Call Reports which accurately reflect Pacific Thrift's
financial condition as of the end of each period;
(13) prohibits Pacific Thrift from paying cash dividends in any amount
without the prior written approval of the FDIC;
(14) prohibits Pacific Thrift from opening any additional offices
without the prior written approval of the FDIC; and
(15) requires the Company to submit written progress reports on a
quarterly basis until the Company accomplishes the corrections
and is released by the Regional Director of the FDIC and the
Commissioner of the DOC.
Noncompliance with the terms of the new C&D could result in various
regulatory actions, including the assessment of civil money penalties,
termination of deposit insurance, and placing Pacific Thrift in
conservatorship or receivership. Although management expects that
Pacific Thrift will substantially comply with the new C&D, there is no
assurance as to the ultimate outcome. These consolidated financial
statements do not include any provisions or adjustments that might
result from the outcome of these uncertainties.
F-44
97
SCHEDULE I
Page 1 of 2
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidating Schedule - Financial Position
December 31, 1994
Lenders
Presidential Pacific Thrift Consolidated Posting and
Mortgage and Loan Reconveyance Publishing
ASSETS Company Company Company Company
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS $ 655,000 $18,700,000 $ 197,000 $ 76,000
ACCOUNTS RECEIVABLE 1,000 1,713,000 3,348,000 48,000
ACCRUED INTEREST RECEIVABLE 478,000 647,000 -- --
LOANS RECEIVABLE 13,064,000 39,981,000 -- --
LOANS HELD FOR SALE 2,605,000 9,406,000 -- --
RECEIVABLE FROM RELATED PARTY 426,000 235,000 -- --
EXCESS YIELD RECEIVABLE -- 888,000 -- --
OTHER REAL ESTATE 6,479,000 1,142,000 -- --
PROPERTY AND EQUIPMENT 64,000 1,304,000 139,000 4,000
GOODWILL 1,749,000 -- -- --
OTHER ASSETS 379,000 388,000 34,000 8,000
INVESTMENT IN SUBSIDIARIES 4,732,000 -- -- --
----------- ----------- ----------- -----------
$30,632,000 $74,404,000 $ 3,718,000 $ 136,000
=========== =========== =========== ===========
Eliminating Entries
---------------------------
ASSETS Dr. Cr. Consolidated
----------- ----------- ------------
CASH AND CASH EQUIVALENTS -- -- $19,628,000
ACCOUNTS RECEIVABLE -- $ 39,000 5,071,000
ACCRUED INTEREST RECEIVABLE -- -- 1,125,000
LOANS RECEIVABLE -- -- 53,045,000
LOANS HELD FOR SALE -- -- 12,011,000
RECEIVABLE FROM RELATED PARTY -- 183,000 478,000
EXCESS YIELD RECEIVABLE -- -- 888,000
OTHER REAL ESTATE -- -- 7,621,000
PROPERTY AND EQUIPMENT -- 189,000 1,322,000
GOODWILL -- -- 1,749,000
OTHER ASSETS -- -- 809,000
INVESTMENT IN SUBSIDIARIES $ 7,640,000 12,372,000 --
----------- ----------- ------------
$ 7,640,000 $12,783,000 $103,747,000
=========== =========== ============
See independent auditors' report and notes to consolidated financial statements.
98
SCHEDULE I
Page 2 of 2
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidating Schedule - Financial Position (Continued)
December 31, 1994
Lenders
Presidential Pacific Thrift Consolidated Posting and
Mortgage and Loan Reconveyance Publishing
LIABILITIES AND PARTNERS' CAPITAL Company Company Company Company
------------ ------------ ------------ ------------
THRIFT CERTIFICATES PAYABLE
Full-paid certificates -- $ 58,058,000 -- --
Installment certificates -- 11,443,000 -- --
------------ ------------ ------------ ------------
-- 69,501,000 -- --
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 971,000 1,280,000 $ 2,187,000 $ 89,000
ACCRUED INTEREST PAYABLE 234,000 171,000 -- --
PAYABLE TO RELATED PARTY 214,000 -- -- --
MORTGAGE NOTES PAYABLE 2,101,000 212,000 -- --
NOTE PAYABLE 14,778,000 -- -- --
NOTE PAYABLE TO RELATED PARTY 600,000 -- 86,000 --
PARTNERSHIP WITHDRAWALS PAYABLE 1,120,000 -- -- --
------------ ------------ ------------ ------------
20,018,000 71,164,000 2,273,000 89,000
------------ ------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
Common stock -- 3,000,000 -- --
Additional paid-in capital -- 7,880,000 -- --
Accumulated deficit -- (7,640,000) -- --
Partners' capital 10,614,000 -- 1,445,000 47,000
------------ ------------ ------------ ------------
10,614,000 3,240,000 1,445,000 47,000
------------ ------------ ------------ ------------
$ 30,632,000 $ 74,404,000 $ 3,718,000 $ 136,000
============ ============ ============ ============
Eliminating Entries
-----------------------------
LIABILITIES AND PARTNERS' CAPITAL Dr. Cr. Consolidated
------------ ------------ ------------
THRIFT CERTIFICATES PAYABLE
Full-paid certificates -- -- $ 58,058,000
Installment certificates -- -- 11,443,000
------------ ------------ ------------
-- -- 69,501,000
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 56,000 -- 4,471,000
ACCRUED INTEREST PAYABLE -- -- 405,000
PAYABLE TO RELATED PARTY 80,000 -- 134,000
MORTGAGE NOTES PAYABLE -- -- 2,313,000
NOTE PAYABLE -- -- 14,778,000
NOTE PAYABLE TO RELATED PARTY 86,000 -- 600,000
PARTNERSHIP WITHDRAWALS PAYABLE -- -- 1,120,000
------------ ------------ ------------
222,000 -- 93,322,000
------------ ------------ ------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL
Common stock 3,000,000 -- --
Additional paid-in capital 7,880,000 -- --
Accumulated deficit -- $ 7,640,000 --
Partners' capital 1,681,000 -- 10,425,000
------------ ------------ ------------
12,561,000 7,640,000 10,425,000
------------ ------------ ------------
$ 12,783,000 $ 7,640,000 $103,747,000
============ ============ ============
See independent auditors' report and notes to consolidated financial statements.
99
SCHEDULE II
PRESIDENTIAL MORTGAGE COMPANY
(A CALIFORNIA LIMITED PARTNERSHIP)
AND SUBSIDIARIES
Consolidating Schedule - Operations
Year Ended December 31, 1994
Lenders
Presidential Pacific Thrift Consolidated Posting and
Mortgage and Loan Reconveyance Publishing
Company Company Company Company
------------ ------------ ------------ ------------
INTEREST INCOME
Loans receivable $ 2,969,000 $ 8,034,000 -- --
Deposits with financial institutions 1,000 400,000 -- --
------------ ------------ ------------ ------------
Total interest income 2,970,000 8,434,000 -- --
------------ ------------ ------------ ------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 -- 28,000 -- --
Other thrift certificates -- 2,917,000 -- --
Notes payable 1,974,000 8,000 -- --
------------ ------------ ------------ ------------
Total interest expense 1,974,000 2,953,000 -- --
------------ ------------ ------------ ------------
Net interest income 996,000 5,481,000 -- --
PROVISION FOR LOAN LOSSES 4,682,000 1,414,000 -- --
------------ ------------ ------------ ------------
Net interest income after provision for loan losses (3,686,000) 4,067,000 -- --
------------ ------------ ------------ ------------
NONINTEREST INCOME
Trustee and reconveyance fees -- -- $ 3,344,000 --
Other income 319,000 806,000 -- $ 587,000
Gain on sale of loans -- 946,000 -- --
Loan servicing fees -- 545,000 -- --
Equity in income (loss) of subsidiaries (2,001,000) -- -- --
------------ ------------ ------------ ------------
(1,682,000) 2,297,000 3,344,000 587,000
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 295,000 4,460,000 1,569,000 169,000
General and administrative 1,752,000 4,081,000 1,168,000 89,000
Related party fees 1,350,000 -- -- --
Operations of other real estate 439,000 293,000 -- --
Depreciation and amortization 310,000 437,000 29,000 --
------------ ------------ ------------ ------------
4,146,000 9,271,000 2,766,000 258,000
------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES (9,514,000) (2,907,000) 578,000 329,000
INCOME TAXES -- 1,000 -- --
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (9,514,000) $ (2,908,000) $ 578,000 $ 329,000
============ ============ ============ ============
Eliminating Entries
-----------------------------
Dr. Cr. Consolidated
------------ ------------ ------------
INTEREST INCOME
Loans receivable -- -- $ 11,003,000
Deposits with financial institutions -- -- 401,000
------------ ------------ ------------
Total interest income -- -- 11,404,000
------------ ------------ ------------
INTEREST EXPENSE
Thrift certificates greater than $100,000 -- -- 28,000
Other thrift certificates -- -- 2,917,000
Notes payable -- -- 1,982,000
------------ ------------ ------------
Total interest expense -- -- 4,927,000
------------ ------------ ------------
Net interest income -- -- 6,477,000
PROVISION FOR LOAN LOSSES -- -- 6,096,000
------------ ------------ ------------
Net interest income after provision for loan losses -- -- 381,000
------------ ------------ ------------
NONINTEREST INCOME
Trustee and reconveyance fees -- -- 3,344,000
Other income -- -- 1,712,000
Gain on sale of loans -- 946,000
Loan servicing fees $ 545,000 -- --
Equity in income (loss) of subsidiaries 907,000 $ 2,908,000 --
------------ ------------ ------------
1,452,000 2,908,000 6,002,000
------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits -- -- 6,493,000
General and administrative -- -- 7,090,000
Related party fees -- 545,000 805,000
Operations of other real estate -- -- 732,000
Depreciation and amortization -- -- 776,000
------------ ------------ ------------
-- 545,000 15,896,000
------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES 1,452,000 3,453,000 (9,513,000)
INCOME TAXES -- -- 1,000
------------ ------------ ------------
NET INCOME (LOSS) $ 1,452,000 $ 3,453,000 $ (9,514,000)
============ ============ ============
See independent auditors' report and notes to consolidated financial statements.
100
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Los Angeles, State of
California, on July 24, 1995.
PRESIDENTIAL MORTGAGE COMPANY (Registrant)
By: s/JOEL R. SCHULTZ
Joel R. Schultz, President of Presidential
Services Corporation, General Partner of
Presidential Management Company, a California
limited partnership, general partner of
the Registrant
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
s/JOEL R. SCHULTZ
Joel R. Schultz Chief Managing Officer July 24, 1995
of Registrant; President
of Presidential Services
Corporation ("PSC"), general
partner of Presidential
Management Company, a
California limited partnership,
general partner of the Registrant
s/RICHARD D. YOUNG Chief Operating Officer
Richard D. Young of the Registrant July 24, 1995
s/CHARLES J. SIEGEL Chief Financial Officer
Charles J. Siegel of the Registrant July 24, 1995
s/RICHARD B. FREMED
Richard B. Fremed Managing Officer of Registrant July 24, 1995
Vice-President, Secretary,
Chief Financial Officer and
Director of PSC
s/NORMAN A. MARKIEWICZ
Norman A. Markiewicz Managing Officer July 24, 1995
of the Registrant and
Executive Vice President
and a Director of PSC
-52-
101
Index of Exhibits
3.1 Fifth Amended and Restated Certificate and Agreement of
Limited Partnership of the Registrant (the "Partnership
Agreement"), dated as of September 7, 1989, incorporated by
reference to Exhibit 3.1 of the Registrant's Registration
Statement on Form S-2, as filed with the Securities and
Exchange Commission August 15, 1989 and amended by Amendment
No. One thereto, as filed with the Securities and Exchange
Commission on October 10, 1989 (Registration No. 33-30517)
(the "1989 Registration Statement").
3.2 Certificate of Limited Partnership of the Registrant on Form
LP-1, as filed with the California Secretary of State and
currently in effect, incorporated by reference to Exhibit 3.2
of the Registration Statement on Form S-11, filed with the
Securities and Exchange Commission on November 13, 1984, as
amended on February 4 and March 1, 1985, and declared
effective on March 6, 1985 (Registration No. 2-94289) (the
"1984 Registration Statement").
3.3 First Amendment to the Partnership Agreement dated as of May
15, 1993, incorporated by reference to Exhibit 3.3 of the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993, as filed with the Securities and Exchange
Commission on November 27, 1994 (the "1993 Annual Report").
3.4 Second Amendment to the Partnership Agreement dated as of
January 1, 1994, incorporated by reference to Exhibit 3.4 of
the 1993 Annual Report.
10.1 Employment Agreement, dated May 9, 1984, by and among Pacific
and Loan Association and the Registrant, as employers, and
Joel R. Schultz, as employee, as currently in effect only with
the Registrant, incorporated by reference to Exhibit 10.2 of
the 1984 Registration Statement.
10.2 Employment Agreement, dated May 9, 1984, by and among Pacific
and Loan Association and the Registrant, as employers, and
Norman A. Markiewicz, as employee, as currently in effect only
with the Registrant, incorporated by reference to Exhibit 10.3
of the 1984 Registration Statement.
10.3 Personnel Services Agreement dated as of December 22, 1988, by
and between Pacific Thrift and Loan Company, a California
corporation and a wholly owned subsidiary of the Registrant,
Presidential Management Company, a California limited
partnership and general partner of the Registrant, and the
Registrant, incorporated by reference to Exhibit 10.4 of the
1989 Registration Statement.
10.4 Loan Agreement (the "Loan Agreement"), dated as of August 28,
1990, as amended and restated May 20, 1992, and as further
amended and restated as of September 28, 1994, by and among
National Westminster Bank USA ("NatWest"), as Agent and a
participating Bank, the banks signatory thereto (the "Banks"),
and the Registrant, incorporated by reference to Exhibit 10.4
of the 1993 Annual Report.
10.5 Agreement for Purchase of Limited Partnership Interests of
Consolidated Reconveyance Company and Lenders Posting and
Publishing Company, dated as of July 1, 1990, incorporated by
reference to Exhibit 10.6 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1990, as filed with
the Securities and Exchange Commission on March 31, 1991.
10.6 Master Loan Purchase Agreement dated as of December 15, 1993
by and between Pacific Thrift and Loan Company and Aames
Capital Corporation, incorporated by reference to Exhibit 10.6
of the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993, as filed with the Securities and
Exchange Commission on November 27, 1994.
10.7 Master Loan Purchase Agreement dated as of June 21, 1995 by
and between Pacific Thrift and Loan Company and Aames Capital
Corporation.
22.1 List of Subsidiaries
S-1