<PAGE> 1
As filed with the Securities and Exchange Commission on April 29, 1997
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
D&N CAPITAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 6798 APPLIED FOR
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
400 QUINCY STREET, HANCOCK, MICHIGAN 49930 (906) 482-2700
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
KENNETH R. JANSON
PRESIDENT
D&N CAPITAL CORPORATION
400 QUINCY STREET
HANCOCK, MICHIGAN 49930
(906) 482-2700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
James S. Fleischer, P.C.
SILVER, FREEDMAN & TAFF, L.L.P.
(A limited liability partnership including professional corporations)
1100 New York Avenue, N.W.
Seventh Floor, East Tower
Washington, DC 20005-3934
(202) 414-6100
Donald L. Kunz
HONIGMAN MILLER SCHWARTZ AND COHN
2290 First National Building
Detroit, Michigan 48226
(313) 256-7800
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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<CAPTION>
CALCULATION OF REGISTRATION FEE
================================================================================================================
TITLE OF EACH AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) PER SHARE(1) PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
[ ]% Noncumulative
Exchangeable Preferred
Stock, Series A,
par value 1,210,000 shares $25.00 $30,250,000 $9,166.67
$25.00 per share
================================================================================================================
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(1) Estimated solely for the purpose of calculating the registration fee.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<PAGE> 2
1,100,000 SHARES
D&N CAPITAL CORPORATION
[ ]% NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
EXCHANGEABLE INTO PREFERRED STOCK
OF
D&N BANK
--------
D&N Capital Corporation (the "Company") is hereby offering 1,100,000
shares of its [ ]% Noncumulative Exchangeable Preferred Stock, Series A, par
value $25.00 per share (the "Series A Preferred Shares"). Dividends on the
Series A Preferred Shares are payable at the rate of [ ]% per annum of the
liquidation preference (an amount equal to $[ ] per annum per share), if, when
and as declared by the Board of Directors of the Company. Dividends are not
cumulative and, if declared, are payable quarterly in arrears on the last day
of March, June, September and December in each year, commencing June 30, 1997.
If no dividend is declared on the Series A Preferred Shares by the Company for
a quarterly dividend period, holders of the Series A Preferred Shares will have
no right to receive a dividend for that period, and the Company will have no
obligation to pay a dividend for that period, whether or not dividends are
declared and paid for any future period. Dividends in each dividend period
shall accrue from the first day of such period, whether or not declared or paid
in the prior period.
SEE "RISK FACTORS" COMMENCING ON PAGE [ ] FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY. AMONG THE RISKS WHICH PROSPECTIVE INVESTORS
SHOULD CONSIDER ARE THE FOLLOWING:
- No prior operating history of the Company;
- Dependence on D&N Bank (the "Bank") as Advisor and Servicer;
- Possible conflicts of interest between the Company and the
Bank and its affiliates;
- Possible restrictions on operations of the Company by financial
institution regulatory authorities;
- Possible adverse effect on the Company's cash flow in the
event of a significant decline in interest rates;
- Geographic concentration in Michigan of properties securing the
Company's initial mortgage loan portfolio;
- Series A Preferred Shares may be exchanged for Bank Preferred
Shares when the Bank is experiencing financial difficulties;
- Dividends are not cumulative.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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INITIAL PUBLIC OFFERING PRICE UNDERWRITING COMMISSION(1) PROCEEDS TO COMPANY(2)
<S> <C>
Per Share . . . . . . . . . . . . . $25.00
Total(3) . . . . . . . . . . . . .
</TABLE>
- --------------
(1) The Company and the Bank have agreed to indemnify the several Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933. The Underwriters have agreed to an underwriting commission of
1.75% for all Series A Preferred Shares sold to directors, officers and
employees of the Company and its affiliates, up to a maximum of 60,000
shares.
(2) Before deducting expenses payable by the Company estimated at $325,000.
(3) The Company has granted the several Underwriters an option for 30 days to
purchase up to an additional 110,000 Series A Preferred Shares at the
initial public offering price per Series A Preferred Share, less
underwriting commissions, solely to cover over-allotments, if any. If such
option is exercised in full, the total initial public offering price,
underwriting commission and proceeds to Company will be $30,250,000,
$__________ and $___________, respectively.
-------------------
The Series A Preferred Shares are offered severally by the
Underwriters, as specified herein, subject to receipt and acceptance by them
and subject to their right to reject any order in whole or in part. It is
expected that delivery of the Series A Preferred Shares offered hereby will be
ready for delivery through the facilities of The Depository Trust Company in
New York, New York, on or about [ ], 1997 against payment therefor in
immediately available funds.
RONEY & CO.
-------------------
The date of this Prospectus is ____________, 1997.
<PAGE> 3
The Series A Preferred Shares are not redeemable prior to [
], 2002 (except upon the occurrence of a Tax Event as described herein). On and
after [ ], 2002, the Series A Preferred Shares may be redeemed for
cash at the option of the Company, in whole or in part, at a redemption price
of $25.00 per share, plus the accrued and unpaid dividends for the most recent
quarter, if any, thereon, subject to the receipt of prior approval from the
Office of Thrift Supervision or any successor regulatory agency. The Series A
Preferred Shares will not be subject to any sinking fund or mandatory
redemption and will not be convertible into any other securities of the Company.
Under certain circumstances, each Series A Preferred Share will be
exchanged automatically (the "Automatic Exchange") for one newly issued Series
A preferred share (the "Bank Preferred Shares") of D&N Bank, a federally
chartered and federally insured stock savings bank (the "Bank"), if the
appropriate regulatory agency directs in writing (a "Directive") an exchange of
the Series A Preferred Shares for Bank Preferred Shares because (i) the Bank
becomes "undercapitalized" under prompt corrective action regulations, (ii) the
Bank is placed into conservatorship or receivership or (iii) the appropriate
federal regulatory agency, in its sole discretion and even if the Bank is not
"undercapitalized," anticipates the Bank becoming "undercapitalized" in the
near term (the "Exchange Event"). CONSEQUENTLY, AN INVESTMENT IN SERIES A
PREFERRED SHARES COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT
A TIME WHEN THE BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK
HAS BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN
THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE
DESCRIPTION OF THE BANK SET FORTH ELSEWHERE IN THIS PROSPECTUS. In the event
of the Automatic Exchange, the Bank Preferred Shares would constitute a new
series of preferred shares of the Bank, would have the same dividend rights,
liquidation preference, redemption options and other attributes as the Series A
Preferred Shares, except that the Bank Preferred Shares would not be listed on
the Nasdaq National Market or any other quotation system, and would rank pari
passu in terms of cash dividend payments and liquidation preference with any
outstanding shares of preferred stock of the Bank. Holders of Series A
Preferred Shares cannot exchange their Series A Preferred Shares for Bank
Preferred Shares voluntarily, and, absent the occurrence of the Automatic
Exchange, holders of Series A Preferred Shares will have no dividend, voting,
liquidation preference or other rights with respect to the Bank or any security
of the Bank. See "Description of Series A Preferred Shares--Automatic
Exchange".
The Company has been formed for the purpose of acquiring, holding and
managing real estate mortgage assets. The Company expects that all of its
mortgage assets will be acquired from the Bank, or its affiliates. All of the
shares of the Company's common stock, par value $300.00 per share (the "Common
Stock"), are owned by the Bank.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N FINANCIAL CORPORATION ("D&N"). NO
OBLIGATION OF THE COMPANY IS GUARANTEED BY THE BANK OR D&N.
The Company expects to qualify as a real estate investment trust (a
"REIT") for federal income tax purposes, commencing with the taxable year
ending December 31, 1997. No person or persons acting as a group is permitted
to beneficially own more than 9.9% of any series of preferred stock of the
Company, including the Series A Preferred Shares, with limited exceptions.
Prior to the offering, there has been no market for the Series A
Preferred Shares. The Company has applied for listing of the Series A
Preferred Shares on the Nasdaq National Market, subject to official notice of
issuance, under the symbol "[ ]". Trading of the Series A Preferred Shares
on the Nasdaq National Market is expected to commence within 30 days after the
initial delivery of the Series A Preferred Shares. The Bank intends to
register the Bank Preferred Shares with the OTS promptly following the issuance
of such shares, but does not intend to apply for listing of the Bank Preferred
Shares on any national securities exchange or for quotation of the Bank
Preferred Shares through the Nasdaq System. Consequently, there can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred
Shares would develop or be maintained.
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SERIES A
PREFERRED SHARES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
<PAGE> 4
TABLE OF CONTENTS
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Page
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<S> <C>
PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
THE BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
THE OFFERING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
THE FORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
The Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Benefits to the Bank and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
BUSINESS AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
TAX STATUS OF THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
No Operating History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Dependence Upon Bank as Advisor and Servicer . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Relationship with the Bank and its Affiliates; Conflicts of Interest . . . . . . . . . . . . . . . 13
Risk of Automatic Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Dividend and Other Regulatory Restrictions on Operations of the Company . . . . . . . . . . . . . 14
Dividends Not Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Interest Rate Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Risks Associated with Mortgage Loans Generally . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Real Estate Market Conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
Delays in Liquidating Defaulted Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Legal Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Environmental Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Risk of Future Revisions in Policies and Strategies By Board of Directors . . . . . . . . . . . . 20
Tax Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Risk Associated with Leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
No Third Party Valuation of the Mortgage Loans; No Arm's-Length Negotiations with Affiliates . . . 22
No Prior Market for Series A Preferred Shares . . . . . . . . . . . . . . . . . . . . . . . . . . 22
THE COMPANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
BUSINESS AND STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Liquidity and Capital Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
General Description of Mortgage Assets; Investment Policy . . . . . . . . . . . . . . . . . . . . 29
Acquisition of Initial Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Management Policies and Programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Description of Initial Portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
Employees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Directors and Executive Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Independent Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Audit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Credit Committee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Compensation of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Limitations on Liability of Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . 50
The Advisor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
</TABLE>
i
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<TABLE>
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CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
The Formation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Benefits to the Bank and its Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
DESCRIPTION OF SERIES A PREFERRED SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Automatic Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Voting Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
Redemption . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
Rights Upon Liquidation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Independent Director Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Restrictions on Ownership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Common Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
Restrictions on Ownership and Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
FEDERAL INCOME TAX CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Taxation of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 65
Failure to Qualify . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Tax Treatment of Automatic Exchange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Taxation of United States Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Taxation of Foreign Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
Information Reporting Requirements and Backup Withholding Tax . . . . . . . . . . . . . . . . . . . . . 75
Other Tax Consequences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
ERISA CONSIDERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Plan Asset Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Effect of Plan Asset Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
Prohibited Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
Unrelated Business Taxable Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
CERTAIN INFORMATION REGARDING THE BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Operations of the Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
Nonperforming Assets and Risk Elements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
Allowance for Loan Losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
Risk Factors and Other Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
UNDERWRITING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
RATINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
CERTAIN LEGAL MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
GLOSSARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95
INDEX TO FINANCIAL STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
ii
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information appearing elsewhere in this Prospectus. See "Glossary" commencing
at page [__] for the definitions of certain terms used in this Prospectus. The
offering of 1,100,000 shares of [____]% Noncumulative Exchangeable Preferred
Stock, Series A, par value $25.00 per share (the "Series A Preferred Shares"),
is referred to herein as the "Offering". Unless otherwise indicated, all
information in this Prospectus assumes that the over-allotment option described
in "Underwriting" is not exercised.
THE COMPANY
D&N Capital Corporation is a newly-formed Delaware corporation
incorporated on March 18, 1997 and created for the purpose of acquiring,
holding and managing real estate mortgage assets ("Mortgage Assets"). The
Company has been formed by D&N Bank, a federally chartered savings bank,
to provide the Bank and its parent, D&N Financial Corporation, a Delaware
corporation ("D&N"), with a means of raising capital for bank regulatory
purposes. The Series A Preferred Shares will be treated as Tier 1 capital for
regulatory purposes for the Bank. The issuance of the Series A Preferred Shares
by the Company is a more cost-effective means of raising capital for the Bank
than if the Bank were to issue preferred stock itself, because of the Company's
ability to deduct for income tax purposes the dividends payable on the Series A
Preferred Share as a result of its qualification as a REIT. The Company will
elect to be subject to tax as a REIT under the Internal Revenue Code of 1986,
as amended (the "Code"), and will generally not be subject to federal income
tax to the extent that it distributes its earnings to its stockholders and
maintains its qualification as a REIT. All of the shares of the Company's
common stock, par value $300.00 per share (the "Common Stock"), are owned by
the Bank.
The Company currently expects to pay an aggregate amount of dividends
with respect to its outstanding shares of capital stock equal to approximately
100% of the Company's "REIT taxable income" (which excludes capital gains).
Dividends will be declared at the discretion of the Board of Directors after
considering the Company's distributable funds, financial requirements, tax
considerations and other factors. Because (i) the Mortgage Assets are interest
bearing, (ii) the Series A Preferred Shares represent only approximately 50% of
the Company's capitalization and (iii) the Company does not anticipate
incurring any indebtedness, the Company currently expects that both its cash
available for distribution and its "REIT taxable income" will be in excess of
amounts needed to pay dividends on the Series A Preferred Shares, even in the
event of a significant drop in interest rate levels.
Under certain circumstances, each Series A Preferred Share will be
exchanged automatically for one newly issued Series A preferred share of the
Bank (a "Bank Preferred Share") if the appropriate regulatory agency directs in
writing (a "Directive") an exchange of the Series A Preferred Shares for Bank
Preferred Shares because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations established pursuant to the Federal Deposit
Insurance Corporation Improvement Act of 1991, as amended ("FDICIA"), (ii) the
Bank
1
<PAGE> 7
is placed into conservatorship or receivership or (iii) the appropriate
regulatory agency, in its sole discretion and even if the Bank is not
"undercapitalized," anticipates the Bank becoming "undercapitalized" in the
near term (the "Exchange Event"). (The term "Directive" is simply a defined
term for purposes of this Prospectus and is not a regulatory definition. A
letter from the staff of the OTS would constitute a Directive). CONSEQUENTLY,
AN INVESTMENT IN SERIES A PREFERRED SHARES COULD BE REPLACED BY AN INVESTMENT
IN BANK PREFERRED SHARES AT A TIME WHEN THE BANK'S FINANCIAL CONDITION IS
DETERIORATING OR THE BANK HAS BEEN PLACED INTO CONSERVATORSHIP OR RECEIVERSHIP.
POTENTIAL INVESTORS IN THE SERIES A PREFERRED SHARES, THEREFORE, SHOULD
CAREFULLY CONSIDER THE DESCRIPTION OF THE BANK SET FORTH UNDER "CERTAIN
INFORMATION REGARDING THE BANK". See also "Description of Series A Preferred
Shares-- Automatic Exchange". The Bank will be considered to be
"undercapitalized" under the prompt corrective action regulations if it has (i)
a core capital (or leverage) ratio of less than 4.0%, (ii) a Tier 1 risk-based
capital ratio of less than 4.0%, or (iii) a total risk-based capital ratio of
less than 8.0%. Tier 1 or core capital consists of common shareholders'
equity, noncumulative perpetual preferred stock, and minority interests in
consolidated subsidiaries, less certain intangible assets and investments in
certain subsidiaries. Total capital consists of core capital plus
supplementary capital (which includes cumulative perpetual preferred stock,
qualifying subordinated debt, and a limited amount of the allowances for loan
and lease losses) to the extent such supplementary capital does not exceed 100%
of core capital, less certain equity investments. For purposes of the prompt
corrective action regulations, the Bank's capital category is determined as of
the most recent date (i) certain quarterly financial reports are required to be
filed with the regulators; (ii) a final report of examination has been
delivered to the Bank; or (iii) the Bank is notified in writing by the OTS of
its capital category or a change in such category. For its fiscal years ended
December 31, 1996, 1995 and 1994, the Bank's core capital (or leverage) ratio
was 5.11%, 5.41% and 5.09%, its Tier 1 risk-based capital ratio was 8.72%,
9.20% and 8.92%, and its total risk-based capital ratio was 9.94%, 10.45% and
10.08%, respectively. After giving effect to the Offering, the 1996 ratios
would have been 6.84%, 11.89% and 13.10%, respectively. After the Offering,
the Bank's capital ratios are expected to decrease as the Bank expands its
business and, thus, its total assets. However, the Bank currently intends, by
managing its growth following the Offering, to maintain its core capital ratio
at or above 6% (compared to the 5% standard for "well-capitalized" institutions
under the prompt corrective action regulations), and its Tier 1 risk-based and
total risk-based capital ratios in excess of the 6.0% and 10.0% levels,
respectively, required of "well capitalized" institutions under the prompt
corrective action regulations. For a discussion of the capital requirements
applicable to the Bank, see "Certain Information Regarding the Bank--Risk
Factors and Other Considerations--Regulatory Capital Levels".
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N. NO OBLIGATION OF THE COMPANY IS
GUARANTEED BY THE BANK OR D&N.
The principal executive offices of the Company are located at 400
Quincy Street, Hancock, Michigan 49930, telephone number (906) 482- 2700.
2
<PAGE> 8
THE BANK
The Bank is a federally chartered and federally insured stock savings
bank which is wholly owned by D&N Financial Corporation. At December 31, 1996,
D&N Financial Corporation had total assets of $1.47 billion and stockholders'
equity of $86.1 million. Its common stock is listed on the Nasdaq National
Market under the symbol "DNFC". At December 31, 1996, the Bank conducted
business from 37 full service offices, seven savings agency offices and four
mortgage banking offices in Michigan. At December 31, 1996, the Bank had total
assets of $1.47 billion, total deposits of $964.1 million and total
stockholders' equity of $79.9 million. For the year ended December 31, 1996,
the Bank had net income of $9.3 million and return on average assets of 0.69%.
See "Certain Information Regarding the Bank--Selected Consolidated Financial
Data".
The Bank Preferred Shares will only be issued upon the occurrence of
the Automatic Exchange. The Bank Preferred Shares will not be registered with
the Securities and Exchange Commission (the "Commission") but are being
registered with the Office of Thrift Supervision (the "OTS"). A copy of the
offering circular filed with the OTS relating to the Bank Preferred Shares is
affixed to this Prospectus (the "Offering Circular") as Annex I. The principal
executive offices of the Bank are located at 400 Quincy Street, Hancock,
Michigan 49930, and its telephone number at such address is (906) 482-2700.
RISK FACTORS
The purchase of the Series A Preferred Shares offered hereby is
subject to certain risks. See "Risk Factors" commencing on page 12. Among such
risks are the following:
- The Company is a newly organized corporation with no operating
history.
- The Company will be dependent in virtually every phase of its
operations on the diligence and skill of the officers and
employees of the Bank and its affiliates.
- Because of the relationship between the Company and the Bank
and its affiliates, conflicts of interest may arise between
the Bank and its affiliates and the Company.
- As a subsidiary of the Bank, the Company is subject to the
risk that banking authorities will restrict the ability of the
Company to transfer assets, to make distributions to
stockholders, including dividends to the holders of Series A
Preferred Shares, or to redeem shares of Preferred Stock.
- Series A Preferred Shares may be exchanged for Bank Preferred
Shares when the Bank is experiencing financial difficulties;
the Bank Preferred Shares will not be listed on the Nasdaq
System and therefore will be an illiquid investment.
3
<PAGE> 9
- Dividends are not cumulative.
- Because the rate at which dividends are required to be paid is
fixed, a significant decline in interest rates might adversely
affect the Company's ability to pay dividends on the Series A
Preferred Shares.
- Risks associated with mortgage loans generally, and
particularly the geographic concentration of the Company's
mortgage loan portfolio, could adversely affect the value of
the Series A Preferred Shares and the Mortgage Loans (defined
below) held by the Company.
- The board of directors of the Company (the "Board of
Directors") may amend or revise (in certain circumstances
subject to the approval of a majority of the Independent
Directors (defined below)) the policies of the Company set
forth herein, including the Company's policy regarding
incurring indebtedness.
- The Company is subject to risks associated with the failure of
the Company to maintain its status as a REIT.
THE OFFERING
For a more complete description of the terms of the Series A Preferred
Shares specified in the following summary, see "Description of Series A
Preferred Shares".
Issuer . . . . . . . . . . . . . . D&N Capital Corporation, a newly-formed
Delaware corporation created for the
purpose of acquiring, holding and
managing Mortgage Assets.
Securities Offered . . . . . . . . 1,100,000 Series A Preferred Shares.
Ranking . . . . . . . . . . . . . . With respect to the payment of
dividends and amounts upon
liquidation, the Series A Preferred
Shares will rank senior to the
Company's Common Stock. Additional
shares of preferred stock of the
Company (the "Preferred Stock")
ranking senior to the Series A
Preferred Shares may not be issued
without the approval of holders of at
least 66 2/3% of the Series A
Preferred Shares. Additional shares of
Preferred Stock ranking on a parity
with the Series A Preferred Shares
may not be issued without the
approval of a majority of the
Independent Directors. See
"Description of Series A Preferred
Shares--Independent Director Approval".
4
<PAGE> 10
Use of Proceeds . . . . . . . . . . The net proceeds to the Company from
the Offering, together with proceeds
received in connection with the sale
of shares of Common Stock to the
Bank, will be used to purchase the
Company's initial portfolio of Mortgage
Assets and to pay the expenses of the
Offering and the formation of the
Company (currently estimated by the
Company to be approximately $325,000
in the aggregate). See "Use of
Proceeds".
Dividends . . . . . . . . . . . . . Dividends on the Series A Preferred
Shares are payable at the rate of [ ]%
per annum of the liquidation
preference (an amount equal to $[ ] per
annum per share), if, when and as
declared by the Board of Directors
of the Company. If declared,
dividends are payable quarterly in
arrears on the last day of March,
June, September and December in each
year, commencing June 30, 1997.
Dividends accrue in each quarterly
period from the first day of such
period, whether or not dividends are
paid with respect to the preceding
period. Dividends on the Series A
Preferred Shares are not cumulative
and, accordingly, if no dividend is
declared on the Series A Preferred
Shares by the Company for a quarterly
dividend period, holders of the Series
A Preferred Shares will have no
right to receive a dividend for that
period, and the Company will have no
obligation to pay a dividend for that
period, whether or not dividends are
declared and paid for any future
period with respect to either the
Series A Preferred Shares or the
Common Stock. If no dividend is paid
on the Series A Preferred Shares for
a quarterly dividend period, the
payment of dividends on the Common
Stock (100% of which is owned by the
Bank) will be prohibited for that
period and at least the following
three quarterly dividend periods.
See "Description of Series A Preferred
Shares--Dividends".
Liquidation Preference . . . . . . The liquidation preference for each
Series A Preferred Share is $25.00,
plus an amount equal to the quarterly
accrued and unpaid dividends, if any,
thereon. See "Description of Series A
Preferred Shares--Rights Upon
Liquidation".
Redemption . . . . . . . . . . . . The Series A Preferred Shares
are not redeemable prior to [
], 2002 (except upon the occurrence
of a Tax Event as defined in
"Description of Series A
Preferred Shares--Redemption"). On and
after [ ], 2002, the Series
A Preferred Shares may be redeemed
for cash at the option of the
Company, in whole or in part, at any
time and from time to time, at a
redemption price of $25.00 per share,
plus the accrued and unpaid dividends
for the most recent quarter, if any,
5
<PAGE> 11
thereon. Upon the occurrence of a Tax
Event, the Company will have the right
at any time to redeem the Series A
Preferred Shares in whole (but not in
part) at a redemption price of $25.00
per share, plus the accrued and unpaid
dividends for the most recent quarter,
if any, thereon. The Series A Preferred
Shares will not be subject to any
sinking fund or mandatory redemption
and will not be convertible into any
other securities of the Company. See
"Description of Series A Preferred
Shares--Redemption".
Automatic Exchange . . . . . . . . Each Series A Preferred Share will be
exchanged automatically for one Bank
Preferred Share upon the occurrence of
the Automatic Exchange. See
"Description of Series A Preferred
Shares--Automatic Exchange".
Voting Rights . . . . . . . . . . . Except as described herein with
respect to certain voting rights in
the Company, holders of Series A
Preferred Shares will not have any
voting rights. In any matter on which
the Series A Preferred Shares may vote
(as expressly provided herein or as may
be required by law), each Series A
Preferred Share will be entitled to
one vote. See "Description of Series
A Preferred Shares--Voting Rights".
Ownership Limits . . . . . . . . . Ownership of more than 9.9% of any
outstanding series of Preferred Stock,
including the Series A Preferred
Shares offered hereby, is restricted
in order to preserve the Company's
status as a REIT for federal income
tax purposes. See "Description
of Capital Stock--Restrictions on
Ownership and Transfer".
Trading . . . . . . . . . . . . . . The Company has applied for listing of
the Series A Preferred Shares on the
Nasdaq National Market, subject to
official notice of issuance, under
the symbol "[ ]".
Ratings . . . . . . . . . . . . . . It is expected that the Series A
Preferred Shares will be rated [ ] by
Duff & Phelps Inc. A security rating
is not a recommendation to buy, sell
or hold securities and may be
subject to revision or withdrawal at
any time by the assigning rating
organization.
6
<PAGE> 12
Rationale . . . . . . . . . . . . . The Series A Preferred Shares will be
treated as Tier 1 capital for
regulatory purposes for the Bank.
The issuance of the Series A
Preferred Shares by the Company is a
more cost-effective means of raising
capital for the Bank than if the Bank
were to issue preferred stock itself,
because of the Company's ability to
deduct for income tax purposes the
dividends payable on the Series A
Preferred Shares as a result of the
Company's qualification as a REIT.
7
<PAGE> 13
THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the
Company, D&N, the Bank and its affiliates will engage in the transactions
described under "Certain Transactions Constituting the Formation--The
Formation". These transactions are designed (i) to facilitate the Offering,
(ii) to transfer the ownership of the Initial Portfolio (defined below) to the
Company and (iii) to enable the Company to qualify as a REIT for federal income
tax purposes commencing with its taxable year ending December 31, 1997.
The following chart outlines the relationship between the Company,
the Bank and its affiliates relevant to the Offering following
completion of the Offering.
<TABLE>
<S><C>
-------------------------------------
/ /
/ D&N FINANCIAL CORPORATION /
/ (D&N) /
/ /
-------------------------------------
/
/
/ 100%
/ Common
/ Stock
/
-------------------------------------
/ /
/ D&N BANK /
/ (THE BANK) /
/ / Public
------------------------------------- Preferred
/ \ Shareholders
/ \ Advisory /
/ 100% \ Agreement /
/ Commmon \ /
/ Stock \ /
/ \ Servicing / 100%
--------------------------------------- \ Agreement / Series A
/ / \ / Preferred Shares
/ / \ /
- ----------------------------------- -----------------------------------
/ / / /
/ D&N MORTGAGE CORPORATION / / D&N CAPITAL CORPORATION /
/ / / (THE COMPANY) /
- ----------------------------------- -----------------------------------
</TABLE>
BENEFITS TO THE BANK AND ITS AFFILIATES
The Bank is required by the OTS to maintain certain levels of capital
for bank regulatory purposes. The Bank has informed the Company that the Series
A Preferred Shares will be treated as capital of the Bank for regulatory
purposes. The Bank has indicated to the Company that such treatment, together
with the Company's ability to deduct, for income tax purposes, the dividends
payable on the Series A Preferred Shares as a result of the Company's
qualification as a REIT, will provide the Bank with a more cost-effective means
of obtaining capital for regulatory purposes than if the Bank were to issue
preferred stock itself.
The Bank will realize certain other benefits from the Offering and the
other transactions constituting the formation of the Company, including (i) the
receipt by the Bank of the net proceeds from the sale of the Series A Preferred
Shares in connection with the sale to the Company of the Initial Portfolio and
(ii) the receipt of advisory and servicing fees under the Advisory Agreement
and the Servicing Agreements. It is also expected that the Bank will receive
dividends in respect of the Common Stock held by the Bank. See "Certain
Transactions Constituting the Formation--Benefits to the Bank and Its
Affiliates".
BUSINESS AND STRATEGY
The Company's principal business objective is to acquire, hold and
manage Mortgage Assets that will generate net income for distribution to
stockholders. The Company expects that all of its Mortgage Assets will be
acquired from the Bank or affiliates of the Bank as whole loans ("Mortgage
Loans") secured by first mortgages or deeds of trust on single-family (one- to
four-unit) residential real estate properties or by commercial real estate
properties. The Company may also from time to time acquire mortgage securities
that qualify as real estate assets under Section 856(c)(6)(B) of the Code that
are rated AA or higher by at least one nationally recognized independent rating
organization and that represent interests in or obligations backed by pools of
mortgage loans ("Mortgage-Backed Securities"). Mortgage loans underlying the
Mortgage-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located in the United States.
The Company expects to generate more than 75% of its gross income from
interest on mortgage assets and does not contemplate having less than 95% of
its income derived from sources other than mortgage assets, dividends, interest
and capital gains on sale of stocks or securities. In addition, the Company
will derive less than 30% of its gross income from the sale or other
disposition of mortgage assets (including interest on mortgages on real
property held less than four years) other than involuntarily converted or
foreclosed property and mortgage backed securities.
8
<PAGE> 14
Simultaneously with the consummation of the Offering, the Bank
will purchase shares of Common Stock for a price equal to $27.5 million. The
Company will use the aggregate proceeds of $55 million received in connection
with both the Offering and such sale of shares of Common Stock to the Bank to
purchase a portfolio of Mortgage Loans (the "Initial Portfolio") from the Bank.
If the Underwriters exercise their option to purchase additional Series A
Preferred Shares to cover over-allotments, the Bank will purchase additional
shares of Common Stock for a price equal to the aggregate public offering price
of the additional Series A Preferred Shares purchased pursuant to the
Underwriters' over-allotment option, and the Company will use the additional
proceeds from any such additional sales of Series A Preferred Shares and shares
of Common Stock to purchase additional Mortgage Loans of the types described in
"Business and Strategy--Description of Initial Portfolio". Simultaneously with
the consummation of the Offering (or upon the exercise by the Underwriters of
their over-allotment option), the Bank will also purchase additional shares of
Common Stock for a price equal to the aggregate amount of underwriting
commissions and expenses incurred by the Company in connection with the
Offering (including without limitation any underwriting commissions associated
with the exercise by the Underwriters of their over-allotment option) and all
expenses incurred by the Company in connection with its formation in order to
provide the Company with funds sufficient to pay such expenses. See "Use of
Proceeds".
On March 24, 1997, the pool of Mortgage Loans from which the Initial
Portfolio will be selected had an aggregate outstanding principal balance of
$64,141,000. Approximately 90% (measured by aggregate outstanding principal
balance) of such pool consists of Mortgage Loans secured solely by first
mortgages or deeds of trust on single-family (one- to four-unit) residential
properties ("Residential Mortgage Loans"). See "Business and
Strategy--Description of Initial Portfolio--Residential Mortgage Loans". The
remainder of such pool consists of Mortgage Loans secured by first mortgages or
deeds of trust on commercial real estate properties ("Commercial Mortgage
Loans"). See "Business and Strategy--Description of Initial
Portfolio--Commercial Mortgage Loans". The Bank will enter into servicing
agreements with respect to the Residential Mortgage Loans and the Commercial
Mortgage Loans (the "Servicing Agreements") pursuant to which it will service
the Mortgage Loans included in the Initial Portfolio and will be entitled to
receive fees in connection with the servicing of such Mortgage Loans. The Bank
in its role as servicer under the Servicing Agreements is hereinafter referred
to as the "Servicer". The Company will not receive income from servicing
loans. See "Business and Strategy--Servicing".
The Company and the Bank believe that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $55 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been
or will be obtained for purposes of the Offering. See "Risk Factors--No Third
Party Valuation of the Mortgage Loans; No Arm's-Length Negotiations with
Affiliates".
The Company will enter into an advisory agreement with the Bank (the
"Advisory Agreement") pursuant to which the Bank will administer the day-to-day
operations of the Company. The Bank in its role as advisor under the terms of
the Advisory Agreement is hereinafter referred to as the "Advisor". The Advisor
will be responsible for (i) monitoring the credit quality of Mortgage Assets
held by the Company, (ii) advising the Company with respect
9
<PAGE> 15
to the acquisition, management, financing and disposition of the Company's
Mortgage Assets and (iii) holding documents relating to the Mortgage Assets as
custodian on behalf of the Company. The Advisor may from time to time
subcontract all or a portion of its obligations under the Advisory Agreement to
one or more of its affiliates involved in the business of managing Mortgage
Assets. The Advisor may, with the approval of a majority of the Board of
Directors, as well as a majority of the Independent Directors, subcontract all
or a portion of its obligations under the Advisory Agreement to unrelated third
parties. The Advisor will not, in connection with the subcontracting of any of
its obligations under the Advisory Agreement, be discharged or relieved in any
respect from its obligations under the Advisory Agreement. The Advisor and its
personnel have substantial experience in mortgage finance and in the
administration of Mortgage Loans.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As
long as any Series A Preferred Shares remain outstanding, any decision by the
Company either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a majority of the Independent Directors. The Advisor will be entitled to
receive an annual advisory fee equal to $125,000. See "Management--The
Advisor".
See "Certain Transactions Constituting the Formation--Benefits to the
Bank and Its Affiliates" for information regarding the aggregate amounts
payable to the Bank and its affiliates in connection with the Offering and the
transactions to be entered into in connection with the Offering.
The Company's Board of Directors is composed of five members, two of
whom will be Independent Directors. An "Independent Director" is a director who
is not a current director, officer or employee of the Company, D&N, the Bank or
any affiliate of the Bank or of any other person or persons that, in the
aggregate, own more than one percent of the outstanding common stock of D&N.
Certain actions by the Company require the prior approval of a majority of
Independent Directors. So long as there are only two Independent Directors, any
action that requires the approval of a majority of the Independent Directors
must be approved by both Independent Directors. Pursuant to the Certificate of
Designation establishing the Series A Preferred Shares, the Independent
Directors are required to take into account the interests of the holders of
both the Series A Preferred Shares and the Common Stock in assessing the
benefit to the Company of any proposed action requiring their approval. The
Company currently has four officers. The Company has no other employees and
does not anticipate that it will require additional employees. See
"Management".
The Company may from time to time purchase additional Mortgage Loans
or interests in Mortgage Loans out of proceeds received in connection with the
repayment or disposition of Mortgage Loans or the issuance of additional shares
of Common Stock or Preferred Stock. Additional shares of Preferred Stock
ranking senior to the Series A Preferred Shares may not be issued by the
Company without the approval of holders of at least 66 2/3% of the outstanding
10
<PAGE> 16
Series A Preferred Shares. Additional shares of Preferred Stock ranking on a
parity with the Series A Preferred Shares may not be issued by the Company
without the approval of a majority of the Independent Directors. See
"Description of Series A Preferred Shares--Voting Rights" and "-- Independent
Director Approval". The Company does not currently intend to issue any
additional shares of Preferred Stock unless it simultaneously issues additional
shares of Common Stock to the Bank, and the aggregate proceeds to be received
from such issuance of Common Stock approximately equals the sum of the
aggregate offering price of such additional Preferred Stock and the Company's
expenses (including any underwriting commissions or placement fees) incurred in
connection with the issuance of such additional shares of Preferred Stock. It
is currently anticipated that the Company will issue additional shares of
Preferred Stock if such issuance would provide the Bank with the most
cost-effective means of raising capital for bank regulatory purposes at the
time. See "Certain Transactions Constituting the Formation--Benefits to the
Bank and Its Affiliates".
The Company currently anticipates that all of the Mortgage Loans that
it may acquire in the future will be purchased from the Bank and affiliates of
the Bank. No arrangements or procedures are currently in place regarding the
acquisition by the Company of Mortgage Loans from unaffiliated third parties.
The Company expects that any additional Mortgage Loans acquired by the Company
will be whole loans, will represent first lien positions, will be acquired on a
basis consistent with secondary market standards and will have been originated
and underwritten in conformity with standards generally applied by the Bank or
affiliates of the Bank at the time the Mortgage Loans were originated. The
Company currently intends to maintain approximately 90% of its portfolio of
Mortgage Assets in Residential Mortgage Loans and approximately 10% of its
portfolio in Commercial Mortgage Loans. The Company does not contemplate
ownership of property other than mortgage assets and Mortgage-Backed Securities
and does not contemplate ownership of 10% or more of the outstanding voting
securities of any one issuer. The Company's current policy is not to
acquire any Commercial Mortgage Loan if such Commercial Mortgage Loan would
constitute more than 5% of the total book value of the Mortgage Assets of the
Company at the time of its acquisition. The Company's current policy prohibits
the acquisition of any Mortgage Loan or any interest in a Mortgage Loan (other
than an interest resulting from the acquisition of Mortgage-Backed Securities),
which Mortgage Loan (i) is delinquent in the payment of principal or interest;
(ii) is or was at any time during the preceding 12 months (a) Classified, (b)
in Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) has been, more than once during the preceding 12 months,
more than 30 days past due in the payment of principal or interest. Mortgage
Loans acquired by the Company in the future will be whole loans owned by the
Bank or an affiliate of the Bank. Loans that are in Nonaccrual Status are
generally loans that are past due 90 days or more in principal or interest and
Classified loans are troubled loans which are deemed substandard or doubtful
and where the full collectibility of principal and interest on such loan is
doubtful.
As a newly-formed entity, the Company has no prior operating history.
As of the date hereof, it has $1,000 in assets, $1,000 in stockholder's equity
and no indebtedness. Immediately after the issuance by the Company of the
Series A Preferred Shares to the public and the Common Stock to the Bank and
the purchase by the Company of the Initial Portfolio, the Company (assuming
that (i) the Underwriters' over-allotment option is not exercised and (ii)
there are $[ ] in aggregate offering and organizational expenses) will
have $55 million in Mortgage Assets, $27.5 million of stated capital
attributable to the Series A Preferred Shares, $[8.65] million
11
<PAGE> 17
of stated capital attributable to the Common Stock and $[18.85] million of
additional paid-in capital. See "Capitalization".
TAX STATUS OF THE COMPANY
The Company will elect to be taxed as a REIT under Sections 856
through 860 of the Code, commencing with its taxable year ending December 31,
1997. As a REIT, the Company generally will not be subject to federal income
tax on net income and capital gains that it distributes to the holders of its
Common Stock and Preferred Stock, including the Series A Preferred Shares.
A REIT is subject to a number of organizational and operational
requirements, including a requirement that it currently distribute to
stockholders at least 95% of its "REIT taxable income". Notwithstanding
qualification for taxation as a REIT, the Company may be subject to federal,
state and/or local tax. See "Risk Factors--Tax Risks" and "Federal Income Tax
Considerations".
RISK FACTORS
Prospective investors should carefully consider the following
information in conjunction with the other information contained in this
Prospectus before purchasing Series A Preferred Shares in the Offering.
NO OPERATING HISTORY
The Company is a newly organized corporation with no operating history
and no revenues to date.
DEPENDENCE UPON BANK AS ADVISOR AND SERVICER
The Company will be dependent for the selection, structuring and
monitoring of its Mortgage Assets on the diligence and skill of its officers
(all of whom are also officers of the Bank or its affiliates) and the officers
and employees of the Bank, as Advisor. See "Management". In addition, the
Company will be dependent upon the expertise of the Bank, as Servicer, for the
servicing of its Mortgage Loans. The Advisor may subcontract all or a portion
of its obligations under the Advisory Agreement, and the Servicer may
subcontract all or a portion of its obligations under the Servicing Agreements,
to one or more affiliates, and under certain conditions to non-affiliates,
involved in the business of managing or servicing, as the case may be, Mortgage
Assets. In the event the Advisor or the Servicer subcontracts its obligations
in such a manner, the Company will be dependent upon the subcontractor to
provide any such services. See "Management--The Advisor" and "Business and
Strategy--Servicing".
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RELATIONSHIP WITH THE BANK AND ITS AFFILIATES; CONFLICTS OF INTEREST
The Bank and its affiliates are involved in virtually every aspect of
the Company's existence. The Bank is the sole holder of the Common Stock of the
Company and administers the day-to-day activities of the Company in its role as
Advisor under the Advisory Agreement. The Bank also services the Company's
Mortgage Loans in its role as Servicer under each of the Servicing Agreements.
In addition, other than the Independent Directors, all of the officers and
directors of the Company are also officers and directors of the Bank or its
affiliates. As the holder of all of the outstanding voting stock of the
Company, the Bank will have the right to elect all directors of the Company,
including the Independent Directors.
The Bank and its affiliates may have interests which are not identical
to those of the Company. Consequently, conflicts of interest may arise with
respect to transactions, including without limitation, the Company's
acquisition of the Initial Portfolio; future acquisitions of Mortgage Loans
from the Bank or its affiliates; servicing of Mortgage Loans, particularly with
respect to Mortgage Loans that become Classified or placed in Nonaccrual Status
or which have been, more than once during the preceding twelve months, more
than 30 days past due in the payment of principal and interest; future
dispositions of Mortgage Loans to D&N and the Bank or any of their non-bank
subsidiaries; and the modification of the Advisory Agreement or the Servicing
Agreements.
For example, conflicts of interest may arise between the Bank and the
Company with respect to the Commercial Mortgage Loans included in the Initial
Portfolio. The Company's interest will be limited to its interest in the
Commercial Mortgage Loan, but the Bank may have other interests as a result of
the Bank's overall relationship with the mortgagor in the course of its
commercial lending business. In addition, certain of the Commercial Mortgage
Loans are cross-collateralized with other credit facilities with the Bank. As
a result of the Bank having a relationship with the mortgagor of a Commercial
Mortgage Loan, including as lender with respect to other outstanding loans to
such mortgagor, the Bank, in its role as Advisor and Servicer, may be subject
to conflict with respect to such Commercial Mortgage Loan, in the event that
such Commercial Mortgage Loan becomes Classified or placed in Nonaccrual Status
or otherwise past due in the payment of principal and interest. As a result of
such conflict, the Company may hold a Commercial Mortgage Loan for a shorter or
longer period of time than would otherwise be the case if the Bank were not the
Servicer of the Commercial Mortgage Loan or the Advisor to the Company.
It is the intention of the Company, D&N and the Bank that any
agreements and transactions between the Company, on the one hand, and D&N, the
Bank or their affiliates, on the other hand, are fair to all parties and
consistent with market terms, including the prices paid and received for
Mortgage Loans, including those in the Initial Portfolio, on their acquisition
or disposition by the Company or in connection with the servicing of such
Mortgage Loans. The requirement in the Certificate of Designation establishing
the Series A Preferred Shares that certain actions of the Company be approved
by a majority of the Independent Directors is also intended to ensure fair
dealings between the Company, D&N, the Bank and their respective affiliates.
However, there can be no assurance that such agreements or transactions will be
on
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terms as favorable to the Company as those that could have been obtained from
unaffiliated third parties. See "Business and Strategy--Management Policies and
Programs--Conflict of Interest Policies".
RISK OF AUTOMATIC EXCHANGE
A decline in the performance and capital levels of the Bank or the
placement of the Bank into conservatorship or receivership could result in the
exchange of the Series A Preferred Shares for Bank Preferred Shares, which
would be an investment in the Bank and not in the Company. As a result,
holders of Series A Preferred Shares would become preferred stockholders of the
Bank at a time when the Bank's financial condition was deteriorating or when
the Bank had been placed into conservatorship or receivership. An investment
in the Bank is also subject to certain risks that are distinct from the risks
associated with an investment in the Company. For example, an investment in
the Bank would involve risks relating to the capital levels of, and other
regulatory requirements applicable to, the Bank and the performance of
the Bank's loan portfolio. An investment in the Bank is also subject to the
general risks inherent in equity investments in depository institutions. In
the event of a liquidation of the Bank, the claims of depositors and secured,
senior, general and subordinated creditors of the Bank would be entitled to a
priority of payment over the claims of holders of equity interests such as the
Bank Preferred Shares. As a result, if the Bank were to be placed into
receivership after the Automatic Exchange or if the Automatic Exchange were to
occur after receivership of the Bank, the holders of the Bank Preferred Shares
likely would receive, if anything, substantially less than the holders of the
Series A Preferred Shares would have received had the Series A Preferred Shares
not been exchanged for Bank Preferred Shares. Potential investors in the
Series A Preferred Shares should carefully consider the risks with respect to
an investment in the Bank set forth under "Certain Information Regarding the
Bank--Risk Factors and Other Considerations". See also "Description of Series
A Preferred Shares--Automatic Exchange".
Although the Series A Preferred Shares will be listed on the Nasdaq
National Market, the Bank does not intend to apply for listing of the Bank
Preferred Shares, for which the Series A Preferred Shares will be exchanged
automatically on a one-for-one basis upon the occurrence of the Automatic
Exchange, on any national securities exchange or for quotation of the Bank
Preferred Shares through the Nasdaq System. Consequently, there can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares, if issued, or that an active public market for the Bank Preferred
Shares would develop or be maintained.
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE COMPANY
Because the Company is a subsidiary of the Bank, regulatory authorities
will have the right to examine the Company and its activities. Under certain
circumstances, including any determination that the Bank's relationship to the
Company results in an unsafe and unsound banking practice, such regulatory
authorities will have the authority to restrict the ability of the Company to
transfer assets, to make distributions to its stockholders (including dividends
to the holders of Series A Preferred Shares, as described below), or to redeem
shares of Preferred Stock,
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or even to require the Bank to sever its relationship with or divest its
ownership of the Company. Such actions could potentially result in the
Company's failure to qualify as a REIT. See "-- Tax Risks".
Payment of dividends on the Series A Preferred Shares could also be
subject to regulatory limitations if the Bank becomes "undercapitalized" for
purposes of the OTS prompt corrective action regulations, which is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1
risk-based capital ratio of less than 4.0% and a core capital (or leverage)
ratio of less than 4.0%. At December 31, 1996, the Bank's total risk-based
capital ratio was 9.94%, its Tier 1 risk-based capital ratio was 8.72% and its
core capital (or leverage) ratio was 5.11%. Such ratios, adjusted to give
effect to the sale of Series A Preferred Shares in the Offering, would have
been 13.10%, 11.87% and 6.84%, respectively.
If the Automatic Exchange occurs, the Bank would likely be prohibited
from paying dividends on the Bank Preferred Shares. In all circumstances
following the Automatic Exchange, the Bank's ability to pay dividends would be
subject to various restrictions under OTS regulations.
Furthermore, in the event the Bank is placed into conservatorship or
receivership (whether before or after the Automatic Exchange), the Bank would
likely be unable to pay dividends on the Bank Preferred Shares. In addition,
in the event of a liquidation of the Bank, the claims of the Bank's depositors
and of its secured, senior, general and subordinated creditors would be
entitled to a priority of payment over the dividend and other claims of holders
of equity interests such as the Bank Preferred Shares issued pursuant to the
Automatic Exchange.
Under OTS regulations, the ability of thrift institutions such as the
Bank to make "capital distributions" (defined to include payment of dividends,
stock repurchases, cash-out mergers and other distributions charged against the
capital accounts of an institution) varies depending primarily on the
institution's earnings and regulatory capital levels. While the Company
believes that dividends on the Series A Preferred Shares should not be
considered "capital distributions" for this purpose, there can be no assurances
that the OTS would agree with this position. However, without addressing the
issue of whether dividends on the Series A Preferred Shares are "capital
distributions" subject to the regulations, in a similar situation the OTS has
indicated that it would not object to the Company's payment of quarterly
dividends on the Series A Preferred Shares in an amount up to the amount of the
Company's net income for that quarter. The Company currently expects that its
net income will be in excess of amounts needed to pay dividends on the Series A
Preferred Shares. See "Business and Strategy--Dividends".
Dividends on the Series A Preferred Shares in excess of the Company's
net income could be treated as "capital distributions" by the OTS, in which
case the Company's payment of such dividends would be subject to restrictions
under the OTS capital distribution regulations. Under these regulations,
institutions are divided into tiers. Tier 1 institutions are those in
compliance with their "fully phased-in" capital requirements and which have not
been notified by the OTS that they are "in need of more than normal
supervision". Tier 1 institutions may make capital distributions without
regulatory approval of up to the greater of (i) 100% of net income for the
calendar year to date, plus up to one-half of the institution's surplus
capital (i.e., the excess of capital over the fully phased-in requirement) at
the beginning of the calendar year in which the
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distribution is made or (ii) 75% of net income for the most recent four
quarters. Tier 1 institutions that make capital distributions under the
foregoing rules must continue to meet the applicable capital requirements on a
pro forma basis after giving effect to such distributions. Tier 1 institutions
may seek OTS approval to pay dividends beyond these amounts.
The category of Tier 2 institutions, which are defined as institutions
that are in compliance with their current, but not their "fully phased-in"
capital requirements, is no longer relevant because all deductions from capital
requirements have been fully phased-in as of July 1, 1996.
Tier 3 institutions have capital levels below their current required
minimum levels and may not make any capital distributions without the prior
written approval of the OTS.
As of December 31, 1996, the Bank had sufficient levels of capital to
be a Tier 1 institution. However, the OTS retains discretion under its capital
distribution regulations to treat an institution that it believes is in need of
more than normal supervision (after written notice) as a Tier 3 institution.
The OTS retains general discretion to prohibit any otherwise permitted
capital distribution on general safety and soundness grounds and must be given
30 days advance notice of all capital distributions.
DIVIDENDS NOT CUMULATIVE
In order to qualify as Tier 1 capital, dividends on the Series A
Preferred Shares are not cumulative. Consequently, if the Board of Directors
does not declare a dividend on the Series A Preferred Shares for any quarterly
period, the holders of the Series A Preferred Shares would not be entitled to
recover such dividend whether or not funds are or subsequently became
available. The Board of Directors may determine, in its business judgment,
that it would be in the best interests of the Company to pay less than the full
amount of the stated dividends on the Series A Preferred Shares or no dividends
for any quarter notwithstanding that funds are available. Factors that would
generally be considered by the Board of Directors in making this determination
are the Company's financial condition and capital needs, the impact of
legislation and regulations as then in effect or as may be proposed, economic
conditions, and such other factors as the Board may deem relevant.
Notwithstanding the foregoing, to remain qualified as a REIT, the Company must
distribute annually at least 95% of its "REIT taxable income" (not including
capital gains) to stockholders. See "--Tax Risks," below and "Federal Income
Tax Considerations--Taxation of the Company--Organizational Requirements".
INTEREST RATE RISK
The Company's income will consist primarily of interest payments on
the Mortgage Loans held by it. The Company anticipates that approximately 60%
of its Commercial Mortgage Loans and approximately 50% of its Residential
Mortgage Loans will bear interest at adjustable rates. If there is a decline
in interest rates (as measured by the indices upon which the interest rates of
the Mortgage Loans are based), then the Company will experience a decrease in
income available
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to be distributed to its stockholders. In such an interest rate environment,
the Company may experience an increase in prepayments on its Mortgage Loans
and may find it more difficult to purchase additional Mortgage Loans bearing
rates sufficient to support payment of the dividends on the Series A Preferred
Shares. In addition, certain Residential Mortgage Loan products which the
Company will hold could allow borrowers in such an interest rate environment to
convert an adjustable rate mortgage to a fixed rate mortgage, thus "locking in"
a low fixed interest rate. Because the rate at which dividends are required to
be paid on the Series A Preferred Shares is fixed, there can be no assurance
that an interest rate environment in which there is a significant decline in
interest rates would not adversely affect the Company's ability to pay
dividends on the Series A Preferred Shares.
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by,
among other things, a decline in real estate values. In the event the Mortgage
Assets held by the Company become nonperforming, the Company may not have funds
sufficient to pay dividends on the Series A Preferred Shares. Factors that
could affect the value of the Mortgage Assets held by the Company include the
following:
Geographic Concentration. Certain geographic regions of the United
States may from time to time experience natural disasters or weaker regional
economic conditions and housing markets, and, consequently, may experience
higher rates of loss and delinquency on Mortgage Loans generally. Any
concentration of the Mortgage Loans in such a region may present risks in
addition to those present with respect to Mortgage Loans generally.
Substantially all of the residential properties underlying the Company's
Residential Mortgage Loans included in the Initial Portfolio are located in
Michigan. All of the commercial properties underlying its Commercial Mortgage
Loans are located in Michigan. Both these sets of Mortgage Loans may be
subject to a greater risk of default than other comparable Mortgage Loans in
the event of adverse economic, political or business developments or natural
hazards that may affect this region and the ability of property owners in this
region to make payments of principal and interest on the underlying mortgages.
The Company complies with general hazard insurance policy requirements of
Fannie Mae ("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC").
The Company will not maintain any special hazard insurance policies which could
mitigate any damages caused by natural disasters (such as floods) which may
occur in this region. In the event of any such natural disaster, the Company's
ability to pay dividends on the Series A Preferred Shares could be adversely
affected. See "Business and Strategy-- Description of Initial
Portfolio--Geographic Distribution" herein for further information regarding
the geographic concentration of the Mortgage Loans in the Initial Portfolio.
No Credit Enhancement or Special Hazard Insurance. As described in
"--Geographic Concentration" above, the Company generally does not intend to
obtain credit enhancements such as mortgagor bankruptcy insurance or to obtain
special hazard insurance for its Mortgage Loans, other than standard hazard
insurance, which will in each case only relate to individual Mortgage Loans.
Accordingly, during the time it holds Mortgage Loans for which third party
insurance is not obtained, the Company will be subject to risks of borrower
defaults and bankruptcies and
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special hazard losses that are not covered by standard hazard insurance (such
as those occurring from floods unless flood insurance has been obtained on an
individual basis). In addition, in the event of a default on any Mortgage Loan
held by the Company resulting from declining property values or worsening
economic conditions, among other factors, the Company would bear the risk of
loss of principal to the extent of any deficiency between (i) the value of the
related mortgaged property, plus any payments from an insurer (or guarantor in
the case of Commercial Mortgage Loans) and (ii) the amount owing on the
Mortgage Loan.
Special Risks Relating to Commercial Mortgage Loans. The Company
anticipates that approximately 10% (measured by aggregate outstanding principal
amount) of its portfolio of Mortgage Assets on an ongoing basis will consist of
Commercial Mortgage Loans. Commercial Mortgage Loans have certain distinct risk
characteristics. The Company's current policy is not to acquire any Commercial
Mortgage Loan if such Commercial Mortgage Loan would constitute more than 5% of
the total book value of the Mortgage Assets of the Company at the time of its
acquisition. Commercial Mortgage Loans generally lack standardized terms,
which may complicate their structure. Commercial real estate properties
themselves tend to be unique and are more difficult to value than residential
real estate properties. Commercial Mortgage Loans also tend to have shorter
maturities than Residential Mortgage Loans and may not be fully amortizing,
meaning that they may have a significant principal balance or "balloon" payment
due on maturity. In addition, commercial real estate properties are generally
subject to relatively greater environmental risks than non-commercial
properties and to the corresponding burdens and costs of compliance with
environmental laws and regulations. See "--Environmental Considerations".
Also, there may be costs and delays involved in enforcing rights of a property
owner against tenants in default under the terms of leases with respect to
commercial properties. For example, tenants may seek the protection of the
bankruptcy laws, which could result in termination of lease contracts.
REAL ESTATE MARKET CONDITIONS
The results of the Company's operations will be affected by various
factors, many of which are beyond the control of the Company, such as: (i)
local and other economic conditions affecting real estate value; (ii) the
ability of tenants to make lease payments; (iii) the ability of a property to
attract and retain tenants, which may in turn be affected by local conditions
such as an oversupply of space or a reduction in demand for rental space in the
area, the attractiveness of properties to tenants, competition from other
available space, the ability of the owner to pay leasing commissions, provide
adequate maintenance and insurance, pay tenant improvement costs and make other
tenant concessions; (iv) interest rate levels and the availability of credit to
refinance such loans at or prior to maturity; and (v) increased operating costs,
including energy costs, real estate taxes and costs of compliance with
environmental controls and regulations. The results of the Company's operations
depend on, among other things, the level of interest income generated by the
Company's Mortgage Assets, the market value of such Mortgage Assets and the
supply of and demand for such Mortgage Assets. Further, no assurance can be
given that the values of the properties securing the Mortgage Loans included in
the Company's Initial Portfolio have remained or will remain at the levels
existing on the dates of origination of such Mortgage Loans.
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DELAYS IN LIQUIDATING DEFAULTED MORTGAGE LOANS
Even assuming that the mortgaged properties underlying the Mortgage
Loans held by the Company provide adequate security for such Mortgage Loans,
substantial delays could be encountered in connection with the liquidation of
defaulted Mortgage Loans, with corresponding delays in the receipt of related
proceeds by the Company. An action to foreclose on a mortgaged property
securing a Mortgage Loan is regulated by state statutes and rules and is
subject to many of the delays and expenses of other lawsuits if defenses or
counterclaims are interposed, sometimes requiring several years to complete.
Furthermore, in some states an action to obtain a deficiency judgment is not
permitted following a nonjudicial sale of a mortgaged property. In the event of
a default by a mortgagor, these restrictions, among other things, may impede
the ability of the Company to foreclose on or sell the mortgaged property or to
obtain proceeds sufficient to repay all amounts due on the related Mortgage
Loan. In addition, the Servicer will be entitled to deduct from collections
received all expenses reasonably incurred in attempting to recover amounts due
and not yet repaid on liquidated Mortgage Loans, including legal fees and costs
of legal action, real estate taxes and maintenance and preservation expenses,
thereby reducing amounts available to the Company.
LEGAL CONSIDERATIONS
Applicable state laws may regulate interest rates and other charges
and require certain disclosures to borrowers. In addition, most states have
other laws, public policy and general principles of equity relating to the
protection of consumers, unfair and deceptive practices and practices which may
apply to the servicing and collection of the Mortgage Loans. Depending on the
provisions of the applicable law and the specific facts and circumstances
involved, violations of these laws, policies and principles may limit the
ability of the Company to collect all or part of the principal of or interest
on the Mortgage Loans, may entitle the borrower to a refund of amounts
previously paid and, in addition, could subject the Company to damages and
administrative sanctions.
ENVIRONMENTAL CONSIDERATIONS
In the event that the Company is forced to foreclose on a defaulted
Mortgage Loan to recover its investment in such Mortgage Loan, the Company may
be subject to environmental liabilities in connection with the underlying real
property which could exceed the value of the real property. Although the
Company intends to exercise due diligence to discover potential environmental
liabilities prior to the acquisition of any property through foreclosure,
hazardous substances or wastes, contaminants, pollutants or sources thereof (as
defined by state and federal laws and regulations) may be discovered on
properties during the Company's ownership or after a sale thereof to a third
party. If such hazardous substances are discovered on a property which the
Company has acquired in foreclosure or otherwise, the Company may be required
to remove those substances and clean up the property. There can be no
assurance that in such a case the Company would not incur full recourse
liability for the entire cost of any removal and clean-up, that the cost of
such removal and clean-up would not exceed the value of the property or that
the Company could recoup any of such costs from any third party. The Company
may also be liable
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to tenants and other users of neighboring properties. In addition, the Company
may find it difficult or impossible to sell the property prior to or following
any such clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and
operating policies and strategies of the Company, certain of which are
described in this Prospectus. These policies may be amended or revised from
time to time at the discretion of the Board of Directors (in certain
circumstances subject to the approval of a majority of the Independent
Directors) without a vote of the Company's stockholders, including holders of
the Series A Preferred Shares. The ultimate effect of any change in the
policies and strategies set forth in this Prospectus on a holder of Series A
Preferred Shares may be positive or negative. See "Business and
Strategy--Management Policies and Programs".
TAX RISKS
Adverse Consequences of Failure to Qualify as a REIT. The Company
intends to operate so as to qualify as a REIT under the Code. Although the
Company believes that it will be owned and organized and will operate in such a
manner, and Coopers & Lybrand L.L.P. will render certain opinions, described
under "Federal Income Tax Considerations" below, regarding the Company's
qualification as a REIT, no assurance can be given that the Company will be
able to operate in such a manner so as to qualify as a REIT or to remain so
qualified. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial or
administrative interpretations. The determination of various factual matters
and circumstances, not entirely within the Company's control and not addressed
by the opinion of Coopers & Lybrand L.L.P., may affect the Company's ability to
qualify as a REIT. Although the Company is not aware of any proposal in
Congress to amend the tax laws in a manner that would materially and adversely
affect the Company's ability to operate as a REIT, no assurance can be given
that new legislation or new regulations, administrative interpretations or
court decisions will not significantly change the tax laws in the future with
respect to qualification as a REIT or the federal income tax consequences of
such qualification.
The Company is relying on the opinion of Coopers & Lybrand L.L.P., tax
advisor to the Company, regarding various issues affecting the Company's
ability to qualify, and retain qualification, as a REIT. Such opinion is not
binding on the Internal Revenue Service ("IRS").
If in any taxable year the Company fails to qualify as a REIT, the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. As a result, the amount available for distribution to
the Company's stockholders would be reduced for the year or years involved. In
addition, unless entitled to relief under certain statutory provisions, the
Company would also be disqualified from treatment as a REIT for the four
taxable years following the year during which qualification was lost. A failure
of the Company to qualify as a REIT would not by itself give the Company the
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right to redeem the Series A Preferred Shares. See "Description of Series A
Preferred Shares--Redemption".
Notwithstanding that the Company currently intends to operate in a
manner designed to qualify as a REIT, future economic, market, legal, tax or
other considerations may cause the Company to determine that it is in the best
interest of the Company and the holders of its Common Stock and Preferred Stock
to revoke the REIT election. As long as any Series A Preferred Shares are
outstanding, any such determination by the Company may not be made without the
approval of a majority of the Independent Directors. The tax law prohibits the
Company from electing treatment as a REIT for the four taxable years following
the year of such revocation. See "Federal Income Tax Considerations".
REIT Requirements with Respect to Stockholder Distributions. To
obtain favorable tax treatment as a REIT qualifying under the Code, the Company
generally will be required each year to distribute as dividends to its
stockholders at least 95% of its "REIT taxable income" (excluding capital
gains). Failure to comply with this requirement would result in the Company's
income being subject to tax at regular corporate rates. In addition, the
Company will be subject to a 4% nondeductible excise tax on the amount, if any,
by which certain distributions considered as paid by it with respect to any
calendar year are less than the sum of 85% of its ordinary income for the
calendar year, 95% of its capital gains net income for the calendar year and
any undistributed taxable income from prior periods.
Redemption Upon Occurrence of a Tax Event. At any time following the
occurrence of a Tax Event (as defined under "Description of Series A Preferred
Shares--Redemption"), even if such Tax Event occurs prior to [ ],
2002, the Company will have the right to redeem the Series A Preferred Shares
in whole but not in part. See "Description of Series A Preferred
Shares--Redemption". Upon the occurrence of a Tax Event, should the Company not
redeem the Series A Preferred Shares, the Company's ability to pay dividends on
the Series A Preferred Shares may be adversely affected.
Automatic Exchange upon Occurrence of the Exchange Event. Upon the
occurrence of the Exchange Event and a Directive, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis into
Bank Preferred Shares. See "Description of Series A Preferred
Shares--Automatic Exchange". Assuming, as is anticipated to be the case, that
the Bank Preferred Shares will be nonvoting, the Automatic Exchange will be
taxable, and each holder of Series A Preferred Shares will have a gain or loss,
as the case may be, measured by the difference between the basis of such holder
in the Series A Preferred Shares and the fair market value of the Bank
Preferred Shares received in the Automatic Exchange. Assuming that such
holder's Series A Preferred Shares were held for more than one year prior to
the Automatic Exchange and held as capital assets, any gain or loss will be
long-term capital gain or loss. See "Federal Income Tax Considerations--Tax
Treatment of Automatic Exchange".
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RISK ASSOCIATED WITH LEVERAGE
Although the Company does not currently intend to incur any
indebtedness in connection with the acquisition and holding of Mortgage Loans,
the Company may do so at any time (although indebtedness in excess of 20% of
the aggregate amount of net proceeds received in connection with the issuance
of Preferred Stock and Common Stock may not be incurred without the approval of
a majority of the Independent Directors of the Company). To the extent the
Company were to change its policy with respect to the incurrence of
indebtedness, the Company would be subject to risks associated with leverage,
including, without limitation, changes in interest rates, prepayment risk and
risks of various hedging strategies.
NO THIRD PARTY VALUATION OF THE MORTGAGE LOANS; NO ARM'S-LENGTH NEGOTIATIONS
WITH AFFILIATES
The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $55 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio were
obtained for purposes of the Offering, and there can be no assurance that the
fair value of the Initial Portfolio does not differ from the purchase price
payable by the Company.
In addition, it is not anticipated that third party valuations will be
obtained in connection with future acquisitions and dispositions of Mortgage
Loans even in circumstances where an affiliate of the Company is selling the
Mortgage Loans to, or purchasing the Mortgage Loans from, the Company.
Accordingly, although the Company, the Bank and D&N intend that future
acquisitions or dispositions of Mortgage Loans will be on a fair value basis,
there can be no assurance that the consideration to be paid (or received) by
the Company to (or from) the Bank, D&N or any of their respective affiliates in
connection with future acquisitions or dispositions of Mortgage Loans will not
differ from the fair value of such Mortgage Loans.
NO PRIOR MARKET FOR SERIES A PREFERRED SHARES
Prior to the Offering, there has been no public market for the Series
A Preferred Shares and there can be no assurance that an active trading market
will develop or be sustained or that the Series A Preferred Shares may be
resold at or above the initial public offering price.
THE COMPANY
The Company is a newly-formed Delaware corporation created for the
purpose of acquiring, holding and managing Mortgage Assets that will generate
net income for distribution to stockholders. The Company has been formed by the
Bank to provide the Bank with a means of raising capital for bank regulatory
purposes. The Company is not a financial institution or insurance company for
purposes of Section 856(a) of the Code. The Series A Preferred Shares will be
treated as capital for the Bank for regulatory purposes. The issuance of the
Series A Preferred Shares by the Company is a more cost-effective means of
raising capital for the Bank than if the Bank were to
22
<PAGE> 28
issue preferred stock itself, because of the Company's ability to deduct for
income tax purposes the dividends payable on the Series A Preferred Shares as a
result of the Company's qualification as a REIT.
The Company anticipates that approximately 90% of its portfolio of
Mortgage Assets will represent interests in Residential Mortgage Loans and that
approximately 10% of its portfolio of Mortgage Assets will represent interests
in Commercial Mortgage Loans (in each case measured by aggregate outstanding
principal amounts).
The Company expects that all of its Mortgage Assets will be acquired
as whole loans from the Bank or affiliates of the Bank. The Bank will
administer the day-to-day operations of the Company in its role as Advisor
under the Advisory Agreement. The Company will elect to be subject to tax as a
REIT under the Code, and will generally not be subject to federal income tax to
the extent that it distributes its earnings to its stockholders and maintains
its qualification as a REIT.
All of the Common Stock of the Company is owned by the Bank, and all
of the common stock of the Bank is owned by D&N. D&N is a thrift institution
holding company organized under the laws of Delaware in 1988 and registered
under the Home Owners Loan Act of 1933, as amended. The Bank conducts its
business through a network of 37 full-service community banking offices,
including its main office in Hancock, Michigan, seven savings agency offices
which provide depository services and four mortgage banking offices. As of
December 31, 1996, the Bank had total assets of $1.47 billion. For the year
ended December 31, 1996, the Bank had a return on average assets of 0.67%.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N. NO OBLIGATION OF THE COMPANY IS
GUARANTEED BY THE BANK OR D&N.
The Series A Preferred Shares will be exchanged automatically on a
one-for-one basis for Bank Preferred Shares upon the occurrence of the
Automatic Exchange. CONSEQUENTLY, AN INVESTMENT IN SERIES A PREFERRED SHARES
COULD BE REPLACED BY AN INVESTMENT IN BANK PREFERRED SHARES AT A TIME WHEN THE
BANK'S FINANCIAL CONDITION IS DETERIORATING OR WHEN THE BANK HAS BEEN PLACED
INTO CONSERVATORSHIP OR RECEIVERSHIP. POTENTIAL INVESTORS IN THE SERIES A
PREFERRED SHARES, THEREFORE, SHOULD CAREFULLY CONSIDER THE DESCRIPTION OF THE
BANK SET FORTH UNDER "CERTAIN INFORMATION REGARDING THE BANK". See also
"Description of Series A Preferred Shares--Automatic Exchange".
For a further description of the operations of the Company, see
"Business and Strategy", "Management", "Risk Factors" and "Federal Income Tax
Considerations".
23
<PAGE> 29
USE OF PROCEEDS
The proceeds to the Company from the sale of the Series A Preferred
Shares offered hereby are expected to be $27.5 million (assuming the
Underwriters' over-allotment option is not exercised). Simultaneously with the
consummation of the Offering, the Bank will purchase shares of Common Stock for
a price equal to $27.5 million. The Company will use the aggregate proceeds of
$55 million received in connection with both the Offering and the sale of
shares of Common Stock to the Bank to purchase the Initial Portfolio from the
Bank. See "Business and Strategy".
If the Underwriters exercise their option to purchase additional
Series A Preferred Shares to cover over-allotments in the Offering, the Bank
will purchase additional shares of Common Stock for a price equal to the
aggregate initial public offering price of such additional Series A Preferred
Shares. The Company will use the additional proceeds from any such additional
sales of Series A Preferred Shares and shares of Common Stock to purchase
additional Mortgage Loans of the types described in "Business and
Strategy--Description of Initial Portfolio". The Company expects that it will
purchase any such additional Commercial and Residential Mortgage Loans within
six months from the exercise by the Underwriters of their over-allotment
option. Pending such purchase, the Company will invest such additional
proceeds in mortgage-backed securities or short-term money market investments.
Simultaneously with the consummation of the Offering, the Bank will
also purchase additional shares of Common Stock for a price equal to the
aggregate amount of underwriting commissions and expenses incurred by the
Company in connection with the Offering and all expenses incurred by the
Company in connection with its formation and the offering of the Series A
Preferred Shares (currently estimated by the Company to be approximately $[
] in the aggregate) in order to provide the Company with funds sufficient to
pay such expenses. Simultaneously with the consummation of any sale of
additional Series A Preferred Shares in connection with the exercise by the
Underwriters of their over-allotment option, the Bank will also purchase
additional shares of Common Stock for a price equal to the aggregate amount of
underwriting commissions and expenses incurred by the Company in connection
with the exercise of such overallotment option in order to provide the Company
with funds sufficient to pay such expenses.
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<PAGE> 30
The following table illustrates the use of proceeds by the Company
from the sale of the Series A Preferred Shares offered hereby (assuming the
Underwriters' over-allotment option is not exercised) and the sale of shares of
Common Stock to the Bank described above.
<TABLE>
<CAPTION>
<S> <C>
Gross proceeds from the Offering of
Series A Preferred Shares . . . . . . . . . . . . $27,500,000
Gross proceeds from the issuance of
shares of Common Stock to the Bank . . . . . . . . [ A ] [B+C+$27.5 M=A]
Public Offering Expenses:
Underwriting commissions . . . . . . . . . . . . [ B ]
Other expenses of the formation
and the Offering . . . . . . . . . . . . . . . . 325,000 (1)
Net proceeds to be applied to the
purchase of Mortgage Assets from
the Bank . . . . . . . . . . . . . . . . . . . . $55,000,000
===========
</TABLE>
---------------
(1) Assumes that expenses incurred by the Company in connection
with its formation and the Offering of the Series A Preferred
Shares, other than underwriting commissions, are $325,000. If
such expenses are in excess of $325,000, the Bank will purchase
additional shares of Common Stock for a purchase price equal to
such excess.
Neither the Bank nor any of its affiliates will receive any
transaction fees upon completion of the Offering, including any advance payment
in respect of servicing or advisory fees.
25
<PAGE> 31
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
April 4, 1997 (the date of the most recent audited financial statement of
the Company) and as adjusted to reflect (i) the consummation of the Offering
(assuming the Underwriters' over-allotment option is not exercised) and (ii)
the transactions described in "Certain Transactions Constituting The
Formation--The Formation" and the use of the net proceeds therefrom as
described under "Use of Proceeds".
<TABLE>
<CAPTION>
April 4, 1997
---------------------------------------
As
Actual Adjusted
------------------ ------------------
(In Thousands)
<S> <C> <C>
DEBT
Total long-term debt . . . . . . . . . . . . . . . . . $ --- $ ---
------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock, par value $25.00; 2,500,000
authorized, none issued and outstanding,
actual; and 2,500,000 shares authorized,
1,100,000 shares issued and outstanding, --- 27,500
as adjusted . . . . . . . . . . . . . . . . . . . . . .
Common Stock, par value $1.00 per share(1);
1,000 shares authorized, 1,000 shares issued and
outstanding, actual; and 250,000 shares authorized,
28,826 shares issued and outstanding, as adjusted . . . 8,648
Additional paid-in capital . . . . . . . . . . . . . . . 1 18,852
------- -------
Total stockholders' equity . . . . . . . . . . . . . . $ 1 $55,000
------- -------
TOTAL CAPITALIZATION . . . . . . . . . . . . . . . . . . . $ 1 $55,000
======= =======
</TABLE>
- -------------
(1) Company was formed with an initial capitalization of $1,000. Prior to
consummation of the Offering, the charter of the Company will be amended to
increase the authorized capital of the Company and to increase the par
value of the Common Stock to $300.00 per share. Since the par value per
share of the Preferred Stock equals the issue price of a Series A Preferred
Share, the full $27.5 million raised in the Offering will represent
Preferred Stock capital. The par value of the Common Stock will equal 30%
of its purchase price of $1,000 per share and, accordingly, the Bank will
be acquiring 28,826 shares of Common Stock upon the consummation of the
Offering for an aggregate purchase price of $28,826,250 (such number of
shares of Common Stock includes Common Stock acquired by the Bank in order
to provide sufficient funds to pay aggregate offering and organization
expenses, currently estimated by the Company to be approximately $325,000).
As a result of these issuances of Common Stock, the Common Stock
capital amount, upon consummation of the Offering, will equal $8,647,800.
The additional paid-in capital of $18,852,200 represents the
excess of the purchase price for the Common Stock over the par value of
such shares after deducting the aggregate amount of offering and
organization expenses.
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<PAGE> 32
BUSINESS AND STRATEGY
GENERAL
The Company's principal business objective is to acquire, hold and
manage Mortgage Loans that will generate net income for distribution to
stockholders. The Company does not expect to be in the business of selling or
trading mortgage assets. The Company will acquire the Initial Portfolio of
Mortgage Loans from the Bank for an aggregate purchase price of approximately
$50 million. See "Certain Transactions Constituting the Formation".
In order to preserve its status as a REIT under the Code,
substantially all of the assets of the Company will consist of Mortgage Loans
and other qualified REIT real estate assets of the type set forth in Section
856(c)(6)(B) of the Code. See "Federal Income Tax Considerations".
DIVIDENDS
The Company currently expects to pay an aggregate amount of dividends
with respect to its outstanding shares of capital stock equal to approximately
100% of the Company's "REIT taxable income" (excluding capital gains). In order
to remain qualified as a REIT, the Company must distribute annually at least
95% of its "REIT taxable income" (excluding capital gains) to stockholders. The
Company anticipates that none of the dividends on the Series A Preferred Shares
and none or no material portion of the dividends on the Common Stock will
constitute non-taxable returns of capital.
Dividends will be declared at the discretion of the Board of Directors
after considering the Company's distributable funds, financial requirements,
tax considerations and other factors. Because (i) the Mortgage Assets are
interest bearing, (ii) the Series A Preferred Shares represent only
approximately 50% of the Company's capitalization and (iii) the Company does
not anticipate incurring any indebtedness, the Company currently expects that
both its cash available for distribution and its "REIT taxable income" will be
in excess of amounts needed to pay dividends on the Series A Preferred Shares,
even in the event of a significant drop in interest rate levels. Accordingly,
the Company expects that it will, after paying the quarterly dividends on the
Series A Preferred Shares, pay dividends to holders of its Common Stock.
Assuming (i) the Mortgage Loans included in the Initial Portfolio are held for
the 12-month period following completion of the Offering, (ii) principal
repayments are reinvested in additional Mortgage Loans with characteristics
similar to those of the Mortgage Loans included in the Initial Portfolio and
(iii) interest rates remain constant during such 12-month period, the Company
anticipates that the Initial Portfolio will generate interest income of
approximately $3.9 million, after payment of servicing and advisory fees,
during such 12-month period. Since the aggregate annual dividend payment on the
Series A Preferred Shares is $[ ] million, based on the foregoing, the
Company anticipates that $[ ] million would be available for payment of
dividends on the Common Stock held by the Bank.
There are several limitations which restrict the Company's ability to
pay dividends on the Common Stock (none of which should adversely affect either
the ability of the Company to pay
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<PAGE> 33
dividends in respect of the Series A Preferred Shares or the ability of the
Company to maintain its status as a REIT). First, under the Company's current
dividend policy, the Company may not make any distribution in respect of the
Common Stock with respect to any year to the extent that, after taking into
account such proposed distribution, total cash or property distributions on the
Company's outstanding shares of Preferred Stock and Common Stock with respect
to that year would exceed 105% of the Company's "REIT taxable income"
(excluding capital gains) for that year plus net capital gains of the Company
for that year. This policy regarding the limitations on payment of dividends in
respect of Common Stock may not be modified without the approval of a majority
of the Independent Directors. Second, if the Company fails to declare and pay
full dividends on the Series A Preferred Shares in any dividend period, the
Company may not make any dividends or other distributions with respect to the
Common Stock until such time as dividends on all outstanding Series A Preferred
Shares have been (i) declared and paid for three consecutive dividend periods
and (ii) declared and paid or declared and a sum sufficient for the payment
thereof has been set apart for payment for the fourth consecutive dividend
period. See, "Description of Series A Preferred Shares--Dividends". Third,
Delaware law provides that dividends (as well as other distributions) may be
paid on the capital stock of the Company only out of (i) the Company's capital
surplus (i.e., the excess of the Company's net assets over the aggregate par
value of all shares of capital stock issued by the Company) and (ii) the
Company's net profits for the year in which the dividend is declared and for
the preceding year. Because the aggregate par value of the Series A Preferred
Shares and the outstanding shares of Common Stock will, upon consummation of
the Offering, equal $[ ] million (assuming the Underwriters' over-allotment
option is not exercised and there are $[ ] of offering and
organizational expenses), the amount of dividends which the Company could
legally pay on its Common Stock cannot exceed an amount which would cause the
Company's net assets to be less than $[ ] million.
The OTS prompt corrective action regulations prohibit thrift
institutions such as the Bank from making "capital distributions" (defined to
include a transaction that the OTS or FDIC determines, by order or regulation,
to be "in substance a distribution of capital") unless the institution is at
least "adequately capitalized" after the distribution. There can be no
assurances that either the OTS or the FDIC would not seek to restrict the
Company's payment of dividends on the Series A Preferred Shares under this
provision if the Bank were to fail to maintain its status as "adequately
capitalized". Currently, an institution is considered "adequately capitalized"
if it has a total risk-based capital ratio of at least 8.0%, a Tier 1
risk-based capital ratio of at least 4.0% and a leverage (or core capital)
ratio of at least 4.0%. At December 31, 1996, the Bank's total risk-based
capital ratio was 9.94%, Tier 1 risk-based capital ratio was 8.72% and core
capital (or leverage) ratio was 5.11%. Such ratios, adjusted to give effect to
the sale of Series A Preferred Shares in the Offering, would be 13.10%, 11.87%
and 6.84%, respectively. In addition, the Exchange Event may take place under
circumstances in which the Bank will not be considered "adequately capitalized"
for purposes of the OTS' prompt corrective action regulations. Thus, at the
time of the Automatic Exchange, the Bank would likely be prohibited from paying
dividends on the Bank Preferred Shares. Further, the Bank's ability to pay
dividends on the Bank Preferred Shares following the Automatic Exchange also
would be subject to various restrictions under OTS regulations and resolution
of the Bank's board of directors. See "Certain Information Regarding the
Bank--Restrictions on Bank Dividends". In the event that the Bank did pay
28
<PAGE> 34
dividends on the Bank Preferred Shares, such dividends would be paid out of the
Bank's capital surplus.
Under certain circumstances, including any determination that the
Bank's relationship to the Company results in an unsafe and unsound banking
practice, regulatory authorities will have the authority to issue an order which
restricts the ability of the Company to make dividend payments to its
stockholders.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity need will be to fund the acquisition
of additional Mortgage Loans as Mortgage Loans held by the Company are repaid.
The acquisition of such additional Mortgage Loans will be funded with the
proceeds of principal repayments on its portfolio of Mortgage Loans. The
Company does not anticipate that it will have any other material capital
expenditures. The Company believes that cash generated from the payment of
interest and principal on its Mortgage Loan portfolio will provide sufficient
funds to meet both operating requirements and payment of dividends by the
Company in accordance with the REIT Requirements for the foreseeable future.
GENERAL DESCRIPTION OF MORTGAGE ASSETS; INVESTMENT POLICY
Residential Mortgage Loans. The Company may from time to time acquire
both conforming and nonconforming Residential Mortgage Loans. Conforming
Residential Mortgage Loans comply with the requirements for inclusion in a loan
guarantee program sponsored by either the FHLMC or FNMA. Under current
regulations, the maximum principal balance allowed on conforming Residential
Mortgage Loans ranges from $214,600 for one-unit residential loans to $442,450
for four-unit residential loans. Nonconforming Residential Mortgage Loans
are Residential Mortgage Loans that do not qualify in one or more respects for
purchase by FNMA or FHLMC under their standard programs. The Company expects
that a majority of the nonconforming Residential Mortgage Loans it purchases
(including substantially all of those included in the Initial Portfolio) will
be nonconforming because they have original principal balances which exceed the
requirements for FHLMC or FNMA programs. A substantial portion of the Company's
nonconforming Residential Mortgage Loans are expected to meet the requirements
for sale to national private mortgage conduit programs or other investors in
the secondary mortgage market.
Each Residential Mortgage Loan will be evidenced by a promissory note
secured by a mortgage or deed of trust or other similar security instrument
creating a first lien on single-family (one- to four-unit) residential
properties. Residential real estate properties underlying Residential Mortgage
Loans consist of individual dwelling units, individual condominium units, two-
to four-family dwelling units, planned unit developments and townhouses.
29
<PAGE> 35
The Company currently expects that approximately 50% of the
Residential Mortgage Loans to be acquired by it will be adjustable rate
Mortgage Loans and that approximately 50% of the Residential Mortgage Loans
will be fixed rate Mortgage Loans.
Commercial Mortgage Loans. The Company may from time to time acquire
Commercial Mortgage Loans secured by apartment buildings, industrial and
warehouse properties, office buildings, retail space and shopping malls, hotels
and motels. The Company expects that substantially all of the Commercial
Mortgage Loans it acquires will be secured by real estate located in Michigan or
the Great Lakes area. Unlike Residential Mortgage Loans, Commercial Mortgage
Loans generally lack standardized terms. Although Commercial Mortgage Loans are
generally nonrecourse to the borrower, the Company anticipates that
substantially all of the Commercial Mortgage Loans that it will acquire will
either be recourse to the borrower or supported by a guarantee of an affiliate
of the borrower. However, there is no requirement that Commercial Mortgage
Loans acquired by the Company have third party guarantees. Commercial Mortgage
Loans may also not be fully amortizing, meaning that they may have a significant
principal balance or "balloon" payment due on maturity. Moreover, commercial
properties, particularly industrial and warehouse properties, are generally
subject to relatively greater environmental risks than non-commercial
properties, generally giving rise to increased costs of compliance with
environmental laws and regulations. See "Risk Factors--Risks Associated with
Mortgage Loans Generally" and "--Environmental Considerations".
The credit quality of a Commercial Mortgage Loan may depend on, among
other factors, the existence and structure of underlying leases, the physical
condition of the property (including whether any maintenance has been
deferred), the creditworthiness of tenants, the historical and anticipated
level of vacancies and rents on the property and on other comparable properties
located in the same region, potential or existing environmental risks, the
availability of credit to refinance the Commercial Mortgage Loan at or prior to
maturity and the local and regional economic climate in general. Foreclosures
of defaulted Commercial Mortgage Loans are generally subject to a number of
complicating factors, including environmental considerations, which are
generally not present in foreclosures of Residential Mortgage Loans. The
Company will sell any foreclosed mortgage assets. See "Risk Factors--Risks
Associated with Mortgage Loans Generally--Special Risks Relating to Commercial
Mortgage Loans" and "--Environmental Considerations".
Mortgage-Backed Securities. The Company may from time to time acquire
Mortgage-Backed Securities rated AA or higher representing interests in or
obligations backed by pools of Mortgage Loans. The Mortgage Loans underlying
the Mortgage-Backed Securities will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States. It is not currently anticipated that the Company will hold a
significant amount of Mortgage-Backed Securities. The Company does not intend
to acquire any interest-only, principal-only or high-risk Mortgage-Backed
Securities. The Company will not be precluded from investing in Mortgage-Backed
Securities where the Bank or one of its affiliates is the sponsor or issuer.
30
<PAGE> 36
ACQUISITION OF INITIAL PORTFOLIO
Simultaneously with the consummation of the Offering, the Company will
acquire the Initial Portfolio pursuant to the terms of two mortgage purchase
agreements with the Bank: the Residential Mortgage Loan Purchase and Warranties
Agreement (the "Residential Mortgage Purchase Agreement") and the Commercial
Mortgage Loan Purchase and Warranties Agreement (the "Commercial Mortgage
Purchase Agreement", and, together with the Residential Mortgage Purchase
Agreement, the "Mortgage Purchase Agreements"), each to be entered into
simultaneously with the consummation of the Offering. The Residential Mortgage
Loans in the Initial Portfolio will be sold to the Company pursuant to the
Residential Mortgage Purchase Agreement. The Commercial Mortgage Loans in the
Initial Portfolio will be sold to the Company pursuant to the Commercial
Mortgage Purchase Agreement. Each Mortgage Loan will be identified in a
schedule appearing as an exhibit to its respective mortgage purchase agreement
(each, a "Mortgage Loan Schedule"). Each Mortgage Loan Schedule will specify,
among other things, with respect to each Mortgage Loan: the interest rate or
interest rate formula applicable to each Mortgage Loan, the original principal
amount and the unpaid principal balance as of the purchase date, the monthly
payment, maturity date, mortgagor, type of mortgaged property, location of the
mortgaged property and current interest rate.
In addition, the Bank will deliver or cause to be delivered to the
Company the mortgage note with respect to each Mortgage Loan (together with all
amendments and modifications thereto) endorsed in blank, the original or
certified copy of the mortgage (together with all amendments and modifications
thereto) with evidence of recording indicated thereon, if available, and an
original or certified copy of an assignment of the mortgage in recordable form.
Such documents will initially be held by the Bank, as Advisor, acting as
custodian for the Company. Although the Company will have the right to record
the assignments of mortgage at any time, it does not currently anticipate doing
so. The Company believes that maintaining record title of the Mortgage Loans
in the name of the Servicer will facilitate the servicing of the Mortgage
Loans. Once the assignments of mortgage are recorded, the Company's lien on the
mortgaged properties will date back to the date of the original mortgages and
rank ahead of any intervening mortgages granted by the borrowers. However, if
the Bank, in violation of the Advisory Agreement and the Servicing Agreements,
sells any of the Company's Mortgage Loans to a third party who records its
assignment of mortgage before the Company records its assignment of mortgage
with respect to such Mortgage Loan, the Company may lose its ownership interest
in such Mortgage Loan. See "--Servicing" and "--Description of Initial
Portfolio--General".
The Bank will make certain representations and warranties with respect
to the Mortgage Loans in the Initial Portfolio for the benefit of the Company
and will be obligated to repurchase any Mortgage Loan sold by it to the Company
as to which there is a material breach of any such representation or warranty,
unless the Bank elects to substitute a qualified Mortgage Loan for such
Mortgage Loan. The Bank will also indemnify the Company for damages or costs
resulting from any such breach. The repurchase price for any such Mortgage Loan
will be its outstanding principal amount plus accrued and unpaid interest on
the date of repurchase plus any premium paid by the Company. In addition, under
the terms of the Mortgage Purchase Agreements, the Company will acquire, in
addition to the Mortgage Loans included in the Initial Portfolio, (i) all
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<PAGE> 37
amounts, including payments of principal and interest (other than payments of
principal and interest due on or before [ ], 1997 with respect to
the Residential Mortgage Loans and [ ], 1997 with respect to the
Commercial Mortgage Loans) held in one or more accounts maintained for the
benefit of or in the name of the Company pursuant to the Servicing Agreements
and (ii) all insurance policies relating to the Mortgage Properties and the
proceeds thereof.
MANAGEMENT POLICIES AND PROGRAMS
In administering the Company's Mortgage Assets, the Advisor has a high
degree of autonomy. The Board of Directors, however, has adopted certain
policies to guide administration of the Company and the Advisor with respect to
the acquisition and disposition of assets, use of capital and leverage, credit
risk management and certain other activities. These policies, which are
discussed below, may be amended or revised from time to time at the discretion
of the Board of Directors (in certain circumstances subject to the approval of
a majority of the Independent Directors) without a vote of the Company's
stockholders, including holders of the Series A Preferred Shares. See also
"--Dividends".
Asset Acquisition and Disposition Policies. Subsequent to the
acquisition of the Initial Portfolio, the Company anticipates that it will from
time to time purchase additional Mortgage Loans from the Bank or its
affiliates, although Mortgage Loans may be acquired from unaffiliated third
parties, out of proceeds received in connection with the repayment or
disposition of Mortgage Loans or the issuance of additional shares of Common
Stock and Preferred Stock. The Company anticipates that additional Mortgage
Loans purchased from the Bank or its affiliates will be purchased on terms that
are substantially identical to those that could be obtained by the Company if
such additional Mortgage Loans were purchased from third parties unaffiliated
with the Company. No arrangements or procedures are currently in place
regarding the purchase of additional Mortgage Loans from unaffiliated third
parties. The Company currently anticipates that additional Mortgage Loans
acquired by the Company will be of the types described in "--Description of
Initial Portfolio", although if the Bank or its affiliates develop additional
Mortgage Loan products, the Company may purchase such additional types of
Mortgage Loans. In addition, the Company may from time to time acquire
Mortgage-Backed Securities representing interests in or obligations backed by
pools of Mortgage Loans that will be secured by single-family residential,
multifamily or commercial real estate properties located throughout the United
States. The Company currently anticipates that it will not acquire the right to
service any Mortgage Loan it acquires in the future and that the Bank or an
affiliate of the Bank will act as servicer of any such additional Mortgage
Loans. The Company anticipates that any servicing arrangement that it enters
into in the future with the Bank will contain fees and other terms that would
be substantially equivalent to those that would be contained in servicing
arrangements entered into with third parties unaffiliated with the Company.
The Company currently intends to maintain approximately 90% of its
portfolio of Mortgage Assets in Residential Mortgage Loans and approximately
10% of the Company's portfolio of Mortgage Assets in Commercial Mortgage Loans
(in each case measured by aggregate outstanding principal balances). The
Company's current policy is not to acquire any Commercial Mortgage Loan that
constitutes more than 5% of the total book value of the Mortgage Assets of
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<PAGE> 38
the Company at the time of its acquisition. In addition, the Company's current
policy prohibits the acquisition of any Mortgage Loan or any interest in a
Mortgage Loan (other than an interest resulting from the acquisition of
Mortgage-Backed Securities), which Mortgage Loan (i) is delinquent in the
payment of principal or interest at the time of proposed acquisition; (ii) is
or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) has been, more than once during the preceding 12 months,
more than 30 days past due in the payment of principal or interest.
The Company may choose, at any time subsequent to its acquisition of
any Mortgage Loan, to require the Servicer of the Mortgage Loan to dispose of
any Mortgage Loan, for any reason, including as a result of such mortgage loan
becoming Classified or being placed in Nonaccrual Status or having been, more
than once during the preceding 12 months, more than 30 days past due in the
payment of principal or interest. The Bank has indicated to the Company that it
will purchase, at the then fair value, any Mortgage Loan of the Company that the
Company chooses to dispose of for the foregoing reasons.
Capital and Leverage Policies. To the extent that the Board of
Directors determines that additional funding is required, the Company may raise
such funds through additional equity offerings, debt financing or retention of
cash flow (after consideration of provisions of the Code requiring the
distribution by a REIT of at least 95% of its "REIT taxable income" and taking
into account taxes that would be imposed on undistributed taxable income), or a
combination of these methods.
The Company will have no debt outstanding following consummation of
the Offering, and the Company does not currently intend to incur any
indebtedness. However, the organizational documents of the Company do not
contain any limitation on the amount or percentage of debt, funded or
otherwise, the Company might incur. Notwithstanding the foregoing, the Company
may not, without the approval of a majority of the Independent Directors, incur
debt for borrowed money other than debt not in excess of 20% of the aggregate
amount of net proceeds received in connection with the issuance of all
outstanding Preferred Stock and Common Stock of the Company. Any such debt
incurred may include intercompany advances made by the Bank to the Company.
The Company may also issue additional series of Preferred Stock.
However, the Company may not issue additional shares of Preferred Stock senior
to the Series A Preferred Shares without the consent of holders of at least 66
2/3% of the outstanding shares of Preferred Stock at that time, voting as a
single class, including the Series A Preferred Shares, and the Company may not
issue additional shares of Preferred Stock on a parity with the Series A
Preferred Shares without the approval of a majority of the Company's
Independent Directors. The Company does not currently intend to issue any
additional series of Preferred Stock unless it simultaneously issues additional
Common Stock to the Bank and the proceeds to be received from the issuance of
the Common Stock are approximately equal to the aggregate offering price of
such additional Preferred Stock plus the Company's expenses (including
underwriting commissions or placement fees) in connection with the issuance of
such additional shares of Preferred Stock. It is currently anticipated that the
33
<PAGE> 39
Company will issue additional shares of Preferred Stock if such issuance would
provide the Bank with the most cost-effective means of raising capital for bank
regulatory purposes at the time. See "Certain Transactions Constituting the
Formation--Benefits to the Bank and Its Affiliates".
Credit Risk Management Policies. The Company expects that
each Mortgage Loan acquired from the Bank or one of its affiliates in the
future will be a whole loan, will represent a first lien position and will be
originated by the Bank or such affiliate in the ordinary course of its real
estate lending activities based on the underwriting standards generally applied
(at the time of origination) for its own account by the Bank or the affiliate
of the Bank which originated the Mortgage Loan. See "--Description of Initial
Portfolio-- Underwriting Standards". The Company also expects that all Mortgage
Loans held by the Company will be serviced pursuant to the Servicing
Agreements, which require servicing in conformity with accepted secondary
market standards, with any servicing guidelines promulgated by the Company and,
in the case of Residential Mortgage Loans, with FNMA and FHLMC guidelines and
procedures. The Company may also choose, at any time subsequent to its
acquisition of any Mortgage Loan, to require the Servicer of such Mortgage
Loans to dispose of any Mortgage Loan for any reason, including as a result of
such Mortgage Loan becoming Classified or being placed in Nonaccrual Status or
having been, more than once during the preceding 12 months, more than 30 days
past due in the payment of principal and interest.
Conflict of Interest Policies. Because of the nature of the Company's
relationship with the Bank and its affiliates, it is likely that conflicts of
interest will arise with respect to certain transactions, including, without
limitation, the Company's acquisition of Mortgage Loans from, or disposition of
Mortgage Loans to, the Bank, D&N or their respective affiliates, foreclosure on
defaulted Commercial Mortgage Loans and the modification of the Advisory
Agreement or either of the Servicing Agreements. It is the Company's policy
that the terms of any financial dealings with the Bank, D&N and their
respective affiliates will be consistent with those available from third
parties in the mortgage lending industry. In addition, neither the Advisory
Agreement nor either of the Servicing Agreements may be modified or terminated
without the approval of a majority of the Independent Directors.
Conflicts of interest between the Company and the Bank and its
affiliates may also arise in connection with making decisions that bear upon
the credit arrangements that the Bank or one of its affiliates may have with a
mortgagor under a Mortgage Loan. Conflicts could also arise in connection with
actions taken by the Bank as a controlling person in the Company. It is the
intention of the Company, the Bank and D&N that any agreements and transactions
between the Company, on the one hand, and D&N, the Bank or their affiliates, on
the other hand, including without limitation the Mortgage Purchase Agreements
and Servicing Agreements, are fair to all parties and are consistent with
market terms for such types of transactions. The Servicing Agreements provide
that (i) foreclosures and dispositions of the Mortgage Loans are to be
performed with a view to maximizing the recovery by the Company as owner of the
Mortgage Loans and (ii) the Servicer shall service the Mortgage Loans solely
with a view toward the interests of the Company, and without regard to the
interests of the Bank or its affiliates. The requirement in the Certificate of
Designation establishing the Series A Preferred Shares that certain actions of
the Company be approved by a majority of the Independent Directors is also
34
<PAGE> 40
intended to ensure fair dealings between the Company and D&N, the Bank and
their respective affiliates. However, there can be no assurance that any such
agreement or transaction will be on terms as favorable to the Company as would
have been obtained from unaffiliated third parties.
There are no provisions in the Company's Certificate of Incorporation
limiting any officer, director, security holder or affiliate of the Company
from having any direct or indirect pecuniary interest in any Mortgage Asset to
be acquired or disposed of by the Company or in any transaction in which the
Company has an interest or from engaging in acquiring, holding and managing
Mortgage Assets. As described herein, it is expected that the Bank and its
affiliates will have direct interests in transactions with the Company
(including without limitation the sale of Mortgage Assets to the Company);
however, it is not currently anticipated that any of the officers or directors
of the Company will have any interests in such Mortgage Assets.
Other Policies. The Company intends to operate in a manner that will
not subject it to regulation under the Investment Company Act of 1940. The
Company does not intend to (i) invest in the securities of other issuers for
the purpose of exercising control over such issuers, (ii) underwrite securities
of other issuers, (iii) actively trade in loans or other investments, (iv)
offer securities in exchange for property or (v) make loans to third parties,
including, without limitation, officers, directors or other affiliates of the
Company. The Company may, under certain circumstances, purchase the Series A
Preferred Shares and other shares of its capital stock in the open market or
otherwise, provided, however, that the Company will not redeem or repurchase
any shares of its Common Stock for so long as any Series A Preferred Shares are
outstanding without the approval of a majority of the Independent Directors.
The Company has no present intention of causing the Company to repurchase any
shares of its capital stock, and any such action would be taken only in
conformity with applicable federal and state laws and regulations and the
requirements for qualifying as a REIT.
The Company intends to publish and distribute to stockholders, in
accordance with Exchange Act rules, annual reports containing financial
statements prepared in accordance with generally accepted accounting principles
and certified by the Company's independent public accountants. The Certificate
of Designation establishing the Series A Preferred Shares provides that the
Company shall maintain its status as a reporting company under the Exchange Act
for so long as any of the Series A Preferred Shares are outstanding.
The Company currently intends to make investments and operate its
business at all times in such a manner as to be consistent with the
requirements of the Code to qualify as a REIT. However, future economic,
market, legal, tax or other considerations may cause the Board of Directors,
subject to approval by a majority of Independent Directors, to determine that
it is in the best interests of the Company and its stockholders to revoke its
REIT status.
DESCRIPTION OF INITIAL PORTFOLIO
Information with respect to the Residential Mortgage Loans and the
Commercial Mortgage Loans in the Initial Portfolio is presented as of March 24,
1997. The composition of the Initial Portfolio actually purchased by the
Company contemporaneously with the consummation of the
35
<PAGE> 41
Offering will differ from the Initial Portfolio as described in this Prospectus
only to the extent it is discovered prior to the consummation of the Offering
that a Mortgage Loan included in the Initial Portfolio described herein (i) is
delinquent in the payment of principal or interest; (ii) is or was at any time
during the preceding 12 months (a) Classified, (b) in Nonaccrual Status, or (c)
renegotiated due to financial deterioration of the borrower; or (iii) has been,
more than once during the preceding 12 months, more than 30 days past due in
the payment of principal or interest. In such event a Mortgage Loan similar in
aggregate outstanding principal balance and product type will be substituted
for such non-purchased Mortgage Loan.
References herein to percentages of Mortgage Loans included in the
Initial Portfolio refer in each case to the percentage of the aggregate
outstanding principal balance of the Mortgage Loans in the Initial Portfolio as
of March 24, 1997, based on the outstanding principal balances of such Mortgage
Loans as of such date, after giving effect to scheduled monthly payments due on
or prior to such date, whether or not received.
The detailed information set forth in this Prospectus with respect to
the Mortgage Loans applies only to the Initial Portfolio and the Company's
portfolio of Mortgage Assets in the future may or may not have the
characteristics described below.
General. The Initial Portfolio contains 489 Residential Mortgage
Loans, representing approximately 90% of the unpaid principal balance of the
Mortgage Loans contained in the Initial Portfolio, and 10 Commercial Mortgage
Loans, representing approximately 10% of the unpaid principal balance of the
Mortgage Loans contained in the Initial Portfolio. On March 24, 1997, the
Mortgage Loans included in the Initial Portfolio had an aggregate outstanding
principal balance of $64,141,000.
Substantially all of the Residential Mortgage Loans included in the
Initial Portfolio were originated by the Bank or D&N Mortgage Corporation in the
ordinary course of its real estate lending activities. All of the Residential
Mortgage Loans included in the Initial Portfolio were originated consistent with
the underwriting policies of the Bank at the time at which such Mortgage Loans
were originated.
Each Commercial Mortgage Loan included in the Initial Portfolio was
originated by the Bank in the ordinary course of its commercial real estate
lending activities.
All of the Residential Mortgage Loans included in the Initial
Portfolio were originated between 1985 and 1997, and have original terms to
stated maturity of either 5, 10, 15, 20, 25 or 30 years. As of March 24, 1997,
the average outstanding principal balance of a Residential Mortgage Loan was
$115,000. The weighted average number of months since origination of the
Residential Mortgage Loans included in the Initial Portfolio (calculated as of
March 24, 1997) was approximately 21 months. The weighted average Loan-to-Value
Ratio (defined below) of the Residential Mortgage Loans included in the Initial
Portfolio is 73.25%; however, 22.44% of the Residential Mortgage Loans have
Loan-to-Value Ratios of greater than 80%. "Loan-to-Value Ratio" means the ratio
(expressed as a percentage) of the original principal amount of such Mortgage
Loan to the lesser of (i) the appraised value at origination of the underlying
mortgaged
36
<PAGE> 42
property and (ii) if the Mortgage Loan was made to finance the acquisition of
property, the purchase price of the mortgaged property.
All of the Commercial Mortgage Loans included in the Initial Portfolio
were originated between 1974 and 1996, and had original terms to stated
maturity of between three and 30 years. Substantially all Mortgage Loans
included in the Initial Portfolio have mortgage notes which contain
"due-on-sale" provisions.
None of the Mortgage Loans included in the Initial Portfolio (i) is
delinquent in the payment of principal or interest as of March 24, 1997; (ii)
is or was at any time during the preceding 12 months (a) Classified, (b) in
Nonaccrual Status, or (c) renegotiated due to financial deterioration of the
borrower; or (iii) was, more than once during the preceding 12 months, more
than 30 days past due in the payment of principal or interest. If, prior to the
acquisition of the Initial Portfolio, any Mortgage Loan included in the
description of the Initial Portfolio herein falls within any of the foregoing
categories, the Company will not purchase such Mortgage Loan but will instead
purchase a Mortgage Loan similar in aggregate outstanding principal balance and
product type which does not fall into any of these categories.
Residential Mortgage Loans. The following types of Residential
Mortgage Loan products, each of which is more fully described below, will be
included in the Initial Portfolio: One-Year ARM, 5, 10, 15, 20, 25 and 30-year
fixed rate Residential Mortgage Loans.
The following table sets forth certain information with respect to
each type of Residential Mortgage Loan included in the Initial Portfolio:
TYPE OF RESIDENTIAL MORTGAGE LOAN PRODUCT
<TABLE>
<CAPTION>
Percentage of
Initial
Number of Aggregate Principal Portfolio Weighted Average
Type Mortgage Loans Balance by Aggregate Remaining Term
---------------------------- -------------- -------------------- -------------- ----------------
(In Thousands)
<S> <C> <C> <C> <C>
Fixed Rate . . . . . . . . 248 $28,470 50.46% 239 months
One-Year ARM . . . . . . . 241 27,954 49.54 333 months
--- ------- ------
Total . . . . . . . . . . . 489 $56,424 100.00%
=== ======= ======
</TABLE>
Of the Residential Mortgage Loans included in the Initial Portfolio,
approximately 50% bear interest at fixed rates (including adjustable
rate Residential Mortgage Loans that have been converted, pursuant to their
terms, to fixed rates). The interest rates of the fixed rate Residential
Mortgage Loans included in the Initial Portfolio range from 7.00% per annum to
8.50% per annum. The weighted average interest rate of the fixed rate
Residential Mortgage Loans included in the Initial Portfolio is approximately
7.63% per annum. The following table contains certain additional data with
respect to the interest rates of the fixed rate Residential Mortgage Loans
included in the Initial Portfolio:
37
<PAGE> 43
INTEREST RATE OF FIXED RATE RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage
Number of Aggregate of Initial
Mortgage Principal Portfolio by
Principal Interest Rate Balance Loans Balance Aggregate
---------------------------------------- -------------- --------------- --------------
(In Thousands)
<S> <C> <C> <C>
7.000%-7.249% . . . . . . . . . . . . . 33 $ 3,610 6.398%
7.250%-7.499% . . . . . . . . . . . . . 48 5,367 9.512
7.500%-7.749% . . . . . . . . . . . . . 72 8,890 15.760
7.750%-7.999% . . . . . . . . . . . . . 38 4,798 8.504
8.000%-8.249% . . . . . . . . . . . . . 18 2,502 4.433
8.250%-8.499% . . . . . . . . . . . . . 24 2,083 3.692
8.500% . . . . . . . . . . . . . . . . 15 1,220 2.163
---- -------- -------
Total . . . . . . . . . . . . . . . 248 $ 28,470 50.46 %
==== ======== =======
</TABLE>
Of the Residential Mortgage Loans included in the Initial Portfolio,
approximately 50% bear interest at adjustable rates. The interest rate on the
"adjustable rate mortgages" or "ARMs" is tied to an index (such as the
interest rate on United States Treasury Bills), and is adjustable periodically.
ARMs are typically subject to limitations on lifetime interest rates as well as
periodic interest rate adjustments. The current interest rates of the
Residential Mortgage Loans included in the Initial Portfolio that are ARMs
ranged from 6.25% per annum to 8.50% per annum as of March 24, 1997. As of March
24, 1997, the weighted average current interest rate of the Residential Mortgage
Loans included in the Initial Portfolio that are ARMs was approximately 7.32%
per annum. The following table contains certain additional data as of March
24, 1997 with respect to the interest rates of the Residential Mortgage Loans
included in the Initial Portfolio that are ARMs:
CURRENT INTEREST RATE OF ADJUSTABLE RATE
RESIDENTIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Percentage
Number of Aggregate of Initial
Mortgage Principal Portfolio by
Current Interest Rate Balance Loans Balance Aggregate
---------------------------------------- -------------- --------------- ----------------
(In Thousands)
<S> <C> <C> <C>
6.250%-6.499% . . . . . . . . . . . . . 40 $ 4,753 8.423%
6.500%-6.749% . . . . . . . . . . . . . 19 3,592 6.366
6.750%-6.999% . . . . . . . . . . . . . 2 468 0.830
7.000%-7.249% . . . . . . . . . . . . . 8 1,457 2.582
7.250%-7.499% . . . . . . . . . . . . . 24 3,110 5.512
7.500%-7.749% . . . . . . . . . . . . . 41 3,527 6.251
7.750%-7.999% . . . . . . . . . . . . . 44 5,402 9.573
8.000%-8.249% . . . . . . . . . . . . . 25 2,931 5.195
8.250%-8.499% . . . . . . . . . . . . . 36 2,396 4.246
8.500% . . . . . . . . . . . . . . . . 2 318 0.564
---- ------- ------
Total . . . . . . . . . . . . . . . 241 $27,954 49.54 %
==== ======= =====
</TABLE>
38
<PAGE> 44
"Gross Margin", with respect to a Residential Mortgage Loan that is an
ARM, means the applicable fixed percentage which, when added to the applicable
index, results in the current interest rate paid by the borrower of such
Residential Mortgage Loan (without taking into account any interest rate caps
or minimum interest rates). Gross Margin is inapplicable to fixed rate
Residential Mortgage Loans. As of March 24, 1997, the weighted average Gross
Margin of the Residential Mortgage Loans included in the Initial Portfolio that
are ARMs was approximately 2.89%.
The following table sets forth certain additional data as of March 24,
1997 with respect to the Gross Margins of the Residential Mortgage Loans
included in the Initial Portfolio that are ARMs:
GROSS MARGIN
<TABLE>
<CAPTION>
Percentage
Number of Aggregate of Initial
Mortgage Principal Portfolio by
Gross Margin Balance Loans Balance Aggregate
---------------------------------------- --------------- ------------------ --------------
(In Thousands)
<S> <C> <C> <C>
2.13%-2.63% . . . . . . . . . . . . . . 16 $ 953 1.689%
2.64%-3.13% . . . . . . . . . . . . . . 213 23,341 41.367
3.14%-3.63% . . . . . . . . . . . . . . 8 3,217 5.701
3.64%-4.25% . . . . . . . . . . . . . . 4 443 0.786
---- ------- ------
Total . . . . . . . . . . . . . . . 241 $27,954 49.54 %
==== ======= =====
</TABLE>
The interest rate of each ARM loan included in the Initial Portfolio
adjusts at the times (each, a "Rate Adjustment Date") and in the manner
described below subject to lifetime interest rate caps, to minimum interest
rates and to maximum annual interest rate increases or decreases, each as
specified in the mortgage note relating to the ARM. Information set forth below
regarding interest rate caps and minimum interest rates applies to the Initial
Portfolio only. Mortgage Loans purchased by the Company after consummation of
the Offering may be subject to different interest rate caps and minimum
interest rates.
Each ARM bears interest at its initial interest rate until its first
Rate Adjustment Date. Effective with each Rate Adjustment Date, the monthly
principal and interest payment on most of the adjustable rate Mortgage Loans
included in the Initial Portfolio will be adjusted to an amount that will fully
amortize the then-outstanding principal balance of such Residential Mortgage
Loan over its remaining term to stated maturity and that will be sufficient to
pay interest at the adjusted interest rate. Certain of the ARMs contain an
option, which may be exercised by the mortgagor, to convert the ARM into a
fixed rate loan for the remainder of the mortgage term. If a Residential
Mortgage Loan that is an ARM is converted into a fixed rate loan, the interest
rate will be determined at the time of conversion as specified in the mortgage
note relating to such Mortgage Loan and will remain fixed at such rate until
the stated maturity of such Residential Mortgage Loan. Most of the Mortgage
Loans included in the Initial Portfolio allow the mortgagor to prepay at any
time some or all of the outstanding principal balance of the Mortgage Loan
without fee or penalty.
39
<PAGE> 45
One-Year ARM. The interest rate with respect to each One-Year ARM is
fixed at an initial rate for the first twelve monthly payments and adjusts
annually thereafter on the date specified in the related mortgage note to a
rate equal to the then-current Treasury Index (defined below) plus the Gross
Margin set forth in such mortgage note, subject to a maximum annual interest
rate increase or decrease of 2.00%, a lifetime interest rate cap equal to the
initial interest rate with respect to such Residential Mortgage Loan plus 6%
and to a minimum interest rate no less than the Gross Margin. The sum of the
Treasury Index and the Gross Margin is rounded upwards to the nearest 0.125%.
The "Treasury Index" with respect to each One-Year ARM is the weekly average
yield on U.S. Treasury securities adjusted to a constant maturity of one year
as published by the Federal Reserve Board in Statistical Release H.15 (519) or
any similar publication or, if not so published, as reported by any Federal
Reserve Bank or by any U.S. Government department or agency and made available
to the Advisor. Should the Treasury Index not be published or become otherwise
unavailable, the Advisor will select a comparable alternative index over which
it has no control and which is readily available.
Certain One-Year ARMs contain a conversion option which, if exercised,
would convert the One-Year ARM into a fixed rate loan for the remainder of the
term of the mortgage. Subject to conditions specified in the mortgage note
related to a One-Year ARM, a mortgagor may have the right to convert the
One-Year ARM to a fixed rate loan beginning with the first Rate Adjustment Date
and on the first day of each month thereafter until and including the fifth
Rate Adjustment Date. If the conversion option is exercised, the interest rate
will be fixed for the remainder of the term of the mortgage and will equal the
sum of a percentage equal to at least 0.625% and the FNMA Required Net Yield.
The mortgagor must pay a conversion fee at the time the option is exercised.
Fixed Rate Loans. The fixed rate Residential Mortgage Loans which are
included in the Initial Portfolio or may be purchased by the Company will
generally have original terms to stated maturity of 15 or 30 years. The
interest rates of these Residential Mortgage Loans are fixed prior to
origination or have been converted, pursuant to the terms of a mortgage note,
to a fixed rate. The monthly principal and interest payment is calculated to
fully amortize the initial outstanding principal balance of such Residential
Mortgage Loan to its stated maturity.
Commercial Mortgage Loans. The Commercial Mortgage Loans included in
the Initial Portfolio will consist of multi-family residential rental
properties, and light industrial, hotel and retail shopping mall
properties located in Michigan. The borrowers of the Commercial Mortgage Loans
included in the Initial Portfolio are primarily customers of the Bank to which
the Bank has extended such Commercial Mortgage Loans in the ordinary course of
its commercial real estate lending activities. Substantially all of the
Commercial Mortgage Loans included in the Initial Portfolio are either recourse
to the borrower or guaranteed as to the payment of principal and interest by an
affiliate of the borrower. The outstanding principal balances of the Commercial
Mortgage Loans included in the Initial Portfolio ranged from $111,000 to $2.1
million as of March 24, 1997.
40
<PAGE> 46
The following table sets forth certain information with respect to
each type of commercial property underlying each Commercial Mortgage Loan
included in the Initial Portfolio:
TYPE OF COMMERCIAL MORTGAGE LOAN
<TABLE>
<CAPTION>
Percentage Weighted Weighted Weighted
of Initial Average Average Average
Aggregate Portfolio by Original Current Expected
Principal Aggregate Loan-to Loan-to Months
Balance Principal Value Value Remaining
Type of Mortgaged Property (In thousands) Balance Ratio(1) Ratio(2) to Maturity
-------------------------- -------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
5-36 unit apartments . . . . . . $ 1,644 21.3% 61.3 44.2 46.2
36+ unit apartments . . . . . . . 963 12.5 69.6 64.7 56.1
Hotel . . . . . . . . . . . . . . 2,070 26.8 74.5 70.1 47.0
Light Industrial . . . . . . . . 1,717 22.3 75.2 71.4 53.0
Retail Shoppers Mall . . . . . . 1,321 17.1 55.5 52.9 20.0
------- -----
Total . . . . . . . . . . . . $ 7,716 100.0%
======= =====
</TABLE>
- ---------------
(1) Represents the ratio of the outstanding principal amount of each Commercial
Mortgage Loan at the time of loan origination or modification, if any, to
the value of the property securing such Commercial Mortgage Loan at the
time of loan origination or modification, if any.
(2) Represents the ratio of the outstanding principal amount of the Commercial
Mortgage Loan at March 24, 1997 to the value of the property securing such
Commercial Mortgage Loan at the time of loan origination or modification,
if any.
Of the Commercial Mortgage Loans included in the Initial Portfolio,
approximately 44% are not fully amortizing and will have significant principal
balances or "balloon" payments due upon maturity.
Of the Commercial Mortgage Loans included in the Initial Portfolio,
31% bear interest at fixed rates. The interest rates of the fixed rate
Commercial Mortgage Loans included in the Initial Portfolio range from 8.25%
per annum to 9.88% per annum. The following table contains certain additional
data with respect to the interest rates of the fixed rate Commercial Mortgage
Loans included in the Initial Portfolio (including those variable rate
Commercial Mortgage Loans that have been converted, pursuant to their terms, to
fixed rates):
INTEREST RATE OF FIXED RATE COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Principal Percentage of Initial
Mortgage Balance Portfolio By Aggregate
Loans (In thousands) Principal Balance
---------- -------------------- ------------------------
<S> <C> <C> <C>
7 - 8.99 . . . . . . . . . . . . . . 2 $ 1,432 18.6%
9 - 11 . . . . . . . . . . . . . . . 2 981 12.7
- ------ ----
Total . . . . . . . . . . . . . . 4 $2,413 31.3%
= ====== ====
</TABLE>
Of the Commercial Mortgage Loans included in the Initial Portfolio,
69% bear interest at variable rates which are typically tied to an index (such
as the Prime Rate or the U.S. Treasury Index) and are adjustable periodically.
The current interest rates borne by the variable rate
41
<PAGE> 47
Commercial Mortgage Loans included in the Initial Portfolio ranged
from 9.00% per annum to 10.125% per annum as of March 24, 1997.
The following table contains certain additional data as of March 24,
1997 with respect to the interest rates of the variable rate
Commercial Mortgage Loans included in the Initial Portfolio:
CURRENT INTEREST RATE OF VARIABLE RATE
COMMERCIAL MORTGAGE LOANS
<TABLE>
<CAPTION>
Number of Aggregate Principal Percentage of Initial
Mortgage Balance Portfolio By Aggregate
Loans (In thousands) Principal Balance
----------- -------------------- ------------------------
<S> <C> <C> <C>
9.00 - 9.99% . . . . . . . . . . 5 $5,053 65.5 %
10.00 - 11.00% . . . . . . . . . . . 1 251 3.2
-- ------ ----
Total . . . . . . . . . . . . . . 6 $5,304 68.7 %
== ====== ====
</TABLE>
Underwriting Standards. The Bank has represented to the Company that
all of the Residential Mortgage Loans included in the Initial Portfolio were
originated generally in accordance with the underwriting policy customarily
employed by the Bank at the time at which the Residential Mortgage Loan in the
Initial Portfolio was originated. The Bank has represented to the Company that
all of the Commercial Mortgage Loans included in the Initial Portfolio were
originated generally consistent with the underwriting policies customarily
employed by the Bank at the time at which the Commercial Mortgage Loans in the
Initial Portfolio were originated.
Residential Mortgage Loans. The underwriting standards applied at
origination of the Residential Mortgage Loans were intended to evaluate the
borrower's credit standing and repayment ability, and the value and adequacy of
the underlying mortgaged property as collateral. Initially, each prospective
borrower was required to provide a current balance sheet describing assets and
liabilities and a statement of income and expenses, as well as, to the extent
required by applicable state law, an authorization to apply for a credit report
which summarized the borrower's credit history with merchants and lenders and
any record of bankruptcy.
For any prospective borrower, an employment verification was obtained
from the borrower's employer wherein the employer reported the length of
employment with the employer, the employee's current salary, and whether it was
expected that the borrower would continue such employment in the future or, the
borrower submitted such other evidence of employment (such as pay stubs)
satisfactory to the Bank. For a self-employed prospective borrower, the
borrower was generally required to submit copies of personal and business
federal income tax returns for the previous two years. For certain prospective
borrowers, the borrower authorized verification of all deposits at financial
institutions at which the borrower had demand or savings accounts.
Once the credit report and the employment and deposit verifications
were received by the underwriting officer considering the loan application, a
determination was made as to whether the prospective borrower had sufficient
monthly income available (i) to meet the borrower's monthly obligations on the
proposed Residential Mortgage Loan (determined on the basis of the monthly
42
<PAGE> 48
payments due in the year of origination) and other expenses related to the home
(such as property taxes and hazard insurance) and (ii) to meet other financial
obligations and monthly living expenses. In all instances, the Bank's
underwriting policies (including those applied in originating the Mortgage
Loans in the Initial Portfolio) may be varied in cases deemed appropriate by
its underwriting officers.
In determining the adequacy of the property as collateral, an
independent appraisal was made of each property considered for financing. Each
appraiser was selected in accordance with predetermined guidelines established
for appraisers. The appraiser was required to inspect the property and verify
that it was in good condition and that construction, if new, had been
completed. If the appraiser reported any exceptions to the verification, the
Bank (or its predecessor) or its agent determined that such property had been
substantially completed to its satisfaction. The appraisal was based on the
appraiser's judgment of value giving appropriate weight to both the market
value of comparable properties and the cost of replacing the property and other
factors as appropriate. The Bank's or its predecessors' underwriting standards
also required a search of the public records relating to a mortgaged property
for liens and judgments against such mortgaged property, as well as customary
title insurance.
Commercial Mortgage Loans. The loan underwriting procedures and
guidelines utilized by the Bank in connection with the origination of the
Commercial Mortgage Loans included in the Initial Portfolio were intended to
assess the value of the related mortgaged property, the ability of such
mortgaged property to be used by the borrower or its agents and the financial
condition of the borrower, including its ability to service the Commercial
Mortgage Loan. The underwriting guidelines included an internal system for
rating the quality of the mortgaged property. The interest rate for the
Commercial Mortgage Loans was determined, in part, upon this rating system.
The underwriting guidelines took into account such factors as
suitability of the mortgaged property for the proposed use; the availability,
rental rates and relative value of comparable properties in the relevant market
area and the anticipated growth or decline in both the immediate and broader
geographic areas in which the mortgaged property is located; the current or
projected occupancy or leasing ratios, if relevant; the condition and age of
the mortgaged property; the management ability of the borrower, including its
business experience and financial soundness; and such other economic,
demographic or other factors as in the judgment of the Bank might affect the
value of the mortgaged property and the ability of the borrower to service the
Commercial Mortgage Loan. Each proposal for a Commercial Mortgage Loan was
presented to the appropriate lending unit of the Bank, which analyzed the
proposed transaction focusing on economic assumptions and the feasibility of
the loan, identified and evaluated potential risks, and made a recommendation
to approve or disapprove the loan. The proposed transaction was then presented
to appropriate credit officers of the Bank for approval.
Once a loan proposal was approved, a loan commitment was issued by the
Bank to the proposed borrower, subject to, among other things, receipt of
acceptable environmental (including Phase I) and appraisal reports and, if
deemed appropriate, engineering reports. The Bank contracted with approved
firms to prepare these reports for the account of the Bank. Any environmental
exceptions were approved by appropriate officers of the Bank before the loan
was
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funded. All Commercial Mortgage Loans were closed using a standardized set of
loan documents to ensure consistency in the portfolio, subject to approved
transaction specific requirements.
Geographic Distribution. Approximately 90% of the residential real
estate properties underlying the Company's Residential Mortgage Loans included
in the Initial Portfolio are located in Michigan. Consequently, these
Residential Mortgage Loans may be subject to a greater risk of default than
other comparable Residential Mortgage Loans in the event of adverse economic,
political or business developments and natural hazards in Michigan that may
affect the ability of residential property owners in Michigan to make payments
of principal and interest on the underlying mortgages. Standard hazard
insurance required to be maintained with respect to Residential Mortgage Loans
held by the Company may not protect the Company against losses occurring from
tornados and other natural disasters. Consequently, in the event of a natural
disaster, the Company's ability to pay dividends on the Series A Preferred
Shares could be adversely affected as the Company will not maintain special
hazard insurance to protect against such losses.
All of the commercial mortgaged properties underlying its Commercial
Mortgage Loans will be located in Michigan. Consequently, these Commercial
Mortgage Loans may be subject to a greater risk of default than other
comparable Commercial Mortgage Loans in the event of adverse economic,
political or business developments in Michigan that may affect the ability of
businesses in that area to make payments of principal and interest on the
underlying mortgages.
Loan-to-Value Ratios; Insurance. All of the Residential Mortgage
Loans having Loan-to-Value Ratios of greater than 80% are insured under primary
mortgage guaranty insurance policies. At the time of origination of the
Residential Mortgage Loans, each of the primary mortgage insurance policy
insurers was approved by FNMA or FHLMC. A standard hazard insurance policy is
required to be maintained by the mortgagor with respect to each Residential
Mortgage Loan in an amount equal to the maximum insurable value of the
improvements securing such Residential Mortgage Loan or the principal balance
of such Residential Mortgage Loan, whichever is less. If the residential real
estate property underlying a Residential Mortgage Loan is located in a flood
zone, such Residential Mortgage Loan may also be covered by a flood insurance
policy as required by law. No mortgagor bankruptcy insurance will be maintained
by the Company with respect to the Residential Mortgage Loans in the Initial
Portfolio, nor will any Residential Mortgage Loan be insured by the Federal
Housing Administration or guaranteed by the Veterans Administration. The
Company will not maintain any special hazard insurance policy with respect to
any Residential Mortgage Loan which could mitigate damages caused by any
natural disaster. In addition, the standard hazard insurance required to be
maintained with respect to Residential Mortgage Loans does not protect the
Company against losses occurring from natural disasters. In the event of any
such natural disaster, the Company's ability to pay dividends on the Series A
Preferred Shares could be adversely affected.
A standard hazard insurance policy is also required to be maintained
by the mortgagor with respect to each of the Commercial Mortgage Loans included
in the Initial Portfolio. If the commercial real estate property securing a
Commercial Mortgage Loan is located in a flood zone, such Commercial Mortgage
Loan may be covered by a flood insurance policy as required by law.
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However, as with the Residential Mortgage Loans in the Initial Portfolio, no
special hazard insurance or mortgagor bankruptcy insurance will be maintained
by the Company with respect to the Commercial Mortgage Loans in the Initial
Portfolio.
SERVICING
The Mortgage Loans included in the Initial Portfolio will be sold to
the Company by the Bank on a servicing retained basis. The Bank will service
the Mortgage Loans included in the Initial Portfolio pursuant to the terms of
the Servicing Agreements. The Bank in its role as servicer under the terms of
the Servicing Agreements is herein referred to as the "Servicer". The Servicer
will receive an annual servicing fee with respect to each Mortgage Loan
serviced for the Company which shall equal the outstanding principal balance of
such Mortgage Loans multiplied by a fee of .375%.
Each Servicing Agreement requires the Servicer to service the
Company's Mortgage Loans in a manner generally consistent with accepted
secondary market practices, with any servicing guidelines promulgated by the
Company and, in the case of Residential Mortgage Loans, with FNMA and FHLMC
guidelines and procedures. The Servicing Agreements require the Servicer to
service the Mortgage Loans solely with a view toward the interests of the
Company, and without regard to the interests of the Bank or its affiliates. The
Servicer will collect and remit principal and interest payments, administer
mortgage escrow accounts, submit and pursue insurance claims and initiate and
supervise foreclosure proceedings on the Mortgage Loans it services. The
Servicer will also provide accounting and reporting services required by the
Company for such Mortgage Loans. Each Servicing Agreement requires the Servicer
to follow such collection procedures as are customary in the industry,
including contacting delinquent borrowers and supervising foreclosures and
property dispositions in the event of unremedied defaults in accordance with
servicing guidelines promulgated by the Company. The Servicer may, in its
discretion, arrange with a defaulting borrower a schedule for the liquidation
of delinquencies, provided that, in the case of Residential Mortgage Loans, no
primary mortgage guarantee insurance coverage is adversely affected. The
Servicer may also be directed by the Company, at any time during the servicing
process, to dispose of any Mortgage Loan which becomes Classified, placed in
Nonaccrual Status or which has been, more than once during the preceding 12
months, more than 30 days past due in the payment of principal and interest.
The Servicer may from time to time subcontract all or a portion of its
servicing obligations under the Servicing Agreements to one or more of its
affiliates or, subject to approval of a majority of the Independent Directors,
may subcontract all or a portion of its obligations under the Servicing
Agreements to an unrelated third party. At March 24, 1997 the Bank serviced
mortgage loans having an aggregate principal balance of approximately $1
billion. The Servicer will not, in connection with subcontracting any of its
obligations under the Servicing Agreements, be discharged or relieved in any
respect from its obligation to the Company to perform its obligations under the
Servicing Agreements.
Each Servicing Agreement requires the Servicer to pay all expenses
related to the performance of its duties under such Servicing Agreement. In
addition, the Servicer will be
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required to make advances of principal and interest and, with respect to the
Residential Mortgage Loans and certain Commercial Mortgage Loans, taxes and
required insurance premiums that are due from mortgagors, unless (with respect
to advances of principal and interest) it determines that such advances are
nonrecoverable. If such advances are made, the Servicer generally will be
reimbursed prior to the Company out of proceeds related to such Mortgage Loan.
The Servicer also will be entitled to reimbursement by the Company for expenses
incurred by it in connection with the liquidation of defaulted Mortgage Loans
serviced by it and in connection with the restoration of mortgaged property. If
claims are not made or paid under applicable insurance policies or if coverage
thereunder has ceased, the Company will suffer a loss to the extent that the
proceeds from liquidation of the mortgaged property, after reimbursement of the
Servicer's expenses in the sale, are less than the outstanding principal
balance of the related Mortgage Loan. The Servicer will be responsible to the
Company for any loss suffered as a result of its failure to make and pursue
timely claims or as a result of actions taken or omissions made by it which
cause the policies to be canceled by the insurer.
In connection with any foreclosure proceedings that the Servicer may
institute, the Servicer may exercise any power of sale contained in any
mortgage or deed of trust, obtain a deed in lieu of foreclosure or otherwise
acquire title to a mortgaged property underlying a Mortgage Loan by operation
of law or otherwise in accordance with the terms of the relevant Servicing
Agreement. The Servicer will not be permitted under the terms of the Commercial
Mortgage Loan Servicing Agreement to acquire title to any commercial real
estate property underlying a Commercial Mortgage Loan or take any action that
would cause the Company to be an "owner" or an "operator" within the meaning of
certain federal environmental laws, unless it has also previously determined,
subject to the approval of the Advisor, based on a report prepared by an
independent person who regularly conducts environmental assessments, that (i)
the mortgaged property is in compliance with applicable environmental laws or
that it would be in the best interests of the Company to take such actions as
are necessary to cause the mortgaged property to comply therewith and (ii)
there are no circumstances or conditions present at the mortgaged property
relating to the use, management or disposal of any hazardous substances,
hazardous materials, hazardous wastes or petroleum-based materials for which
investigation, testing, monitoring, containment, clean-up or remediation could
be required under any federal, state or local law or regulation, or, if any
such materials are present for which such action could be required, that it
would be in the best interest of the Company to take such actions with respect
to the mortgaged property.
The Company may terminate either Servicing Agreement upon the
happening of one or more events specified in the Servicing Agreement. Such
events relate generally to the Servicer's proper and timely performance of its
duties and obligations under the Servicing Agreement. In addition, the Company
may also terminate either Servicing Agreement without cause upon 30 days'
notice and payment of a termination fee that is competitive with that which is
generally payable in the industry.
The termination fee will be equal to 2% of the aggregate outstanding
principal amount of the loans then serviced under the applicable Servicing
Agreement. As long as any Series A Preferred Shares remain outstanding, the
Company may not terminate, or elect not to renew,
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either Servicing Agreement without the approval of a majority of the
Independent Directors. As is customary in the mortgage loan servicing industry,
the servicer will be entitled to retain any late payment charges and penalties
collected in connection with the mortgage loans serviced by it. In addition,
the Servicer will receive any benefit derived from interest earned on collected
principal and interest payments between the date of collection and the date of
remittance to the Company and from interest earned on tax and insurance impound
funds with respect to Mortgage Loans serviced by it. Each Servicing Agreement
requires the Servicer to remit to the Company no later than the 20th day of
each month all principal and interest due from borrowers of Mortgage Loans
serviced by it (unless deemed nonrecoverable by the Servicer) on the first day
of such month with respect to the Residential Mortgage Loans and from the last
remittance date with respect to the Commercial Mortgage Loans.
When any mortgaged property underlying a Mortgage Loan is conveyed by
a mortgagor, the Servicer generally will enforce any "due-on-sale" clause
contained in the Mortgage Loan, to the extent permitted under applicable law
and governmental regulations. The terms of a particular Mortgage Loan or
applicable law, however, may provide that the exercise of the "due-on-sale"
clause is prohibited under certain circumstances related to the security
underlying the Mortgage Loan and the buyer's ability to fulfill the obligations
under the related mortgage note. Upon any assumption of a Mortgage Loan by a
transferee, a fee equal to a specified percentage of the outstanding principal
balance of the Mortgage Loan is typically required, which sum will be retained
by the Servicer as additional servicing compensation.
As a result of the relationship between the Servicer and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest".
EMPLOYEES
The Company has four officers, each of whom is described further below
under "Management". The Company does not anticipate that it will require any
additional employees because it has retained the Advisor to perform certain
functions pursuant to the Advisory Agreement described below under
"Management--The Advisor". It is currently anticipated that all of the officers
of the Company will also be officers or employees of D&N, the Bank or their
affiliates. The Company will maintain corporate records and audited financial
statements that are separate from those of the Bank or any of its affiliates.
None of the officers, employees or directors of the Company will have any
direct or indirect pecuniary interest in any Mortgage Asset to be acquired or
disposed of by the Company or in any transaction in which the Company has an
interest or will engage in acquiring, holding and managing Mortgage Assets.
COMPETITION
The Company does not anticipate that it will engage in the business of
originating Mortgage Loans. It does anticipate that it will purchase Mortgage
Loans in addition to those in
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the Initial Portfolio and that all of these Mortgage Loans will be purchased
from the Bank or affiliates of the Bank.
LEGAL PROCEEDINGS
The Company is not the subject of any material litigation. None of the
Company, the Advisor, the Bank or any of its affiliates is currently involved
in nor, to the Company's knowledge, currently threatened with any material
litigation with respect to the Mortgage Loans to be included in the Initial
Portfolio, other than routine litigation arising in the ordinary course of
business, most of which is expected to be covered by liability insurance.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The Company's Board of Directors is composed of five members, two of
whom are Independent Directors. These directors will serve until their
successors are duly elected and qualified. There is no current intention to
alter the number of directors comprising the Board of Directors. Pursuant to
the Certificate of Designation establishing the Series A Preferred Shares, the
Independent Directors are required to take into account the interests of the
holders of both the Series A Preferred Shares and the Common Stock in assessing
the benefit to the Company of any proposed action requiring their consent. In
considering the interests of the holders of the Series A Preferred Shares, the
Independent Directors shall owe the same duties which the Independent Directors
owe to holders of Common Stock. The Company currently has four officers. The
Company has no other employees and does not anticipate that it will require
additional employees. See "Business and Strategy--Employees".
The persons who are directors and executive officers of the Company
are as follows:
<TABLE>
<CAPTION>
Name Age Position and Offices Held
- ---------------------------------- --- ---------------------------------------------------------
<S> <C> <C>
James Bogan Director
William J. McGarry 54 Director
George J. Butvilas 51 Director
Kenneth R. Janson 45 Director, President and Chief Executive Officer
Richard E. West 50 Director and Vice President
Daniel D. Greenlee 44 Treasurer and Chief Financial Officer
Peter L. Lemmer 39 Secretary
</TABLE>
The following is a summary of the experience of the executive officers
and directors of the Company:
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<PAGE> 54
James Bogan [to come]
William J. McGarry, age 54, is the Treasurer and Chief Financial
Officer of Michigan Technological University located in Houghton, Michigan. He
was named to his current position at the University on December 1, 1992, after
serving two years as a senior associate with Coopers & Lybrand in Boston.
Prior to his term with Coopers & Lybrand, Mr. McGarry served as
principal consultant with information Associates of Rochester, New York, and
was vice president in charge of the large financial services management
consulting and systems integration practice at SEI Corporation of Cambridge,
Massachusetts. He has also served as senior director of finance and
administration at Rensselaer Polytechnic Institute and as director of
administrative systems at Lehigh University.
George J. Butvilas, age 51, joined the Bank as President in May 1990.
He was named Chief Executive Officer of the Bank in 1991 and Chief Executive
Officer of D&N in 1992. Prior to joining the Bank, he had over 16 years
experience as a commercial and community banker, most recently as Executive
Vice President and Director of Boulevard Bancorp, Inc. of Chicago, Illinois.
Kenneth R. Janson, age 45, is Executive Vice President/Chief Financial
Officer and Treasurer of D&N and the Bank. Prior to joining the Bank in May
1988 as Vice President/Financial Analysis, he was affiliated with various
universities, the last six years as Associate Professor of Accounting at
Michigan Technological University. Mr. Janson is responsible for directing
accounting, investment and investor relations functions for the Bank and D&N.
Richard E. West, age 50, is Executive Vice President/ Wholesale
Lending of the Bank. Prior to joining the Bank in January 1990, he was
Servicing Manager for 20 years with Rothschild Financial Corporation and Valley
National Bank of Arizona. Mr. West is responsible for directing the loan
servicing, residential lending and consumer lending functions of the Bank.
Daniel D. Greenlee, age 44, is Senior Vice President/Controller of the
Bank. He has been with the Bank in various capacities since 1984 and is
presently responsible for the accounting, financial and regulatory reporting,
financial analysis, tax and risk management functions of the Bank.
Peter L. Lemmer, age 39, is Senior Vice President/General Counsel of
D&N and the Bank. Prior to joining the Bank in October 1990, he held various
positions involving legal services, the last five years as Senior Vice
President/Compliance and Vice President, Associate General Counsel/Compliance
Officer with Cal America Savings, later known as Columbus Savings, and American
Federal Bank, respectively. Mr. Lemmer is responsible for the legal and
regulatory functions of the Bank and D&N.
INDEPENDENT DIRECTORS
The Company's Certificate of Designation establishing the Series A
Preferred Shares requires that, so long as any Series A Preferred Shares are
outstanding, certain actions by the Company be approved by a majority of the
Independent Directors of the Company. See "Description of Series A Preferred
Shares--Independent Director Approval". James Bogan and William McGarry are
the Company's initial Independent Directors. For so long as there are only two
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<PAGE> 55
Independent Directors, any action that requires the approval of a majority of
Independent Directors must be approved by both Independent Directors.
If at any time the Company fails to declare and pay a quarterly
dividend payment on the Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two at
the Company's next annual meeting and the holders of Series A Preferred Shares,
voting together with the holders of any other outstanding series of Preferred
Stock as a single class, will be entitled to elect two additional directors to
serve on the Company's Board of Directors. Any member of the Board of
Directors elected by holders of the Company's Preferred Stock will be deemed to
be an Independent Director for purposes of the actions requiring the approval
of a majority of the Independent Directors. See "Description of Series A
Preferred Shares--Voting Rights".
AUDIT COMMITTEE
Upon consummation of the Offering, the Company will establish an audit
committee which will review the engagement and independence of its auditors.
The audit committee will also review the adequacy of the Company's internal
accounting controls. The audit committee will initially be comprised of
Messrs. Bogan and McGarry.
CREDIT COMMITTEE
Upon consummation of the Offering, the Company will establish a credit
committee which will review and approve the acquisition of any additional
Mortgage Loans by the Company, will review the status of all Mortgage Loans
which have become Classified or have been placed in Nonaccrual Status, and will
review the terms and conditions upon which any such Loans are modified or
disposed of by the Company. The credit committee will initially be comprised of
Messrs. Butvilas, Janson and West.
COMPENSATION OF DIRECTORS AND OFFICERS
The Company intends to pay the Independent Directors of the Company
fees for their services as directors. The Independent Directors will receive a
fee of $250 for attendance (in person or by telephone) at each meeting of the
Board of Directors or Committee of the Board. However, multiple fees shall not
be paid for two or more meetings attended on the same day. The Company will
not pay any compensation to its officers or employees or to directors who are
not Independent Directors.
LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation eliminates, to the fullest
extent permitted by the Delaware General Corporation Law, the personal
liability of a director to the Company or its stockholders for monetary damages
for breach of such director's fiduciary duty. The Company's Certificate of
Incorporation empowers the Company to indemnify, to the fullest extent
permitted by the Delaware General Corporation Law, any director or officer of
the Company. The
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<PAGE> 56
Company's Certificate of Incorporation also empowers the Company to purchase
and maintain insurance to protect any director or officer against any liability
asserted against him or her, or incurred by him or her, arising out of his or
her status as such.
The by-laws of the Company (the "By-laws") require indemnification of
the Company's directors and officers and specify that the right to
indemnification is a contract right, setting forth certain procedural and
evidentiary standards applicable to the enforcement of a claim under the
By-laws. The By-laws also entitle any director or officer to be reimbursed for
the expenses of defending any claim against him or her arising out of his or
her status as such. The By-laws of the Company also provide that the Company
may enter into contracts with any director or officer in furtherance of the
indemnification provisions contained in the By-laws and allow the Company to
create a trust fund to ensure payment of amounts indemnified.
THE ADVISOR
In connection with the consummation of the Offering and the formation
of the Company as described herein, the Company will enter into the Advisory
Agreement with the Bank to administer the day-to-day operations of the Company.
The Bank in its role as advisor under the terms of the Advisory Agreement is
herein referred to as the "Advisor". The Advisor will be responsible for (i)
monitoring the credit quality of the Mortgage Assets held by the Company, (ii)
advising the Company with respect to the acquisition, management, financing and
disposition of the Company's Mortgage Assets and (iii) maintaining custody of
the documents related to the Company's Mortgage Loans. The Advisor may, from
time to time, subcontract all or a portion of its obligations under the
Advisory Agreement to one or more of its affiliates involved in the business of
managing Mortgage Assets or, with the approval of a majority of the Board of
Directors as well as a majority of the Independent Directors, subcontract all
or a portion of its obligations under the Advisory Agreement to unrelated third
parties. The Advisor will not, in connection with the subcontracting of any of
its obligations under the Advisory Agreement, be discharged or relieved in any
respect from its obligations under the Advisory Agreement. Notwithstanding the
above, the Company will control the activities of the Advisor and the Company's
directors will maintain the continuing and exclusive authority to manage the
operations of the Company.
The Advisor has substantial experience in the mortgage lending
industry, both in the origination and in the servicing of mortgage loans. At
December 31, 1996, the Advisor held approximately $614 million of residential
mortgage loans and approximately $111 million of commercial mortgage loans. In
its residential mortgage loan business, the Advisor originates and purchases
residential mortgage loans and may sell such loans to investors, primarily in
the secondary market, while generally retaining the rights to service such
loans. In its commercial mortgage loan business, the Advisor typically
services the commercial mortgage loans in its portfolio which it has
originated.
The Advisory Agreement has an initial term of five years, and will be
renewed automatically for additional five-year periods unless notice of
nonrenewal is delivered to the Advisor by the Company. The Advisory Agreement
may be terminated by the Company at any time upon 90 days' prior notice. As
long as any Series A Preferred Shares remain outstanding, any decision by the
Company either not to renew the Advisory Agreement or to terminate the Advisory
Agreement must be approved by a majority of the Board of Directors, as well as
by a
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<PAGE> 57
majority of the Independent Directors. The Advisor will be entitled to receive
an annual advisory fee equal to $125,000 with respect to the advisory and
management services provided by it to the Company.
As a result of the relationship between the Bank and the Company,
certain conflicts of interest may arise. See "Risk Factors--Relationship with
the Bank and its Affiliates; Conflicts of Interest".
The principal executive offices of the Advisor are located at 400
Quincy Street, Hancock, Michigan 49930, telephone number (906) 482- 2700.
CERTAIN TRANSACTIONS CONSTITUTING THE FORMATION
THE FORMATION
Prior to or simultaneously with the completion of the Offering, the
Company, the Bank and its affiliates will engage in the transactions described
below which are designed (i) to facilitate the Offering, (ii) to transfer the
ownership of the Initial Portfolio to the Company and (iii) to enable the
Company to qualify as a REIT for federal income tax purposes commencing with
its taxable year ending December 31, 1997.
The transactions constituting the formation of the Company will
include the following:
- The Certificate of Incorporation of the Company will be
amended to provide for 2,500,000 authorized shares of
Preferred Stock and 250,000 authorized shares of Common Stock,
and the Company will file a Certificate of Designation with
the Secretary of State of the State of Delaware establishing
the terms of the Series A Preferred Shares.
- The Company will sell to the public 1,100,000 Series A
Preferred Shares in the Offering (assuming the Underwriters'
over-allotment option is not exercised).
- The Bank will acquire 27,500 shares of Common Stock for a
purchase price equal to $27.5 million. In addition, the Bank
will acquire additional shares of Common Stock for a purchase
price equal to the aggregate amount of underwriting
commissions and expenses of the Offering and the formation of
the Company.
- The Bank will sell the Initial Portfolio to the Company for an
aggregate purchase price equal to approximately $55 million
pursuant to the terms of the Residential Mortgage Purchase
Agreement and the Commercial Mortgage Purchase Agreement.
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<PAGE> 58
- The Company will enter into the Advisory Agreement
with the Bank pursuant to which the Bank, as Advisor,
will manage the Mortgage Assets held by the Company
and administer the day-to-day operations of the
Company. See "Management--The Advisor".
- The Company will enter into the Servicing Agreements with the
Bank pursuant to which the Bank, as Servicer, will service the
Mortgage Loans included in the Initial Portfolio. See
"Business and Strategy--Servicing".
The Bank currently owns, and following the completion of the Offering
intends to continue to own, all of the issued and outstanding shares of Common
Stock of the Company.
A PURCHASE OF SERIES A PREFERRED SHARES IS A PURCHASE OF SECURITIES
ISSUED BY THE COMPANY AND IS NOT A PURCHASE OF SECURITIES ISSUED BY, OR
OTHERWISE AN INVESTMENT IN, THE BANK OR D&N. NO OBLIGATION OF THE COMPANY IS
GUARANTEED BY THE BANK OR D&N.
In addition to its ownership of 100% of the Common Stock of the
Company, the Bank will also have responsibility for the day-to-day management
and custody of the Company's assets, in its capacity as Advisor under the
Advisory Agreement, and will have responsibility for servicing the Mortgage
Loans as Servicer under the Servicing Agreements. See "Management--The Advisor"
and "Risk Factors--Relationship with the Bank and its Affiliates; Conflicts of
Interest".
The Company and the Bank intend that the fair value of the Initial
Portfolio will approximately equal the amount (approximately $55 million) that
the Company will pay for the Initial Portfolio. However, no third party
valuations of the Mortgage Loans constituting the Initial Portfolio have been
or will be obtained for purposes of the Offering, and there can be no assurance
that the fair value of the Initial Portfolio will not differ from the purchase
price to be paid by the Company. See "Risk Factors--No Third Party Valuation of
the Mortgage Loans; No Arm's-Length Negotiations with Affiliates" and
"--Relationship with the Bank and its Affiliates; Conflicts of Interest".
BENEFITS TO THE BANK AND ITS AFFILIATES
The Bank and its affiliates expect to realize the following benefits
in connection with the Offering and the formation of the Company:
- The Bank is required by the OTS to maintain certain levels of
capital for regulatory purposes. The Bank has informed the
Company that the Series A Preferred Shares will be treated as
capital of the Bank for regulatory purposes. The Bank has
indicated to the Company that such treatment, together with
the Company's ability to deduct, for income tax purposes, the
dividends payable on the Series A Preferred Shares as a result
of the Company's qualification as a REIT, will provide the
Bank with a more cost-effective means of obtaining regulatory
capital than if the Bank were to issue preferred stock itself.
The Bank would not be permitted to
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treat any securities issued by a trust established by the
Bank to securitize its mortgage assets as capital for
regulatory purposes.
- The Bank will receive approximately $55 million at the
consummation of the Offering (assuming no exercise by the
Underwriters of their over-allotment option) in connection
with the sale of the Initial Portfolio to the Company
(approximately $27.5 million of which represents new funds
after giving effect to the Bank's expense of purchasing the
Company's Common Stock).
- The Bank will be entitled to receive annual advisory and
servicing fees and annual dividends in respect of the Common
Stock. For the first 12 months following completion of the
Offering, these annual fees and dividends are anticipated to
be as follows:
Advisory Fee . . . . . . . . . . . . . . . . . $ 125,000
Servicing Fee(1) . . . . . . . . . . . . . . . 214,000
Common Stock Dividend(2) . . . . . . . . . . . [_______]
$[ ]
---------------
(1) Assumes that for the first 12 months following
completion of the Offering, the Company holds
Residential Mortgage Loans and Commercial Mortgage
Loans with the same outstanding principal balances as
those Mortgage Loans included in the Initial Portfolio.
See "Business and Strategy--Servicing" for a description
of the basis upon which the servicing fees will be
calculated.
(2) The amount of dividends to be paid in respect of the
Common Stock is expected to be equal to the excess of
the Company's "REIT taxable income" (excluding capital
gains) over the amount of dividends paid in respect of
Preferred Stock. The aggregate annual dividend amount of
the Series A Preferred Shares is $[ ] million.
Assuming that (i) the Mortgage Loans included in the
Initial Portfolio are held for the 12-month period
following completion of the Offering, (ii) principal
repayments are reinvested in additional Mortgage Loans
with characteristics similar to those of the Mortgage
Loans included in the Initial Portfolio and (iii)
interest rates remain constant during such 12-month
period, the Company anticipates that the Initial
Portfolio will generate "REIT taxable income" (excluding
capital gains) of approximately $3.9 million, after
payment of servicing and advisory fees, during such
12-month period.
- The Bank will also be entitled to retain any late payment
charges, and penalties collected in connection with the
Mortgage Loans serviced by it. In addition, the Bank,
as Servicer, will receive any benefit derived from interest
earned on collected principal and interest payments between
the date of collection and the date of remittance to the
Company and from interest earned on tax and insurance escrow
funds with respect to Mortgage Loans serviced by it.
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DESCRIPTION OF SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of
the Series A Preferred Shares, and is qualified in its entirety by reference to
the terms and provisions of the Certificate of Designation establishing the
Series A Preferred Shares and the Company's Certificate of Incorporation, the
forms of which have been filed with the Securities and Exchange Commission (the
"Commission") as exhibits to the registration statement of which this
Prospectus forms a part. See "Description of Capital Stock" below.
GENERAL
The Series A Preferred Shares form a series of the Preferred Stock of
the Company, which Preferred Stock may be issued from time to time in one or
more series with such rights, preferences and limitations as are determined by
the Company's Board of Directors or, if then constituted, a duly authorized
committee thereof. The Board of Directors has authorized the Company to issue
the Series A Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued,
fully paid and nonassessable. The holders of the Series A Preferred Shares will
have no preemptive rights with respect to any shares of the capital stock of
the Company or any other securities of the Company convertible into or carrying
rights or options to purchase any such shares. The Series A Preferred Shares
will not be convertible into shares of Common Stock or any other class or
series of capital stock of the Company and will not be subject to any sinking
fund or other obligation of the Company for its repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Preferred Stock will be Illinois Stock Transfer Company, Inc. The registrar
for shares of Preferred Stock will send notices to shareholders of any meetings
at which holders of the Preferred Stock have the right to elect directors of
the Company or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares will be entitled to receive, when
and as declared by the Board of Directors of the Company out of assets of the
Company legally available therefor, cash dividends at the rate of [ ]% per
annum of the initial liquidation preference (equivalent to $[ ] per share
per annum). If declared, dividends on the Series A Preferred Shares will be
payable quarterly on March 31, June 30, September 30 and December 31 of each
year, at such annual rate, commencing on June 30, 1997. Dividends in each
quarterly period will accrue from the first day of such period, whether or not
declared or paid for the prior quarterly period. Each declared dividend will
be payable to holders of record as they appear on the stock register of the
Company on such record dates, not exceeding 45 days preceding the payment dates
thereof, as shall be fixed by the Board of Directors of the Company or a duly
authorized committee thereof. Dividends payable on the Series A Preferred Shares
for any period greater or less than a full dividend period shall be computed
on the basis of twelve 30-day months, a 360-day year and the actual number of
days elapsed in the period. Dividends payable on the Series A Preferred Shares
for each full dividend period shall be computed by dividing the rate per annum
by four.
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The right of holders of Series A Preferred Shares to receive dividends
is noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Company will have no obligation to pay a
dividend for that period, whether or not dividends are declared and paid for
any future period with respect to either the Series A Preferred Shares or the
Common Stock. If the Company fails to pay or declare and set aside for payment
a quarterly dividend on the Series A Preferred Shares, holders of the Preferred
Stock of the Company, including the Series A Preferred Shares, will be entitled
to elect two directors. See "--Voting Rights".
If full dividends on the Series A Preferred Shares for any dividend
period shall not have been declared and paid, or declared and a sum sufficient
for the payment thereof shall not have been set apart for such payments, no
dividends shall be declared or paid or set aside for payment and no other
distribution shall be declared or made or set aside for payment upon the Common
Stock or any other capital stock of the Company ranking junior to or on a
parity with the Series A Preferred Shares as to dividends or amounts upon
liquidation, nor shall any Common Stock or any other capital stock of the
Company ranking junior to or on a parity with the Series A Preferred Shares as
to dividends or amounts upon liquidation be redeemed, purchased or otherwise
acquired for any consideration (or any monies to be paid to or made available
for a sinking fund for the redemption of any such stock) by the Company (except
by conversion into or exchange for other capital stock of the Company ranking
junior to the Series A Preferred Shares as to dividends and amounts upon
liquidation), until such time as dividends on all outstanding Series A
Preferred Shares have been (i) declared and paid for three consecutive dividend
periods and (ii) declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for the fourth consecutive
dividend period.
When dividends are not paid in full (or a sum sufficient for such full
payment is not set apart) upon the Series A Preferred Shares and the shares of
any other series of capital stock ranking on a parity as to dividends with the
Series A Preferred Shares, all dividends declared upon the Series A Preferred
Shares and any other series of capital stock ranking on a parity as to
dividends with the Series A Preferred Shares shall be declared pro rata so that
the amount of dividends declared per share on the Series A Preferred Shares and
such other series of capital stock shall in all cases bear to each other the
same ratio that full dividends, for the then-current dividend period, per share
on the Series A Preferred Shares (which shall not include any accumulation in
respect of unpaid dividends for prior dividend periods) and full dividends,
including required or permitted accumulations, if any, on such other series of
capital stock bear to each other.
For a discussion of the tax treatment of distributions to
stockholders, see "Federal Income Tax Considerations--Taxation of United States
Stockholders" and "--Taxation of Foreign Stockholders" and for a discussion of
certain potential regulatory limitations on the Company's ability to pay
dividends, see "Risk Factors--Financial Institutions Regulatory Restrictions on
Operations of the Company".
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AUTOMATIC EXCHANGE
Each Series A Preferred Share will be exchanged automatically for one
newly issued Bank Preferred Share if the appropriate regulatory agency directs
in writing an exchange of the Series A Preferred Shares for Bank Preferred
Shares because (i) the Bank becomes "undercapitalized" under prompt corrective
action regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory agency, in
its sole discretion and even if the Bank is not "undercapitalized," anticipates
the Bank becoming "undercapitalized" in the near term (i.e., the Exchange
Event). Upon the Automatic Exchange, each holder of Series A Preferred Shares
shall be unconditionally obligated to surrender to the Bank the certificates
representing each Series A Preferred Share of such holder, and the Bank shall
be unconditionally obligated to issue to such holder in exchange for each such
Series A Preferred Share a certificate representing one Bank preferred Share.
Any Series A Preferred Shares purchased or redeemed by the Company prior to the
Time of Exchange (as defined below) shall not be deemed outstanding and shall
not be subject to the Automatic Exchange.
The Automatic Exchange shall occur as of 8:00 a.m. Eastern Time on the
date for such exchange set forth in the Directive, or, if such date is not set
forth in the Directive, as of 8:00 a.m. on the earliest possible date such
exchange could occur consistent with the Directive (the "Time of Exchange"), as
evidenced by the issuance by the Bank of a press release prior to such time.
As of the Time of Exchange, all of the Series A Preferred Shares will be deemed
cancelled without any further action by the Company, all rights of the holders
of Series A Preferred Shares as stockholders of the Company will cease, and
such persons shall thereupon and thereafter be deemed to be and shall be for
all purposes the holders of Bank Preferred Shares within 30 days of such event,
and the Bank will deliver to each such holder certificates for Bank Preferred
Shares upon surrender of certificates for Series A Preferred Shares. Until
such replacement stock certificates are delivered (or in the event such
replacement certificates are not delivered), certificates previously
representing Series A Preferred Shares shall be deemed for all purposes to
represent Bank Preferred Shares. All corporate action necessary for the Bank
to issue the Bank Preferred Shares will be completed upon completion of the
Offering. Accordingly, once the Directive is issued, no action will be
required to be taken by holders of Series A Preferred Shares, by the Bank or by
the Company in order to effect the Automatic Exchange as of the Time of
Exchange.
Absent the occurrence of the Exchange Event, no shares of Bank
Preferred Shares will be issued. Upon the occurrence of the Exchange Event,
the Bank Preferred Shares to be issued as part of the Automatic Exchange would
constitute a newly issued series of preferred stock of the Bank and would
constitute 100% of the issued and outstanding shares of Bank Preferred Shares.
Holders of Bank Preferred Shares would have the same dividend rights,
liquidation preference, redemption options and other attributes as to the Bank
as holders of Series A Preferred Shares have as to the Company, except that the
Bank Preferred Shares would not be listed on the Nasdaq System. Any accrued
and unpaid dividends for the most recent quarter on the Series A Preferred
Shares as of the Time of Exchange would be deemed to be accrued and unpaid
dividends for the most recent quarter on the Bank Preferred Shares. The Bank
Preferred Shares would rank pari passu in terms of dividend payment
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and liquidation preference with any outstanding shares of preferred stock of
the Bank. See "Certain Information Regarding the Bank-- Capitalization". The
Bank intends to register the Bank Preferred Shares with the OTS pursuant to an
Offering Circular, a copy of which is affixed to this Prospectus as Annex I and
incorporated herein by reference. The Bank Preferred Shares will not be
registered with the Commission and will be offered pursuant to an exemption
from registration under Section 3(a)(5) of the Securities Act of 1933, as
amended (the "Securities Act"). The Bank does not intend to apply for listing
of the Bank Preferred Shares on any national securities exchange or for
quotation of the Bank Preferred Shares through the Nasdaq System. Absent the
occurrence of the Exchange Event, however, the Bank will not issue any Bank
Preferred Shares, although the Bank will be able to issue preferred stock in
series. There can be no assurance as to the liquidity of the trading markets
for the Bank Preferred Shares, if issued, or that an active public market for
the Bank Preferred Shares would develop or be maintained.
Holders of Series A Preferred Shares cannot exchange their Series A
Preferred Shares for Bank Preferred Shares voluntarily. In addition, absent
the occurrence of the Automatic Exchange, holders of Series A Preferred Shares
will have no dividend, voting, liquidation preference or other rights with
respect to any security of the Bank; such rights as are conferred by the Series
A Preferred Shares exist solely as to the Company.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to
vote as indicated below, each Series A Preferred Share will be entitled to one
vote on matters on which holders of the Series A Preferred Shares are entitled
to vote.
If at the time of any annual meeting of the Company's stockholders for
the election of directors the Company has failed to pay or declare and set
aside for payment a quarterly dividend during any of the four preceding
quarterly dividend periods on any series of Preferred Stock of the Company,
including the Series A Preferred Shares, the number of directors then
constituting the Board of Directors of the Company will be increased by two,
and the holders of the Series A Preferred Shares, voting together with the
holders of all other series of Preferred Stock as a single class, will be
entitled to elect such two additional directors to serve on the Company's Board
of Directors at each such annual meeting. Each director elected by the holders
of shares of the Preferred Stock shall continue to serve as such director until
the later of (i) the full term for which he or she shall have been elected or
(ii) the payment of four quarterly dividends on the Preferred Stock, including
the Series A Preferred Shares.
The affirmative vote or consent of the holders of at least 66 2/3% of
the outstanding shares of each series of Preferred Stock of the Company,
including the Series A Preferred Shares, voting as a single class without
regard to series, will be required (a) to create any class or series of stock
which shall have preference as to dividends or distribution of assets over any
outstanding series of Preferred Stock of the Company other than a series which
shall not have any right to object to
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such creation or (b) alter or change the provisions of the Company's
Certificate of Incorporation (including the Certificate of Designation
establishing the Series A Preferred Shares) so as to adversely affect the
voting powers, preferences or special rights of the holders of a series of
Preferred Stock of the Company; provided that if such amendment shall not
adversely affect all series of Preferred Stock of the Company, such amendment
need only be approved by at least 66 2/3% of the holders of shares of all
series of Preferred Stock adversely affected thereby.
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to [ ],
2002 (except upon the occurrence of a Tax Event). On or after such date, the
Series A Preferred Shares will be redeemable at the option of the Company, in
whole or in part, at any time or from time to time on not less than 30 nor more
than 60 days' notice by mail, at a redemption price of $25.00 per share, plus
the accrued and unpaid dividends for the most recent quarter to the date of
redemption, if any, thereon. Any such redemption may only be effected with the
prior approval of the OTS (unless at such time such approvals are not
required). Unless full dividends on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof has been set apart for payment for the then current
dividend period, no Series A Preferred Shares shall be redeemed unless all
outstanding Series A Preferred Shares are redeemed and the Company shall not
purchase or otherwise acquire any Series A Preferred Shares; provided, however,
that the Company may purchase or acquire Series A Preferred Shares pursuant to
a purchase or exchange offer made on the same terms to holders of all
outstanding Series A Preferred Shares.
The Company will also have the right at any time, upon the occurrence
of a Tax Event and with the prior written approval of the OTS, to redeem the
Series A Preferred Shares, in whole (but not in part) at a redemption price of
$25.00 per share, plus the accrued and unpaid dividends for the most recent
quarter to the date of redemption, if any, thereon. "Tax Event" means the
receipt by the Company of an opinion of a law or accounting firm experienced in
such matters to the effect that, as a result of (i) any amendment to,
clarification of, or change (including any announced prospective change) in,
the laws or treaties (or any regulations thereunder) of the United States or
any political subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative pronouncement,
published or private ruling, regulatory procedure, notice or announcement
(including any notice or announcement of intent to adopt such procedures or
regulations) ("Administrative Action") or (iii) any amendment to, clarification
of, or change in the official position or the interpretation of such
Administrative Action or any interpretation or pronouncement that provides for
a position with respect to such Administrative Action that differs from the
theretofore generally accepted position, in each case, by any legislative body,
court, governmental authority or regulatory body, irrespective of the manner in
which such amendment, clarification or change is made known, which amendment,
clarification, or change is effective or such pronouncement or decision is
announced on or after the date of issuance of the Series A Preferred Shares,
there is more than an insubstantial risk that (a) dividends paid or to be paid
by the Company with respect to the capital stock of the Company are not, or
will not be, fully deductible by the Company for United States federal income
tax purposes
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or (b) the Company is, or will be, subject to more than a de minimis amount of
other taxes, duties or other governmental charges.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution
or winding up of the Company, the holders of the Series A Preferred Shares at
the time outstanding will be entitled to receive out of assets of the Company
available for distribution to stockholders, before any distribution of assets
is made to holders of Common Stock or any other class of stock ranking junior
to the Series A Preferred Shares upon liquidation, liquidating distributions in
the amount of $25 per share, plus the accrued and unpaid dividends for the most
recent quarter thereon, if any, to the date of liquidation.
After payment of the full amount of the liquidating distributions to
which they are entitled, the holders of Series A Preferred Shares will have no
right or claim to any of the remaining assets of the Company. In the event
that, upon any such voluntary or involuntary liquidation, dissolution or
winding up, the available assets of the Company are insufficient to pay the
amount of the liquidation distributions on all outstanding Series A Preferred
Shares and the corresponding amounts payable on all shares of other classes or
series of capital stock of the Company ranking on a parity with the Series A
Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Company, then the holders of
the Series A Preferred Shares and such other classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the
full liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, the consolidation or merger of the Company with or
into any other entity, the consolidation or merger of any other entity with or
into the Company or the sale of all or substantially all of the property or
business of the Company, shall not be deemed to constitute a liquidation,
dissolution or winding up of the Company.
INDEPENDENT DIRECTOR APPROVAL
The Certificate of Designation establishing the Series A Preferred
Shares requires that, so long as any Series A Preferred Shares are outstanding,
certain actions by the Company be approved by a majority of the Independent
Directors. For so long as there are only two Independent Directors, any action
that requires the approval of a majority of Independent Directors must be
approved by both Independent Directors. James Bogan and William McGarry are
the Company's initial Independent Directors. See "Management--Independent
Directors". In order to be considered "independent", a director must not be a
current director, officer or employee of the Company, the Bank or any affiliate
of the Bank or of any person or persons that, in the aggregate, own more than
one percent of the Common Stock of D&N. In addition, any members of the Board
of Directors of the Company elected by holders of Preferred Stock, including
the Series A Preferred Shares, will be deemed to be Independent Directors for
purposes of approving actions requiring the approval of a majority of the
Independent Directors.
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The actions which may not be taken without the approval of a majority
of the Independent Directors include (i) the issuance of additional Preferred
Stock ranking on a parity with the Series A Preferred Shares, (ii) the
incurrence of debt for borrowed money in excess of 20% of the aggregate amount
of net proceeds received in connection with the issuance of Preferred Stock and
Common Stock, (iii) the modification of the general distribution policy or the
declaration of any distribution in respect of Common Stock for any year if,
after taking into account any such proposed distribution, total distributions
on the Series A Preferred Shares and the Common Stock would exceed an amount
equal to the sum of 105% of the Company's "REIT taxable income" (excluding
capital gains) for such year plus net capital gains of the Company for that
year, (iv) the acquisition of real estate assets other than Mortgage Loans or
Mortgage-Backed Securities that (A) qualify as real estate assets under Section
856(c)(6)(B) of the Code, (B) are rated investment grade or better by at least
one nationally recognized independent rating organization, (C) are not
interest-only, principal-only or high-risk securities and (D) represent
interests in or obligations backed by pools of mortgage loans, (v) the
redemption of any shares of Common Stock, (vi) the termination or modification
of, or the election not to renew, the Advisory Agreement or any Servicing
Agreement or the subcontracting of any duties under the Advisory Agreement or
the Servicing Agreements to third parties unaffiliated with the Bank, (vii) any
dissolution, liquidation or termination of the Company prior to [
], 2002, (viii) any material amendment to or modification of either of the
Mortgage Purchase Agreements, including, without limitation, any amendment to
the representations, warranties and covenants contained in such agreements made
in connection with the acquisition of additional Mortgage Loans and (ix) the
determination to revoke the Company's REIT status or the amendment of any of
the ownership limitations contained in the Certificate of Incorporation. The
Certificate of Designation requires that, in assessing the benefits to the
Company of any proposed action requiring their consent, the Independent
Directors take into account the interests of holders of both the Common Stock
and the Preferred Stock, including, without limitation, holders of the Series A
Preferred Shares. In considering the interests of the holders of Preferred
Stock, including without limitation the holders of the Series A Preferred
Shares, the Independent Directors shall owe the same duties which the
Independent Directors owe to the holders of Common Stock.
RESTRICTIONS ON OWNERSHIP
For information regarding restrictions on ownership of the Series A
Preferred Shares, see "Description of Capital Stock--Restrictions on Ownership
and Transfer".
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the capital stock of the Company
does not purport to be complete and is subject in all respects to the
applicable provisions of the Delaware General Corporation Law and the
Certificate of Incorporation of the Company.
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COMMON STOCK
General. The Company is authorized to issue up to 250,000 shares of
Common Stock. Upon consummation of the Offering and the transactions described
in "Certain Transactions Constituting the Formation", the Company will have
outstanding [ ] shares of Common Stock, all of which will be held by the
Bank.
Dividends. Holders of Common Stock are entitled to receive dividends
when, as and if declared by the Board of Directors out of funds legally
available therefor, provided that, so long as any shares of Preferred Stock are
outstanding, no dividends or other distributions (including redemptions and
purchases) may be made with respect to the Common Stock unless full dividends
on the shares of all series of Preferred Stock, including accumulations in the
case of noncumulative Preferred Stock, have been paid for the prior four
quarters. In order to remain qualified as a REIT, the Company must distribute
annually at least 95% of its annual "REIT taxable income" (not including
capital gains) to stockholders.
Voting Rights. Subject to the rights, if any, of the holders of any
class or series of Preferred Stock, all voting rights are vested in the Common
Stock. The holders of Common Stock are entitled to one vote per share. All of
the issued and outstanding shares of Common Stock are currently, and upon
consummation of the Offering will be, held by the Bank.
Rights Upon Liquidation. In the event of the liquidation, dissolution
or winding up of the Company, whether voluntary or involuntary, after there
have been paid or set aside for the holders of all series of Preferred Stock
the full preferential amounts to which such holders are entitled, the holders
of Common Stock will be entitled to share equally and ratably in any assets
remaining after the payment of all debts and liabilities.
PREFERRED STOCK
Subject to limitations prescribed by Delaware law and the Company's
Certificate of Incorporation, the Board of Directors or, if then constituted, a
duly authorized committee thereof is authorized to issue, from the authorized
but unissued shares of capital stock of the Company, Preferred Stock in such
classes or series as the Board of Directors may determine and to establish,
from time to time, the number of shares of Preferred Stock to be included in
any such class or series and to fix the designation and any preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms and conditions of redemption of the shares
of any such class or series, and such other subjects or matters as may be fixed
by resolution of the Board of Directors.
Preferred Stock, upon issuance against full payment of the purchase
price therefor, will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock will be described in the
Certificate of Designation relating to that class or series.
A Certificate of Designation relating to each class or series of
Preferred Stock will set forth the preferences and other terms of such class or
series, including, without limitation, the
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following: (1) the title and stated value of such class or series; (2) the
number of shares of such class or series offered and the liquidation preference
per share of such class or series; (3) the dividend rate(s), period(s), and/or
payment date(s) or method(s) of calculation thereof applicable to such class or
series; (4) whether such class or series of Preferred Stock is noncumulative or
not and, if noncumulative, the date from which dividends on such class or
series shall accumulate; (5) the provision for a sinking fund, if any, for such
class or series; (6) the provision for redemption, if applicable, of such class
or series; (7) any limitations on direct or beneficial ownership and
restrictions on transfer, in each case as may be appropriate to preserve the
status of the Company as a REIT; (8) any voting rights of such class or series;
(9) the relative ranking and preferences of such class or series as to dividend
rights and rights upon liquidation, dissolution or winding up of the affairs of
the Company; (10) any limitations on issuance of any class or series of
Preferred Stock ranking senior to or on a parity with such class or series of
Preferred Stock as to dividend rights and rights upon liquidation, dissolution
or winding up of the affairs of the Company; and (11) any other specific terms,
preferences, rights, limitations or restrictions of such class or series.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
The Company's Certificate of Incorporation contains certain
restrictions on the number of shares of Common Stock and Preferred Stock that
individual stockholders may own. For the Company to qualify as a REIT under the
Code, no more than 50% in number or value of its outstanding shares of capital
stock may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) during the last half of a
taxable year (other than the first year) or during a proportionate part of a
shorter taxable year (the "Five or Fewer Test"). The capital stock of the
Company must also be beneficially owned by 100 or more persons during at least
335 days of a taxable year or during a proportionate part of a shorter taxable
year (the "One Hundred Persons Test"). The ownership by the Bank of 100% of the
shares of Common Stock of the REIT will not adversely affect the Company's REIT
qualification because each stockholder of D&N (the sole stockholder of the
Bank) counts as a separate beneficial owner for purposes of the Five or Fewer
Test and the capital stock of D&N is widely held. Further, the Certificate of
Incorporation of the Company contains restrictions on the acquisition of
Preferred Stock intended to ensure compliance with the One Hundred Persons
Test. Such provisions include a restriction that if any transfer of shares of
capital stock of the Company would cause the Company to be beneficially owned
by fewer than 100 persons, such transfer shall be null and void and the
intended transferee will acquire no rights to the stock.
Subject to certain exceptions specified in the Company's Certificate
of Incorporation, no holder of Preferred Stock is permitted to own (including
shares deemed to be owned by virtue of the attribution provisions of the Code)
more than 9.9% (the "Ownership Limit") of any issued and outstanding class or
series of Preferred Stock. The Board of Directors may (but in no event will be
required to), upon receipt of a ruling from the IRS or an opinion of counsel
satisfactory to it, waive the Ownership Limit with respect to a holder if such
holder's ownership will not then or in the future jeopardize the Company's
status as a REIT.
The Certificate of Incorporation provides that shares of any class or
series of Preferred Stock owned, or deemed to be owned, by or transferred to a
stockholder in excess of the
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Ownership Limit (the "Excess Shares") will automatically be transferred, by
operation of law, to a trustee as a trustee of a trust for the exclusive
benefit of a charity to be named by the Company as of the day prior to the day
the prohibited transfer took place. Any distributions paid prior to the
discovery of the prohibited transfer are to be repaid by the original
transferee to the Company and by the Company to the trustee; any vote of the
shares while the shares were held by the original transferee prior to the
Company's discovery thereof shall be void ab initio and the original transferee
shall be deemed to have given its proxy to the trustee. Any unpaid
distributions with respect to the original transferee will be rescinded as void
ab initio. In liquidation, the original transferee stockholder's ratable share
of the Company's assets would be limited to the price paid by the original
transferee for the Excess Shares or, if no value was given, the price per share
equal to the closing market price on the date of the purported transfer. The
trustee of the trust shall promptly sell the shares to any person whose
ownership is not prohibited, whereupon the interest of the trust shall
terminate. Proceeds of the sale shall be paid to the original transferee up to
its purchase price (or, if the original transferee did not purchase the shares,
the value on its date of acquisition) and any remaining proceeds shall be paid
to a charity to be named by the Company.
The constructive ownership rules of the Code are complex and may cause
Preferred Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9.9% of a class
or series of issued and outstanding Preferred Stock (or the acquisition of an
interest in an entity that owns shares of such series of Preferred Stock) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9.9% of such class or
series of Preferred Stock, and thus subject such stock to the Ownership Limit.
Direct or constructive ownership in excess of the Ownership Limit would cause
ownership of the shares in excess of the limit to be transferred to the
trustee.
All certificates representing shares of Preferred Stock will bear a
legend referring to the restrictions described above.
The Ownership Limit provisions will not be automatically removed even
if the REIT Provisions (as defined herein) are changed so as to eliminate any
ownership concentration limitation or if the ownership concentration limitation
is increased. The Certificate of Incorporation may not be amended to alter,
change, repeal or amend any of the Ownership Limit provisions without the prior
approval of a majority of the Independent Directors.
The Certificate of Incorporation requires that any person who
beneficially owns 1% (or such lower percentage as may be required by the Code
or the Treasury Regulations) of the outstanding shares of any class or series
of Preferred Stock of the Company must provide certain information to the
Company within 30 days of June 30 and December 31 of each year. In addition,
each stockholder shall upon demand be required to disclose to the Company in
writing such information as the Company may request in order to determine the
effect, if any, of such stockholder's actual and constructive ownership on the
Company's status as a REIT and to ensure compliance with the Ownership Limit.
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FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding the Offering is based upon current law, is for general information
only and is not tax advice. The information set forth below, to the extent that
it constitutes summaries of tax matters or tax conclusions, has been reviewed
by Coopers & Lybrand L.L.P., and it is their opinion that such information is
accurate in all material respects. The discussion below is based on existing
federal income tax law, which is subject to change, with possible retroactive
effect. The discussion below does not address all aspects of taxation that may
be relevant in the particular circumstances of each stockholder or to certain
types of stockholders (including insurance companies, tax-exempt entities,
financial institutions or broker-dealers, foreign corporations and persons who
are not citizens or residents of the United States, except to the extent
discussed) subject to special treatment under the federal income tax laws.
EACH PROSPECTIVE INVESTOR IS URGED TO SEEK INDIVIDUAL ADVICE
CONCERNING THE EFFECT ON HIM OR HER OF THE PURCHASE, OWNERSHIP AND SALE OF THE
SERIES A PREFERRED SHARES UNDER FEDERAL, STATE, LOCAL AND FOREIGN TAX LAWS,
INCLUDING THE EFFECT OF POSSIBLE CHANGES IN TAX LAW.
TAXATION OF THE COMPANY
General. The Company will elect to be taxed as a REIT under Sections
856 through 860 of the Code and the applicable Treasury Regulations (the "REIT
Requirements" or the "REIT Provisions"), which are the requirements for
qualifying as a REIT, commencing with its taxable year ending December 31,
1997. The Company believes that, commencing with its taxable year ending
December 31, 1997, it will be owned and organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code, and the Company
intends to continue to operate in such a manner, but no assurance can be given
that it will operate in a manner so as to qualify or remain qualified.
The REIT Requirements are technical and complex. The following
discussion sets forth only the material aspects of those requirements. This
summary is qualified in its entirety by the applicable Code provisions, rules
and regulations promulgated thereunder, and administrative and judicial
interpretations thereof.
In the opinion of Coopers & Lybrand L.L.P., commencing with the
Company's taxable year ending December 31, 1997, the Company will be organized
in conformity with the requirements for qualification as a REIT, and its
proposed method of operation will enable it to meet the requirements for
qualification and taxation as a REIT under the Code. It must be emphasized that
this opinion is based on certain factual assumptions relating to the
organization and operation of the Company and is conditioned upon certain
representations made by the Company as to factual matters, such as the
organization and expected manner of operation of the Company. In addition, this
opinion is based upon factual assumptions and representations of the
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Company concerning its business and Mortgage Assets. Moreover, such
qualification and taxation as a REIT depends upon the Company's ability to
meet, through actual annual operating results, distribution levels and
diversity of stock ownership, the various qualification tests imposed under the
Code discussed below, the results of which will not be reviewed by Coopers &
Lybrand L.L.P. on a continuing basis. No assurance can be given that the actual
results of the Company's operation for any one taxable year will satisfy such
requirements. See "--Failure to Qualify".
If the Company qualifies for taxation as a REIT, it generally will not
be subject to federal corporate income taxes on that portion of its ordinary
income or capital gain that is currently distributed to stockholders. Such
treatment substantially eliminates the federal "double taxation" on earnings
(at the corporate and the stockholder levels) that generally results from
investment in a corporation.
Despite the REIT election, the Company may be subject to federal
income and excise tax as follows:
First, the Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
Second, under certain circumstances, the Company may be subject to the
"alternative minimum tax" on certain of its items of tax preferences,
if any.
Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" that is held primarily for sale
to customers in the ordinary course of business or (ii) other
nonqualifying net income from foreclosure property, it will be subject
to tax at the highest corporate rate on such income.
Fourth, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course
of business, other than sales of foreclosure property and sales that
qualify for a statutory safe harbor), such income will be subject to a
100% tax.
Fifth, if the Company should fail to satisfy the 75% gross income test
or the 95% gross income test (as discussed below), but has nonetheless
maintained its qualifications as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on the
net income attributable to the greater of the amount by which the
Company fails the 75% or 95% test, multiplied by a fraction intended
to reflect the Company's profitability.
Sixth, if the Company should fail to distribute, or fail to be treated
as having distributed, with respect to each calendar year at least the
sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain net income for such year, and (iii) any
undistributed taxable income from prior periods, the
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Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
The Company does not now intend to acquire any appreciated assets from
a corporation generally subject to full corporate-level tax in a transaction in
which any gain on the transfer is not fully recognized. However, in the event
of such an acquisition, the Company could, under certain circumstances, be
subject to tax upon disposition of such assets.
Organizational Requirements. The Code defines a REIT as a
corporation, trust, or association (i) that is managed by one or more trustees
or directors; (ii) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(iii) that would be taxable as a domestic corporation, but for the REIT
Requirements; (iv) that is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial ownership
of which is held by 100 or more persons; (vi) not more than 50% in value of the
outstanding stock of which is owned, directly or indirectly, by five or fewer
individuals (as defined in the Code to include private foundations and certain
pension trusts and other entities) at any time during the last half of each
taxable year; (vii) that is not a bank, an insurance company or certain other
specified types of financial institutions; and (viii) that meets certain other
tests, described below, regarding the nature of its income and assets. The Code
provides that conditions (i) through (iv), inclusive, must be met during the
entire taxable year and that condition (v) must be met during at least 335 days
of a taxable year of 12 months, or during a proportionate part of a taxable
year of less than 12 months. Conditions (v) and (vi) will not apply until after
the first taxable year for which an election is made to be taxed as a REIT. For
purposes of condition (vi), certain tax-exempt entities are generally treated
as individuals, and the beneficiaries of a pension trust that qualifies under
Section 401(a) of the Code and that holds shares of a REIT will be treated as
holding shares of the REIT in proportion to their actuarial interests in the
pension trust. See "--Taxation of United States Stockholders-- Treatment of
Tax-Exempt Stockholders".
Coopers & Lybrand L.L.P. is of the opinion that, for purposes of
condition (v) above, beneficial owners of both common and preferred shares of a
corporation are counted toward the 100 holder requirement. The Company expects
that the Series A Preferred Shares will be held by not less than 100 beneficial
owners at all times such Shares are outstanding. Such ownership of the Series A
Preferred Shares would allow the Company to meet condition (v). Coopers &
Lybrand L.L.P. is of the opinion that, in determining whether condition (vi)
above is met, shareholders of a corporation are treated as owning their
proportionate share of any stock held by that corporation. The Company expects
that the stock of the Company and of D&N will at no time be held directly or
indirectly by five or fewer shareholders who are individuals, private
foundations, pension trusts or other relevant entities that in the aggregate
own more than 50 percent by value of the stock of the Company or D&N,
respectively. Stock ownership of the Company and D&N in accordance with the
Company's expectation will satisfy condition (vi) with respect to the Company.
In addition, the Company's Certificate of Incorporation includes certain
restrictions regarding transfer of its shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such transfer and ownership restrictions are
described under "Description of Capital Stock--Restrictions
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on Ownership and Transfer". Coopers & Lybrand L.L.P. is also of the opinion
that the Company will not be treated as a bank for federal income tax purposes
by reason of the activities of any shareholder.
In addition, a corporation may not elect to become a REIT unless its
taxable year is the calendar year. The Company satisfies this requirement.
In the case of a REIT that is a partner in a partnership, Treasury
Regulations provide that the REIT will be deemed to own its proportionate share
of the assets of the partnership and will be deemed to be entitled to the
income of the partnership attributable to such share. In addition, the
character of the assets and gross income of the partnership will retain the
same character in the hands of the REIT for purposes of the REIT Requirements,
including satisfying the gross income tests and the assets test.
Income Tests. In order to maintain qualification as a REIT, the
Company must annually satisfy three gross income requirements. First, at least
75% of the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (as
interest on obligations secured by mortgages on real property, certain "rents
from real property" or as gain on the sale or exchange of such property and
certain fees with respect to agreements to make or acquire mortgage loans),
from certain types of temporary investments or certain other types of gross
income. Second, at least 95% of the Company's gross income (excluding gross
income from prohibited transactions) for each taxable year must be derived from
such real property investments as aforesaid and from dividends, interest, and
gain from the sale or other disposition of stock or securities and certain
other types of gross income (or from any combination of the foregoing). Third,
short-term gain from the sale or other disposition of stock or securities, gain
from prohibited transactions, and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) from the date of acquisition must represent less
than 30% of the Company's gross income (including gross income from prohibited
transactions) for each taxable year.
For interest to qualify as "interest on obligations secured by
mortgages on real property or on interests in real property," the obligation
must be secured by real property having a fair market value at the time of
acquisition at least equal to the principal amount of the loan. The term
"interest" includes only an amount that constitutes compensation for the use or
forbearance of money. For example, a fee received or accrued by a lender which
is in fact a charge for services performed for a borrower rather than a charge
for the use of borrowed money is not includible as interest; amounts earned as
consideration for entering into agreements to make loans secured by real
property, although not interest, are otherwise treated as within the 75% and
95% classes of gross income so long as the determination of those amounts does
not depend on the income or profits of any person. By statute, the term
interest does not include any amount based on income or profits except that the
Code provides that (i) interest "based on a fixed percentage or percentages of
receipts or sales" is not excluded and (ii) when the REIT makes a loan that
provides for interest based on the borrower's receipts or sales and the
borrower leases under one or more
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leases based on income or profits, only a portion of the contingent interest
paid by the borrower will be disqualified as interest.
Rents received or deemed to be received by the Company will qualify as
"rents from real property" in satisfying the gross income requirements for a
REIT described above only if certain statutory conditions are met that limit
rental income essentially to rentals on investment-type properties. In the
event that a REIT acquires by foreclosure property that generates income that
does not qualify as "rents from real property," such income may be treated as
qualifying for two years following foreclosure (which period may be extended by
the IRS) so long as (i) all leases entered into after foreclosure generate only
qualifying rent, (ii) only limited construction takes place and (iii) within 90
days of foreclosure, any trade or business in which the property is used is
conducted by an independent contractor from which the REIT derives no income.
In the event the special foreclosure property rule applies to qualify otherwise
unqualified income, the net income that qualifies only under the special rule
for foreclosure property may be subject to tax, as described above.
Relief Provisions. If the Company fails to satisfy one or both of the
75% or 95% gross income tests for any taxable year, it may nevertheless qualify
as a REIT for such year if it is entitled to relief under certain provisions of
the Code. These relief provisions will be generally available if the Company's
failure to meet such tests was due to reasonable cause and not due to willful
neglect, the Company attaches a schedule of the sources of its income to its
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. As discussed above in "--Taxation of the Company--General," even if
these relief provisions apply, a tax would be imposed with respect to the
excess net income.
Asset Tests. At the close of each quarter of its taxable year, the
Company must satisfy three tests relating to the nature of its assets. First,
at least 75% of the value of the Company's total assets must be represented by
real estate assets (including stock or debt instruments held for not more than
one year that were purchased with the proceeds of a stock offering or long-term
(at least five years) debt offering of the Company), cash, cash items, and
government securities. Second, not more than 25% of the Company's total assets
may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
After initially meeting the asset tests at the close of any quarter,
the Company will not lose its status as a REIT if it fails to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter, the failure can be cured by
disposition of sufficient nonqualifying assets within 30 days after the close
of that quarter. The Company intends to maintain adequate records of the value
of its assets to ensure compliance with the asset tests, and
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to take such action within 30 days after the close of any quarter as may be
required to cure any noncompliance but no assurance can be given that such
asset tests will be met.
Annual Distribution Requirements. In order to be treated as a REIT,
the Company is required to distribute dividends (other than capital gain
dividends) to its stockholders in an amount at least equal to (A) the sum of
(i) 95% of the Company's "REIT taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) plus (ii) 95% of
the net income, if any, from foreclosure property in excess of the special tax
on income from foreclosure property, minus (B) the sum of certain items of
noncash income. Such distributions must be paid in the taxable year to which
they relate or in the following taxable year if declared before the Company
timely files its tax return for such year and if paid on or before the first
regular dividend payment after such declaration. To the extent that the Company
does not distribute (or is not treated as having distributed) all of its net
capital gain or distributes (or is treated as having distributed) at least 95%,
but less than 100% of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gains corporate tax
rates. The Code permits a stockholder to elect to be treated for tax purposes
as having (i) received a distribution in the amount specified in the election
and (ii) contributed the amount thereof to the capital of the Company. In the
event the Company fails to distribute 100% of its income and capital gains, the
Bank may elect to be so treated. Furthermore, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. The Company intends to make
timely distributions sufficient to satisfy the annual distribution requirement.
"REIT taxable income" is the taxable income of a REIT, which generally
is computed in the same fashion as the taxable income of any corporation,
except that (i) certain deductions are not available, such as the deduction for
dividends received, (ii) it may deduct dividends paid (or deemed paid) during
the taxable year, (iii) net capital gains and losses are excluded, and (iv)
certain other adjustments are made.
It is possible that, from time to time, the Company may not have
sufficient cash or other liquid assets to meet the 95% distribution requirement
due to timing differences between (i) the actual receipt of income and actual
payment of deductible expenses and (ii) the inclusion of such income and
deduction of such expenses in calculating the taxable income of the Company. In
the event that such an insufficiency or such timing differences occur, in order
to meet the 95% distribution requirement the Company may find it necessary to
arrange for borrowings or to pay dividends in the form of taxable stock
dividends if it is practicable to do so.
Under certain circumstances, the Company may be able to rectify a
failure to meet the distribution requirement for a year by paying "deficiency
dividends" to stockholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. Thus, the Company
may be able to avoid being taxed on amounts distributed as deficiency
dividends; however, the Company will be required to pay interest based upon the
amount of any deduction taken for deficiency dividends.
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FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable
year, and the relief provisions described above do not apply, the Company will
be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in
any year in which the Company fails to qualify will not be deductible by the
Company nor will they be required to be made. In such event, to the extent of
current and accumulated earnings and profits, all distributions to stockholders
will be taxable as ordinary income, and subject to certain limitations of the
Code, corporate distributees may be eligible for the dividends-received
deduction. Unless entitled to relief under specific statutory provisions, the
Company will also be disqualified from taxation as a REIT for the four taxable
years following the year during which qualification was lost, and will not be
permitted to requalify unless it distributes any earnings and profits
attributable to the period when it failed to qualify. In addition, it would be
subject to tax on any built-in gains on property held during the period during
which it did not qualify if it sold such property within 10 years of
requalification. It is not possible to state whether in all circumstances the
Company would be entitled to such statutory relief.
TAX TREATMENT OF AUTOMATIC EXCHANGE
Upon the occurrence of the Automatic Exchange, the outstanding Series A
Preferred Shares will be automatically exchanged on a one-for-one basis for
Bank Preferred Shares. See "Description of Series A Preferred
Shares--Automatic Exchange". The Automatic Exchange will be a taxable exchange
with respect to which each holder of the Series A Preferred Shares will have a
gain or loss, as the case may be, measured by the difference between the basis
of such holder in the Series A Preferred Shares and the fair market value of
the Bank Preferred Shares received in the Automatic Exchange. Assuming that
such holder's Series A Preferred Shares were held as capital assets for more
than one year prior to the Automatic Exchange, any gain or loss will be
long-term capital gain or loss. Long-term capital losses are deductible,
subject to certain limitations. The basis of the holder in the Bank Preferred
Shares will be their fair market value at the time of the Automatic Exchange.
TAXATION OF UNITED STATES STOCKHOLDERS
As used herein, the term "United States Stockholder" means a holder of
Series A Preferred Shares that is for United States federal income tax purposes
(i) a citizen or resident of the United States, (ii) a corporation,
partnership, or other entity created or organized in or under the laws of the
United States or of any political subdivision thereof, or (iii) an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.
Distributions Generally. As long as the Company qualifies as a REIT,
distributions to a United States Stockholder up to the amount of the Company's
current or accumulated earnings and profits (and not designated as capital
gains dividends) will be taken into account as ordinary income and will not be
eligible for the dividends-received deduction for corporations. Distributions
that are designated by the Company as capital gain dividends will be treated as
long-term capital gain (to the extent they do not exceed the Company's actual
net capital gain) for
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the taxable year without regard to the period for which the stockholder has
held its stock. However, corporate stockholders may be required to treat up to
20% of certain capital gains dividends as ordinary income, pursuant to Section
291(d) of the Code. A distribution in excess of current or accumulated earnings
and profits will first be treated as a tax-free return of capital, reducing the
tax basis in the United States Stockholder's Series A Preferred Shares, and a
distribution in excess of the United States Stockholder's tax basis in its
Series A Preferred Shares will be taxable gain realized from the sale of such
shares. Dividends declared by the Company in October, November or December of
any year payable to a stockholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
stockholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. Stockholders
may not claim the benefit of any tax losses of the Company on their own income
tax returns.
The Company will be treated as having sufficient earnings and profits
to treat as a dividend any distribution by the Company up to the amount
required to be distributed in order to avoid imposition of the 4% excise tax
discussed under "--Taxation of the Company--General" and "--Taxation of the
Company--Annual Distribution Requirements" above. As a result, stockholders may
be required to treat as taxable dividends certain distributions that would
otherwise result in tax-free returns of capital. Moreover, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of the Company's earnings and
profits.
Losses incurred on the sale or exchange of Series A Preferred Shares
held for less than six months will be deemed a long-term capital loss to the
extent of any capital gain dividends received by the selling stockholder with
respect to such stock.
Treatment of Tax-Exempt Stockholders. Distributions from the Company
to a tax-exempt employee's pension trust or other domestic tax-exempt
stockholder will generally not constitute "unrelated business taxable income"
unless the stockholder has borrowed to acquire or carry its shares of the
Company. A tax-exempt employee's pension trust that holds more than 10% of the
shares of the capital stock of the Company may under certain circumstances be
required to treat a certain percentage of dividends as unrelated business
taxable income if the Company is "predominantly held" by qualified trusts. For
these purposes, a qualified trust is any trust defined under Section 401(a) of
the Code and exempt from tax under Section 501(a) of the Code.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing United States income taxation of non-resident
alien individuals, foreign corporations, foreign partnerships, and foreign
trusts and estates holding Series A Preferred Shares (collectively, "Foreign
Stockholders") are complex, and no attempt will be made herein to provide more
than a summary of such rules. A Foreign Stockholder should consult with its own
tax advisor to determine the effect of federal, state, and local and country of
tax residence income tax laws on an investment in the Company, including any
reporting requirements.
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In general, a Foreign Stockholder will be subject to regular United
States income tax to the same extent as a United States Stockholder with
respect to income or gain derived from its investment in the Company if under
all facts and circumstances such income or gain is "effectively connected" with
such stockholder's conduct of a trade or business in the United States. See "--
Taxation of United States Stockholders". A corporate Foreign Stockholder that
receives income that is effectively connected with a United States trade or
business may also be subject to the branch profits tax under Section 884 of the
Code, which is payable in addition to the regular United States corporate
income tax. The following discussion will apply to a Foreign Stockholder whose
income or gain derived from investment in the Company is not so effectively
connected in light of the facts and circumstances.
The Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA")
significantly affects the federal income tax treatment of the sale or exchange
of shares in REITs held by a Foreign Stockholder. Under FIRPTA, gain or loss
realized on the sale or exchange of a "United States real property interest"
("USRPI") by a foreign taxpayer is treated by statute as effectively connected
with a U.S. trade or business as a matter of law, without regard to the
particular facts and circumstances. Shares of a corporation generally are
treated as a USRPI only if the fair market value of USRPIs owned by the
corporation equals or exceeds 50% of the fair market value of its total assets.
If at no time within the five years preceding the sale or exchange of shares in
the Company the shares constituted a USRPI, gain or loss on the sale or
exchange will not be treated as effectively connected with a U.S. trade or
business by reason of FIRPTA. While ownership of real property within the U.S.
(including ownership of interests in certain entities) is always a USRPI, a
loan secured by a mortgage on U.S. real property constitutes a USRPI only if
the amounts payable by the borrower are contingent on the income or receipts of
the borrower or the property or otherwise based on the property. Because such
contingent interest is not likely to be present in the residential mortgage
loans to be owned by the Company that are expected to represent approximately
90% of the assets of the Company (although such interest is fairly common in
commercial loans) the Company believes it is unlikely that its shares will be
USRPIs or that it will derive significant gain from the sale or exchange of
USRPIs, although whether its shares are a USRPI or it derives income from
USRPIs will depend upon the facts as they ultimately develop. A distribution of
cash to a Foreign Stockholder that is not attributable to gain from sales or
exchanges by the Company of USRPIs and not designated by the Company as a
capital gain dividend is not subject to FIRPTA but generally will be subject to
the withholding of United States federal income tax at a rate of 30%, unless
(i) a lower treaty rate applies or (ii) the Foreign Stockholder files an IRS
Form 4224 with the withholding agent certifying that the investment to which
the distribution relates is effectively connected to a United States trade or
business of such Foreign Stockholder. A Foreign Stockholder who receives a
distribution that has been subject to such withholding tax may file a claim for
refund to the extent the withholding has been imposed on a portion of such
distributions representing amounts in excess of current and accumulated
earnings and profits. Under FIRPTA, distributions of proceeds attributable to
gain from the Company's sale or exchange of a USRPI are subject to income tax
at the normal capital gains rates applicable to United States stockholders
(subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual). Also, these
distributions may be subject to a 30% branch profits tax in the hands of a
corporate Foreign Stockholder not entitled to a treaty exemption or reduced
rate of tax. Treasury Regulations require
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the withholding of 35% of any distribution that could be designated by the
Company as a capital gain dividend. This amount is creditable against the
Foreign Stockholder's tax liability. It should be noted that the 35%
withholding tax rate on capital gain dividends is higher than the 28% maximum
rate on capital gains of individuals. Capital gain dividends not attributable
to gain on the sale or exchange of USRPIs are not subject to United States
taxation if there is no requirement of withholding.
If the shares of the Company do constitute a USRPI (or did so
constitute within the previous five years), gain or loss on the sale or
exchange of the shares will be treated as effectively connected with the
conduct of a U.S. trade or business unless one or more special rules apply to
preclude U.S. taxation.
If the Company is a "domestically-controlled REIT," a sale of Series A
Preferred Shares by a Foreign Stockholder generally will not be subject to
United States taxation. A domestically controlled REIT is a REIT in which, at
all times during a specified testing period, less than 50% in value of its
shares is held directly or indirectly, under Code attribution rules, by Foreign
Stockholders. Because the Series A Preferred Shares will be publicly traded, no
assurance can be given that the Company will constitute a
domestically-controlled REIT or that it will be possible to ascertain whether
or not it is domestically-controlled.
If the Company is not a domestically-controlled REIT, a sale of Series
A Preferred Shares would be subject to tax under FIRPTA as a sale of a USRPI
and gain or loss would be effectively connected with a United States trade or
business if either (i) the Series A Preferred Shares were not "regularly
traded" (as defined by applicable Treasury Regulations) on an established
securities market (e.g., the New York Stock Exchange, on which the Series A
Preferred Shares will be listed) during the quarter in which the Series A
Preferred Shares were sold or (ii) even if the Series A Preferred Shares were
"regularly traded", the selling stockholder held, directly or indirectly, more
than 5% of the Series A Preferred Shares during the five-year period ending on
the date of disposition. The applicable Treasury Regulations that define
"regularly traded" for this purpose may be interpreted to provide that a
security will not be "regularly traded" for any calendar quarter during which
100 or fewer persons (treating related persons as one person) in the aggregate
own 50% or more of such security or the quarterly trading volume is less than
7.5% of the average number of the issued and outstanding shares of such
security (2.5% if there are 2,500 or more stockholders of record). In the event
that the Series A Preferred Shares were not "regularly traded" and the Company
did not at that time constitute a domestically-controlled REIT, a Foreign
Stockholder (without regard to its ownership percentage of Series A Preferred
Shares) must treat as effectively connected with a United States trade or
business any gain or loss on any sale or other disposition of Series A
Preferred Shares that occurs within a calendar quarter during which the Series
A Preferred Shares were not "regularly traded" and the shares were a USRPI.
If the gain on the sale of the Company's Series A Preferred Shares
were subject to taxation under FIRPTA, the Foreign Stockholder would be subject
to the same treatment as a United States Stockholder with respect to such gain
(subject to applicable alternative minimum tax and a special alternative
minimum tax in the case of a nonresident alien individual). Notwithstanding the
74
<PAGE> 80
foregoing, capital gain from sale of shares of a REIT not subject to FIRPTA
will nonetheless be taxable to a Foreign Stockholder who is an individual
(under rules generally applicable to United States Stockholders) if such person
is in the United States for 183 days or more during the taxable year of
disposition and certain other conditions apply. In any event, a purchaser of
Series A Preferred Shares from a Foreign Stockholder will not be required under
FIRPTA to withhold on the purchase price if the purchased Series A Preferred
Shares are "regularly traded" on an established securities market or if the
Company is a domestically-controlled REIT. Otherwise, under FIRPTA the
purchaser of Series A Preferred Shares may be required to withhold 10% of the
purchase price and remit such amount to the IRS.
Shares of the Company owned by a nonresident alien decedent are
subject to United States federal estate tax (which is imposed at rates up to
55%) unless an estate tax treaty binding upon the United States provides
otherwise.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its stockholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
United States Stockholders. Under certain circumstances, a United
States Stockholder of Series A Preferred Shares may be subject to backup
withholding at a rate of 31% on payments made with respect to, or cash proceeds
of a sale or exchange of, Series A Preferred Shares. Backup withholding will
apply only if the holder (i) fails to furnish the person required to withhold
with its Taxpayer Identification Number ("TIN") which, for an individual, would
be his or her Social Security Number, (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that it has failed properly to report payments of interest
and dividends, or (iv) under certain circumstances, fails to certify, under
penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. Backup withholding will not apply with
respect to payments made to certain exempt recipients, such as corporations and
tax-exempt organizations. A United States Stockholder should consult with a tax
advisor regarding qualification for exemption from backup withholding and the
procedure for obtaining such an exemption. Backup withholding is not an
additional tax. Rather, the amount of any backup withholding with respect to a
payment to a United States Stockholder will be allowed as a credit against such
United States Stockholder's United States federal income tax liability and may
entitle such United States Stockholder to a refund, provided that the required
information is furnished to the IRS.
Foreign Stockholders. Additional issues may arise pertaining to
information reporting and backup withholding with respect to Foreign
Stockholders, and a Foreign Stockholder should consult with a tax advisor with
respect to any such information reporting and backup withholding requirements.
Backup withholding with respect to a Foreign Stockholder is not an additional
tax. Rather, the amount of any backup withholding with respect to a payment to
a Foreign Stockholder will be allowed as a credit against any United States
federal income tax liability of such Foreign Stockholder. If withholding
results in an overpayment of taxes, a refund may be obtained provided that the
required information is furnished to the IRS.
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<PAGE> 81
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its stockholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective stockholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in the Company.
ERISA CONSIDERATIONS
GENERAL
In evaluating the purchase of Series A Preferred Shares, a fiduciary
of a qualified profit-sharing, pension or stock bonus plan, including a plan
for self-employed individuals and their employees or any other employee benefit
plan subject to the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), a collective investment fund or separate account in which such plans
invest and any other investor using assets that are treated as the assets of an
employee benefit plan subject to ERISA (each, a "Plan" and collectively,
"Plans") should consider (a) whether the ownership of Series A Preferred Shares
is in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Series A Preferred Shares is solely in the interest of
Plan participants and beneficiaries and otherwise consistent with the
fiduciary's responsibilities and in compliance with the requirements of Part 4
of Title I of ERISA, including, in particular, the diversification, prudence
and liquidity requirements of Section 404 of ERISA and the prohibited
transaction provisions of Section 406 of ERISA and Section 4975 of the Code;
(c) whether the Company's assets are treated as assets of the Plan; and (d) the
need to value the assets of the Plan annually. In addition, the fiduciary of an
individual retirement arrangement under Section 408 of the Code (an "IRA")
considering the purchase of Series A Preferred Shares should consider whether
the ownership of Series A Preferred Shares would result in a non-exempt
prohibited transaction under Section 4975 of the Code.
The fiduciary investment considerations summarized below provide a
general discussion that does not include all of the fiduciary investment
considerations relevant to Plans and, where indicated, IRAs. This summary is
based on the current provisions of ERISA and the Code and regulations and
rulings thereunder, and may be changed (perhaps adversely and with retroactive
effect) by future legislative, administrative or judicial actions. PLANS AND
IRAS THAT ARE PROSPECTIVE PURCHASERS OF SERIES A PREFERRED SHARES SHOULD
CONSULT WITH AND RELY UPON THEIR OWN ADVISORS IN EVALUATING THESE MATTERS IN
LIGHT OF THEIR OWN PARTICULAR CIRCUMSTANCES.
PLAN ASSET REGULATION
Under Department of Labor regulations governing what constitutes the
assets of a Plan or IRA ("Plan Assets") for purposes of ERISA and the related
prohibited transaction provisions of
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<PAGE> 82
the Code (the "Plan Asset Regulation", 29 C.F.R. Sec.2510.3-101), when a Plan
or IRA makes an equity investment in another entity, the underlying assets of
the entity will not be considered Plan Assets if the equity interest is a
"publicly-offered security".
For purposes of the Plan Asset Regulation, a "publicly-offered
security" is a security that is (a) "freely transferable", (b) part of a class
of securities that is "widely held," and (c) sold to the Plan or IRA as part of
an offering of securities to the public pursuant to an effective registration
statement under the Securities Act and part of a class of securities that is
registered under the Exchange Act within 120 days (or such later time as may be
allowed by the Commission) after the end of the fiscal year of the issuer
during which the offering of such securities to the public occurred. The Series
A Preferred Shares will be registered under the Securities Act of 1933, as
amended (the "Securities Act"), and the Exchange Act within the time periods
specified in the Plan Asset Regulation.
The Plan Asset Regulation provides that a security is "widely held"
only if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be "widely held" because the number of independent investors falls
below 100 subsequent to the initial offering as a result of events beyond the
control of the issuer. The Company expects the Series A Preferred Shares to be
"widely held" upon the completion of the Offering.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the Offering, certain restrictions
ordinarily will not, alone or in combination, affect the finding that such
securities are "freely transferable". The Company believes that any
restrictions imposed on the transfer of the Series A Preferred Shares are
limited to the restrictions on transfer generally permitted under the Plan
Asset Regulation and are not likely to result in the failure of the Series A
Preferred Shares to be "freely transferable".
A Plan should not acquire or hold the Series A Preferred Shares if the
Company's underlying assets will be treated as the assets of such Plan.
However, the Company believes that under the Plan Asset Regulation the Series A
Preferred Shares should be treated as "publicly-offered securities" and,
accordingly, the underlying assets of the Company should not be considered to
be assets of any Plan or IRA investing in the Series A Preferred Shares.
EFFECT OF PLAN ASSET STATUS
ERISA generally requires that the assets of a Plan be held in trust
and that the trustee, or an investment manager (within the meaning of Section
3(38) of ERISA), have exclusive authority and discretion to manage and control
the assets of the Plan. As discussed above, the assets of the Company under
current law do not appear likely to be assets of the Plans receiving Series A
Preferred Shares as a result of the Offering. However, if the assets of the
Company were deemed to be assets of the Plans under ERISA, certain directors
and officers of the Company might be
77
<PAGE> 83
deemed fiduciaries with respect to the Plans that invest in the Company and the
prudence and other fiduciary standards set forth in ERISA would apply to them
and to all investments.
If the assets of the Company were deemed to be Plan Assets,
transactions between the Company and parties in interest or disqualified
persons with respect to the investing Plan or IRA could be prohibited
transactions unless a statutory or administrative exemption is available. In
addition, investment authority would also have been improperly delegated to
such fiduciaries, and, under certain circumstances, Plan fiduciaries who make
the decision to invest in the Series A Preferred Shares could be liable as
co-fiduciaries for actions taken by the Company that do not conform to the
ERISA standards for investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited
from causing the Plan to engage in certain types of transactions. Section
406(a) prohibits a fiduciary from knowingly causing a Plan to engage directly
or indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in its own interest or for its own account, from
acting in any capacity in any transaction involving the Plan on behalf of a
party (or representing a party) whose interests are adverse to the interests of
the Plan, and from receiving any consideration for its own account from any
party dealing with the Plan in connection with a transaction involving Plan
assets. Similar provisions in Section 4975 of the Code apply to transactions
between disqualified persons and Plans and IRAs and result in the imposition of
excise taxes on such disqualified persons.
If a prohibited transaction has occurred, Plan fiduciaries involved in
the transaction could be required to (a) undo the transaction, (b) restore to
the Plan any profit realized on the transaction and (c) make good to the Plan
any loss suffered by it as a result of the transaction. In addition, parties in
interest or disqualified persons would be required to pay excise taxes or
penalties.
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an IRA or his beneficiary, the
IRA would lose its tax-exempt status. The other penalties for prohibited
transactions would not apply.
Thus, the acquisition of the Series A Preferred Shares by a Plan could
result in a prohibited transaction if an Underwriter, the Company, the Bank,
D&N or any of their affiliates is a party in interest or disqualified person
with respect to the Plan. Any such prohibited transaction could be treated as
exempt under ERISA and the Code if the Series A Preferred Shares were acquired
pursuant to and in accordance with one or more "class exemptions" issued by the
Department of Labor, such as Prohibited Transaction Class Exemption ("PTCE")
75-1 (an exemption for certain transactions involving employee benefit plans
and broker-dealers (such as the Underwriters), reporting dealers, and banks),
PTCE 84-14 (an exemption for certain transactions determined by
78
<PAGE> 84
an independent qualified professional asset manager), PTCE 90-1 (an exemption
for certain transactions involving insurance company pooled separate accounts),
PTCE 91-38 (an exemption for certain transactions involving bank collective
investment funds), PTCE 95-60 (an exemption for certain transactions involving
an insurance company's general account) and PTCE 96-23 (an exemption for
certain transactions determined by a qualifying in-house asset manager).
A Plan should not acquire the Series A Preferred Shares pursuant to
the Offering if such acquisition will constitute a non-exempt prohibited
transaction.
UNRELATED BUSINESS TAXABLE INCOME
Plan fiduciaries should also consider the consequences of holding more
than 10% of the Series A Preferred Shares if the Company is "predominantly
held" by qualified trusts. See "Federal Income Tax Considerations--Taxation of
United States Stockholders--Treatment of Tax-Exempt Stockholders".
CERTAIN INFORMATION REGARDING THE BANK
The following is a summary of certain information regarding the Bank.
As an integral part of this Prospectus, a copy of the Bank's offering circular
filed with the OTS relating to the Bank Preferred Shares to be issued upon the
Exchange Event (the "Offering Circular"), including exhibits is attached hereto
as Annex I and is incorporated by reference herein. All material information
relating to the Bank, including information relating to the Bank's financial
position, can be found in these documents. There has been no material change
in the Bank's affairs since the conclusion of the fiscal year ended December
31, 1996 which has not otherwise been disclosed by the Bank.
OPERATIONS OF THE BANK
The Bank's primary business consists of attracting deposits from the
general public and making real estate loans, consumer loans and other types of
investments. The Bank conducts its business through a network of 37
full-service community banking offices, including its main office in Hancock,
Michigan, seven savings agency offices which provide depository services and
four mortgage banking offices. The Bank's deposits are insured up to the
maximum extent permitted by law by the Federal Deposit Insurance Corporation
("FDIC"). The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the 12 regional banks comprising the FHLB System.
The Bank is subject to supervision by the OTS and by the FDIC.
Like many savings institutions, the operations of the Bank are
materially affected by general economic conditions, the monetary and fiscal
policies of the federal government and the policies of the various regulatory
authorities, including the OTS, the FDIC and the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Its results of
operations
79
<PAGE> 85
are largely dependent upon its net interest income, which is the difference
between the interest it receives on its loans and investment securities, and
the interest it pays on its liabilities.
General. The Bank, like most other savings institutions, has
traditionally concentrated its lending activities on first mortgage
conventional loans secured by residential real estate and, to a lesser extent,
consumer loans and income producing property loans. Approximately $377.0
million or 54% of the Bank's total loans, excluding loans held for sale,
secured by real estate as of December 31, 1996, permit periodic interest rate
adjustments.
Loan Portfolio Composition. The following table sets forth
information concerning the composition of the Bank's loan portfolio in dollar
amounts and percentages, by type of loan.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ----------------- ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TYPE OF LOAN
REAL ESTATE
One - to-four family
Permanent $ 600,923 56.91% $597,892 62.78% $526,572 64.07% $387,252 59.89% $457,196 62.93%
Construction 13,201 1.25 19,982 2.10 2,159 0.26 2,083 0.32 1,289 0.18
Income producing property
Permanent 85,619 8.11 89,176 9.36 115,162 14.01 131,372 20.31 173,122 23.83
Construction 26,472 2.51 21,074 2.21 17,741 2.16 10,475 1.62 933 0.13
----------- -------- -------- ------- -------- ------ -------- ------- -------- -------
Total real estate loans 726,215 68.78 728,124 76.45 661,634 80.50 531,182 82.14 632,540 87.07
CONSUMER LOANS
Automobile loans 141,056 13.36 81,885 8.60 46,711 5.68 34,220 5.29 32,494 4.47
Home equity 82,305 7.79 60,003 6.30 39,939 4.86 23,058 3.57 18,702 2.58
Home improvement 46,545 4.41 41,542 4.36 39,279 4.78 40,017 6.19 46,368 6.38
Mobile home loans 289 0.03 417 0.04 619 0.08 776 0.12 1,170 0.16
Unsecured 15,172 1.44 19,637 2.06 22,197 2.70 20,328 3.14 8,539 1.18
Other 53,901 5.10 35,975 3.78 22,194 2.70 16,245 2.51 12,188 1.68
----------- -------- -------- ------- -------- ------ -------- ------- -------- -------
Total consumer loans 339,268 32.13 239,459 25.14 170,939 20.80 134,644 20.82 119,461 16.45
COMMERCIAL LOANS
Revolving business
loans 2,363 0.22 1,119 0.12 -- -- -- -- -- --
Term business loans 9,982 0.95 6,650 0.70 4,748 0.58 -- -- -- --
----------- -------- -------- ------- -------- ------ -------- ------- -------- -------
Total commercial loans 12,345 1.17 7,769 0.82 4,748 0.58 -- -- -- --
----------- -------- -------- ------- -------- ------ -------- ------- -------- -------
Loans receivable, gross 1,077,828 102.08 975,352 102.41 837,321 101.88 665,826 102.96 752,001 103.52
Less:
Discounts (premiums)
on loans
purchased (2,035) (0.19) (1,709) (0.18) 999 0.12 2,896 0.45 5,448 0.75
Allowance for losses 11,042 1.05 10,081 1.06 8,349 1.02 11,570 1.79 15,611 2.15
Undisbursed portion
of loan proceeds 12,085 1.14 13,198 1.38 4,213 0.51 2,750 0.43 404 0.06
Deferred income 860 0.08 1,423 0.15 1,885 0.23 1,900 0.29 3,993 0.55
Unearned income on
consumer loans -- -- -- -- -- -- 1 -- 44 0.01
----------- -------- -------- ------- -------- ------ -------- ------- -------- -------
21,952 2.08 22,993 2.41 15,446 1.88 19,117 2.96 25,500 3.52
Loans receivable, net $ 1,055,876 100.00% $952,359 100.00% $821,875 100.00% $646,709 100.00% $726,501 100.00%
=========== ======== ======== ======= ======== ====== ======== ======= ======== =======
</TABLE>
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<PAGE> 86
The total amount of loans, excluding loans held for sale, due after
December 31, 1997 which have fixed interest rates is $322.1 million, while the
amount of loans due after such date having floating or adjustable rates is
$627.4 million.
Loan Originations, Purchases and Sales. Federally chartered savings
institutions, like the Bank, have general authority to make real estate loans
throughout the United States. The Bank has originated residential mortgage
loans secured by property both within and outside the State of Michigan. The
Bank has also purchased residential mortgage loans secured by property located
in various states. In addition, the Bank has originated income producing
property loans secured by real estate located in the State of Michigan and has
purchased such loans secured by property located in Michigan and elsewhere.
Since 1990, the Bank has chosen to focus the activities of its community
banking offices on loan originations in their market areas. At December 31,
1996, 75% of the Bank's real estate loans receivable (excluding government
agency insured or guaranteed mortgage-backed and derivative products) were
secured by real estate located in Michigan.
At December 31, 1996, 5% of the Bank's real estate loans receivable
(excluding government agency insured or guaranteed mortgage-backed securities)
was secured by real estate located in California. At December 31, 1996,
$351,000, or 1%, of real estate loans located in California were nonperforming.
The following table presents information regarding the geographic
location of the properties securing the Bank's residential mortgage and income
producing property loans at December 31, 1996. See "- Classified Assets, Loan
Delinquencies and Defaults" for a discussion of other real estate owned.
<TABLE>
<CAPTION>
Outstanding Balance at
December 31, 1996
----------------------
(In thousands)
<S> <C>
MICHIGAN
One- to four-family residential . . . . . . . . . . . . . . . . . . . . $ 448,387
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,554
Mini warehouse, storage . . . . . . . . . . . . . . . . . . . . . . . . 848
Mobile home parks . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,710
Motels/hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,171
Shopping centers and retail . . . . . . . . . . . . . . . . . . . . . . 17,455
Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,317
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,907
Condominiums and land development . . . . . . . . . . . . . . . . . . . 16,895
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,569
-----------
538,813
</TABLE>
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<PAGE> 87
<TABLE>
<CAPTION>
Outstanding Balance at
December 31, 1996
---------------------
(In thousands)
<S> <C>
CALIFORNIA
One- to four-family residential . . . . . . . . . . . . . . . . . . . . $ 22,222
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,436
Mobile home parks . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,950
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 726
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 390
103
-----------
33,960
MASSACHUSETTS
One- to four-family residential . . . . . . . . . . . . . . . . . . . . 22,385
----------
22,385
NEW YORK
One- to four-family residential . . . . . . . . . . . . . . . . . . . . 5,836
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,037
----------
7,873
NORTH CAROLINA
One- to four-family residential . . . . . . . . . . . . . . . . . . . . 4,778
----------
4,778
TEXAS
One- to four-family residential . . . . . . . . . . . . . . . . . . . . 8,762
----------
8,762
PENNSYLVANIA
One- to four-family residential . . . . . . . . . . . . . . . . . . . . 5,508
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 336
Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 130
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
----------
6,115
FLORIDA
One- to four-family residential . . . . . . . . . . . . . . . . . . . . 4,768
----------
4,768
OTHER (31 STATES)
One- to four-family residential . . . . . . . . . . . . . . . . . . . . 82,679
Apartments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,316
Mobile home parks . . . . . . . . . . . . . . . . . . . . . . . . . . . 783
Motels/hotels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 368
Shopping centers and retail . . . . . . . . . . . . . . . . . . . . . . 2,428
Office buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 138
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 431
----------
89,219
</TABLE>
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<PAGE> 88
<TABLE>
<CAPTION>
Outstanding Balance at
December 31, 1996
---------------------
(In thousands)
<S> <C>
Rated conventional residential participation certificates . . . . . . . . $ 5,775
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 722,448
Plus
Accrued interest receivable, net of
reserve for uncollected interest . . . . . . . . . . . . . . . . . 3,767
Less
Deferred income, discounts and premiums, net . . . . . . . . . . . . . (489)
Loans in process . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,085
Loss allowances . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,173
----------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 707,446
==========
</TABLE>
Residential loan originations are attributable primarily to referrals
from real estate brokers and builders, as well as walk-in customers.
Construction loan originations have been obtained primarily by direct
solicitation of builders and continued business from builders who have
previously borrowed from the Bank. Income producing property loans have been
obtained from mortgage broker referrals, previous borrowers and direct contacts
with the Bank.
The Bank has sold loans and loan participations in the secondary
market, generally without recourse. Loans held for sale are recorded at the
lower of cost or market value. At December 31, 1996, the Bank had $5.2 million
of net loans held for sale consisting of 15- and 30-year fixed rate loans.
These sales have provided additional funds for loan originations and
investments and also generated income. The Bank generally continues, after the
sale, to service the loans and loan participations sold. Loan sales are made
on a yield basis with a portion of the difference between the yield to the
purchaser and the amount paid by the borrower constituting servicing income to
the Bank. On occasion, the Bank also purchased mortgage loan servicing rights
from others in order to maintain its loan servicing portfolio economies of
scale. During 1994, the Bank decided to sell the majority of its portfolio of
purchased mortgage loan servicing rights in order to reduce the Bank's interest
rate risk and balance sheet volatility. The scale of loan servicing operations
has been reduced as the Bank concentrates its loan servicing activities on
originated loans. The weighted average servicing fee for loans serviced for
others was .29% at December 31, 1996. At December 31, 1996, the Bank serviced
for others approximately $415 million in loans and loan participations.
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<PAGE> 89
The Bank's investment in mortgage servicing rights ("MSR"s) totaled
$1.4 million at December 31, 1996. The following table details the value of
the Bank's investment in MSRs.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1996 1995 1994
---------- ---------- ----------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year . . . . . . . . . . $ 1,113 $ 968 $ 9,870
Additions:
Capitalized servicing . . . . . . . . . . . . . 630 621 --
Purchased servicing . . . . . . . . . . . . . . -- -- --
----------- ----------- -----------
Total . . . . . . . . . . . . . . . . . . . . 630 621 --
Reductions:
Scheduled amortization . . . . . . . . . . . . 267 169 1,315
Additional amortization due to
changes in prepayment assumptions . . . . . . 33 71 421
Impairment . . . . . . . . . . . . . . . . . . -- 234 --
Sales . . . . . . . . . . . . . . . . . . . . . -- -- 7,148
Transfers to loan portfolio under
recourse and other provisions . . . . . . . . -- 2 18
----------- ----------- ---------
Total . . . . . . . . . . . . . . . . . . . . 300 476 8,902
--------- --------- -------
Balance at end of year . . . . . . . . . . . . . $ 1,443 $ 1,113 $ 968
========= ========= =======
Fair market value at end of year . . . . . . . . $ 1,770 $ 1,161 $ 912
========= ========= =======
</TABLE>
84
<PAGE> 90
The following table shows origination, purchase, sale and repayment
activities of the Bank, including mortgage-backed securities, for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ---------- ------------ ----------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C>
ORIGINATIONS
Real estate:
One- to four-family residential . $194,357 $182,800 $ 81,279 $147,246 $121,468
Income producing property . . . . 33,816 17,614 17,620 13,014 2,711
Non-real estate:
Consumer . . . . . . . . . . . . 271,622 195,109 132,836 95,129 85,254
Commercial . . . . . . . . . . . 11,437 3,739 4,478 -- --
-------- -------- --------- -------- --------
Total originations . . . . . . . 511,232 399,262 236,213 255,389 209,433
PURCHASES
Real estate:
One- to four-family residential . 148,405 103,524 188,481 72,125 5,662
Income producing property . . . . -- -- 1,852 -- 4,989
Mortgage-backed securities . . . . 58,892 -- 68,391 108,749 86,464
-------- -------- --------- -------- --------
Total purchases . . . . . . . .
207,297 103,524 258,724 180,874 97,115
-------- -------- --------- -------- --------
Total additions . . . . . . . . 718,529 502,786 494,937 436,263 306,548
SALES
Real estate:
One- to four-family residential . 68,024 107,080 45,311 106,167 40,610
Mortgage-backed securities(1) . . -- 4,210 50,658 126,932 110,737
Non-real estate:
Consumer loans . . . . . . . . . . 2,810 2,976 2,894 2,229 2,934
-------- -------- --------- -------- --------
Total sales . . . . . . . . . . 70,834 114,266 98,863 235,328 154,281
Principal repayments . . . . . . . . 426,291 288,485 239,816 316,624 400,042
-------- -------- --------- -------- --------
Total reductions . . . . . . . . 497,125 402,751 338,679 551,952 554,323
Transfers to other real estate owned (3,373) (1,936) (2,861) (9,380) (6,259)
Increase (decrease) in other items, net 9,033 8,801 1,079 (19,622) 4,477
-------- -------- --------- -------- --------
Net increase (decrease) . . . . $227,064 $106,900 $154,476 $(144,691) ($249,557)
======== ======== ========= ========= =========
</TABLE>
- ---------------
(1) Includes sales of mortgage derivative products which were carried at the
lower of cost or market.
Outstanding loan commitments of the Bank at December 31, 1996 amounted
to $36.7 million for one- to four-family residential real estate loans and
$32.7 million for commercial real estate loans.
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets, including other real estate owned, decreased to
$8.1 million at December 31, 1996 compared to $9.7 million at December 31,
1995. The ratio of nonperforming assets to total assets was 0.55% at December
31, 1996 compared to 0.79% at December 31, 1995. Allowances for losses
represented 136% of nonperforming assets at December 31, 1996.
85
<PAGE> 91
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio:
<TABLE>
<CAPTION>
March 31, December 31,
---------- ----------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- --------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccruing loans . . . . . . . . . . $ 4,488 $ 6,621 $ 8,225 $ 17,995 $ 30,102 $ 44,703
Accruing loans delinquent
more than 90 days . . . . . . . . -- -- 24 5 13 --
Restructured loans . . . . . . . . . -- -- -- -- 166 167
-------- -------- -------- -------- -------- --------
Total nonperforming loans . . . . 4,488 6,621 8,249 18,000 30,281 44,870
Other real estate owned (OREO) . . . 1,226 1,470 1,452 6,520 13,312 11,186
-------- -------- -------- -------- -------- --------
Total nonperforming assets . . . $ 5,714 $ 8,091 $ 9,701 $ 24,520 $ 43,593 $ 56,056
======== ======== ======== ======== ======== ========
Nonperforming loans as a
percentage of total loans . . . . 0.41% 0.62% 0.86% 2.17% 4.60% 6.05%
======== ======== ======== ======== ======== ========
Nonperforming assets as a
percentage of total assets . . . 0.37% 0.55% 0.79% 2.17% 4.04% 4.47%
======== ======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of nonperforming
loans . . . . . . . . . . . . . . 244.81% 166.77% 122.21% 46.38% 38.21% 34.79%
======== ======== ======== ======== ======== ========
Allowances for loan and OREO losses
as a percentage of
nonperforming assets . . . . . . 192.28% 136.47% 105.29% 35.40% 28.03% 30.08%
======== ======== ======== ======== ======== ========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
Loss allowances are established at levels considered appropriate based
on management's judgment of potential losses in residential, income producing
and consumer loan portfolios. The loan portfolios are reviewed at least
quarterly for changes in performance, collateral value and overall quality.
Allocated allowances are established for problem loans with expected losses,
and in addition, allowances are established for unidentified potential losses.
Regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based upon their
judgment of the information available to them at the time of their examination.
A $1.1 million provision for potential loan losses was made in 1996, compared
to $2.4 million in 1995 and $100,000 in 1994. Management's judgment in
determining the level of the allowance for loan losses is influenced by several
factors during the quarterly reviews. These factors include, but are not
limited to, past loan performance and loss experience, current economic and
market conditions, collateral location and market values, industry and
geographic concentrations and delinquency statistics and ratios. Management
also considers the different levels of risk between income producing
propertyloans, installment loans and one- to four-family residential loans. In
addition, management considers the level of nonperforming assets and classified
assets, the level of lending activity and the overall size of the loan
portfolio.
86
<PAGE> 92
The following table sets forth an analysis of the Bank's allowance for
loan losses:
<TABLE>
<CAPTION>
Three
Months
Ended
March 31, Year Ended December 31,
---------- -----------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of period . . . $ 11,042 $ 10,081 $ 8,349 $ 11,570 $ 15,611 $ 18,744
Charge-offs:
Single family . . . . . . . . . . 53 314 169 110 1,136 329
Income producing property . . . . -- -- 1,019 3,109 2,584 2,180
Installment . . . . . . . . . . . 381 1,216 999 773 681 1,000
Commercial . . . . . . . . . . . . -- -- -- -- -- --
-------- -------- --------- -------- -------- --------
474 1,530 2,187 3,992 4,401 3,509
Recoveries:
Single family . . . . . . . . . . -- 3 917 9 25 --
Income producing property . . . . -- 1,098 245 300 8 3
Installment . . . . . . . . . . . 79 290 357 362 327 256
Commercial . . . . . . . . . . . . -- -- -- -- -- --
-------- -------- --------- -------- -------- --------
79 1,391 1,519 671 360 259
Net charge-offs . . . . . . . . . . . 355 139 668 3,321 4,041 3,250
Provision charged to operations . . . 300 1,100 2,400 100 -- 117
-------- -------- --------- -------- -------- --------
Balance at end of period . . . . . . $ 10,977 $ 11,042 $ 10,081 $ 8,349 $ 11,570 $ 15,611
======== ======== ========= ======== ======== ========
Net charge-offs as a percentage
of average loans . . . . . . . 0.13% 0.01% 0.07% 0.43% 0.59% 0.42%
======== ======== ========= ======== ======== ========
Allowance for loan losses as a
percentage of total loans. . . . 1.01% 1.03% 1.05% 1.01% 1.76% 2.10%
======== ======== ========= ======== ======== ========
</TABLE>
87
<PAGE> 93
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial and other data of the Bank herein
as of and for the years ended December 31, 1996, 1995, 1994, 1993 and 1992 have
been derived from the Consolidated Financial Statements of D&N.
<TABLE>
<CAPTION>
For the Three For the
Months Ended Year Ended
March 31, December 31,
----------- ---------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---------- --------- --------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Loans $ 21,937 $ 86,151 $ 72,550 $ 58,274 $ 58,906 $ 72,729
Mortgage-backed securities 4,436 10,930 10,577 7,875 12,935 31,878
Investments and deposits 1,962 7,228 7,638 5,462 8,233 12,921
--------- --------- --------- -------- -------- ---------
TOTAL INTEREST INCOME 28,335 104,309 90,765 71,611 80,074 117,528
INTEREST EXPENSE
Deposits 11,288 43,859 38,639 29,806 33,815 46,607
Securities sold under agreement to repurchase 759 2,193 1,450 808 1 159
FHLB advances and other borrowed money 5,030 15,558 13,445 7,446 9,757 21,997
Interest rate instruments -- -- 2,521 9,812 15,309 18,876
--------- --------- --------- -------- -------- ---------
TOTAL INTEREST EXPENSE 17,077 61,610 56,055 47,872 58,882 87,639
--------- --------- --------- -------- -------- ---------
NET INTEREST INCOME 11,258 42,699 34,710 23,739 21,192 29,889
Provision for loan losses 300 1,100 2,400 100 -- 117
--------- --------- --------- -------- -------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSS 10,958 41,599 32,310 23,639 21,192 29,772
NONINTEREST INCOME
Loan servicing and administrative fees, net 521 1,914 1,882 2,228 (13,964) 3,431
Deposit related 921 3,621 3,147 3,098 3,002 3,356
Gain on loans held for sale 26 1,031 882 227 777 (44)
Other 135 470 222 1,173 672 765
--------- --------- --------- -------- -------- ---------
TOTAL OPERATING NONINTEREST INCOME 1,603 7,036 6,133 6,726 (9,513) 7,508
Gain (loss) on investment securities available
for sale -- 188 (120) (221) 470 962
Gain on sale of loans and mortgage-backed
securities available for sale 5 -- 899 843 (12,968) 333
Gain on sale of loan servicing rights -- -- -- 140 475 4,594
--------- --------- --------- -------- -------- ---------
TOTAL NONINTEREST INCOME 1,608 7,224 6,912 7,488 (21,536) 13,397
NONINTEREST EXPENSE
Compensation and benefits 4,064 16,868 15,723 14,572 13,344 12,564
Occupancy 780 2,834 2,273 1,987 2,044 2,137
Other expense 2,495 11,429 10,481 9,902 14,171 11,581
--------- --------- --------- -------- -------- ---------
GENERAL AND ADMINISTRATIVE EXPENSE 7,339 31,131 28,477 26,461 29,559 26,282
Other real estate owned, net (22) 71 (999) (2,136) 2,340 2,919
Amortization of intangibles -- -- 370 448 767 1,933
FDIC insurance 176 7,894 2,431 2,639 2,275 2,207
--------- --------- --------- -------- -------- ---------
TOTAL NONINTEREST EXPENSE 7,493 39,096 30,279 27,412 34,941 33,341
--------- --------- --------- -------- -------- ---------
INCOME BEFORE INCOME TAX EXPENSE 5,073 9,727 8,943 3,715 (35,285) 9,828
Federal income tax expense (credit) 1,781 349 (1,675) 150 (3,738) 4,254
--------- --------- --------- -------- -------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 3,292 9,378 10,618 3,565 (31,547) 5,574
Extraordinary items and accounting changes,
net of taxes -- -- -- -- (35,575) (1,572)
--------- --------- --------- -------- -------- ---------
NET INCOME $ 3,292 $ 9,378 $ 10,618 $ 3,565 $(67,122) $ 4,002
========= ========= ========= ======== ======== =========
</TABLE>
88
<PAGE> 94
<TABLE>
<CAPTION>
At or
For the Three At or
Months Ended For the Year
March 31, Ended December 31,
------------- ---------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 1,528,466 $ 1,472,988 $ 1,228,495 $ 1,128,730 $ 1,080,324 $ 1,252,955
Net loans receivable 1,081,837 1,055,876 952,359 821,875 646,709 726,501
Nonperforming assets 5,714 8,091 9,701 24,520 43,593 56,056
Mortgage-backed securities 273,460 251,256 127,709 151,293 171,983 241,040
Excess of cost over net assets of
association acquired -- -- -- 384 845(1) 36,380
Mortgage servicing rights 1,404 1,443 1,113 968 9,870 29,198
Deposits 1,007,508 964,133 922,932 817,674 844,012 916,644
Borrowings 417,485 404,037 216,295 226,956 101,648 174,232
Stockholder's Equity 83,291 80,014 71,108 57,545 55,971 101,698
Tangible stockholder's equity 82,299 79,003 69,985 57,484 56,133 67,232
Number of offices 48 48 46 41 38 40
SELECTED RATIOS:
Return on average assets 0.89% 0.69% 0.90% 0.33% (5.50)% 0.28%
Net interest margin 3.13 3.26 3.04 2.31 1.95 2.28
General and administrative expenses
to average assets 2.31 2.42 2.45 2.42 1.83
Nonperforming assets to total assets 0.37 0.55 0.79 2.17 4.04 4.47
Allowance for loan losses to
nonperforming loans 244.81 166.77 122.21 46.38 38.21 34.79
Allowance for loan losses to total loans 1.01 1.03 1.05 1.01 1.76 2.10
Net loan charge-offs to average loans 0.13 0.01 0.07 0.43 0.59 0.42
Tangible capital ratio 5.15 5.11 5.41 5.05 4.89 4.32
Core capital ratio 5.15 5.11 5.41 5.09 4.97 5.32
Tier 1 risk-based capital ratio 8.69 8.72 9.20 8.92 8.95 9.34
Risk-based capital ratio 9.85 9.94 10.45 10.08 10.21 10.57
</TABLE>
- ---------------
(1) Includes cumulative effect of change in accounting for goodwill of
($34,754,000).
RISK FACTORS AND OTHER CONSIDERATIONS
Because of the potential for the Automatic Exchange, the purchase of
the Series A Preferred Shares involves a high degree of risk with respect to
the performance and capital levels of the Bank. Prospective investors in the
Series A Preferred Shares should carefully consider the following risk factors
and other considerations relating to the Bank before deciding whether to invest
in such shares.
Effect of an Increase in Interest Rates on Operating Results. The
Bank's operating results depend to a large extent on its net interest income,
which is the difference between the interest the Bank receives from its loans,
securities and other assets and the interest the Bank pays on its deposits and
other liabilities. Interest rates are highly sensitive to many factors,
including governmental monetary policies and domestic and international
economic and political conditions. Conditions such as inflation, recession,
unemployment, money supply, international disorders and other factors beyond
the control of the Bank may affect interest rates. If generally prevailing
interest rates increase, the "net interest spread" of the Bank, which is the
difference between the rates of interest earned and the rates of interest paid
by the Bank, is likely to contract, resulting in less net interest income.
89
<PAGE> 95
Although the Bank pursues an asset-liability management
strategy designed to control its risk from changes in market interest rates,
the Bank's liabilities have shorter terms and are more interest-sensitive than
its assets. At March 31, 1997, the Bank's one-year interest-sensitivity
"gap" (the sum of all interest earning assets to be re-priced within one year
minus all interest-bearing liabilities to be re-priced within one year, as a
percentage of total assets) was negative 11.15%. As a result of its gap
position, the Bank's net interest spread will narrow, and its operating results
will be adversely affected, during periods of rising market interest rates if
the Bank is unable to reduce its gap. There can be no assurance that the Bank
will be able to adjust its gap sufficiently to offset any negative effect of
changing market interest rates.
Regulatory Capital Levels. As a federal savings association, the Bank
is subject to minimum capital requirements prescribed by federal statute and
OTS regulations. At March 31, 1997, the Bank was in compliance with all of
its regulatory capital requirements under FIRREA, with tangible, core and total
risk-based regulatory capital ratios of 5.15%, 5.15% and 9.85%, respectively,
compared to the regulatory requirements of 1.50%, 3.00% and 8.00%,
respectively.
The OTS' prompt corrective action regulations establish five capital
categories for thrift institutions: well capitalized, adequately capitalized,
undercapitalized, severely undercapitalized and critically undercapitalized.
These categories are determined for the supervisory purposes of Section 38 of
the Federal Deposit Insurance Act (which establishes a system of mandatory and
discretionary supervisory actions which generally become more severe as capital
levels decline) and may not necessarily constitute an accurate measure of the
Bank's current overall financial condition or its future prospects. A thrift
generally will be considered "well capitalized" if it has a core capital (or
leverage) ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least
6.0% and a total risk-based capital ratio of at least 10.0%. A thrift
generally will be considered "adequately capitalized" if it has a core capital
(or leverage) ratio of at least 4.0%, a Tier 1 risk-based capital ratio of at
least 4.0%, and a total risk-based capital ratio of at least 8.0%. The Bank's
core (or leverage), Tier 1 risk-based and total risk-based capital ratios at
March 31, 1997, of 5.15%, 8.69% and 9.85%, respectively, exceeded the capital
ratios established for "adequately capitalized" institutions. The OTS has the
discretion to reclassify an institution from "well capitalized" to "adequately
capitalized" and to treat an "adequately capitalized" institution as an
"undercapitalized" institution for purposes of the prompt corrective action
regulations (including imposing restrictions on the payment of dividends) if,
after notice and an opportunity for a hearing, the OTS determines that the
institution (i) is in an unsafe or unsound condition or (ii) has received and
has not corrected a less than satisfactory examination rating for asset
quality, management, earnings or liquidity.
Risks Relating to Elimination of Thrift Charter. During the past few
years, Congress has been considering legislation in various forms that would
require federal thrifts, like the Bank, to convert their charters to national
or state bank charters. Recent legislation requires the merger of the Bank
Insurance Fund ("BIF") and the SAIF into a single Deposit Insurance Fund on
January 1, 1999 but only if the thrift charter is eliminated by that date. In
the absence of appropriate "grandfather" provisions, legislation eliminating
the thrift charter could have a material adverse effect on the Bank. The Bank
cannot determine whether, or in what form, such legislation will
90
<PAGE> 96
eventually be enacted and there can be no assurance that any such legislation
that is enacted will contain adequate grandfather rights for the Bank.
Absence of a Public Market for Bank Preferred Shares. If Bank
Preferred Shares are issued, the Bank does not intend to apply for listing of
the Bank Preferred Shares on any national securities exchange or for quotation
of the Bank Preferred Shares through the Nasdaq System. There can be no
assurance as to the liquidity of the trading markets for the Bank Preferred
Shares or that an active public market for the Bank Preferred Shares would
develop or be maintained.
Restrictions on Bank Dividends. If the Automatic Exchange occurs and
the Bank has not been placed into conservatorship or receivership, the Bank
would likely be prohibited from paying dividends on the Bank Preferred Shares
as long as the Bank remains "undercapitalized" for purposes of the OTS prompt
corrective action regulations or the OTS anticipates the Bank being
"undercapitalized" in the near term. The prompt corrective action regulations
prohibit thrift institutions such as the Bank from making "capital
distributions" (defined to include a cash distribution) unless the institution
is at least "adequately capitalized" after the distribution.
However, if the Automatic Exchange occurs after the Bank has been
placed into conservatorship or receivership, the claims of the Bank's
depositors and of its secured, senior, general and subordinated creditors would
be entitled to a priority of payment over the claims of holders of equity
interests such as the Bank Preferred Shares issued pursuant to the Automatic
Exchange.
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated
[ ], 1997 (the "Underwriting Agreement") among the Company, the
Bank and the underwriters named below (the "Underwriters"), the Company has
agreed that the Company will sell to each of the Underwriters, and each of such
Underwriters for which Roney & Co., LLC is acting as a representative (the
"Representative") has severally agreed to purchase from the Company, the
respective number of Series A Preferred Shares set forth opposite its name
below:
<TABLE>
<CAPTION>
Number of Shares
of Series A
Underwriter Preferred Shares
----------- ----------------
<S> <C>
Roney & Co., LLC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
----------
1,100,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . =========
</TABLE>
91
<PAGE> 97
Under the terms and conditions of the Underwriting Agreement, the
Underwriters are committed to take and pay for all the Series A Preferred
Shares offered hereby, if any are taken.
The Underwriters propose to offer the Series A Preferred Shares in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus, and in part to certain securities dealers at
such price less a concession of $[ ] per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $[ ] per share
to certain brokers and dealers. After the Series A Preferred Shares are
released for sale to the public, the offering price and other selling terms may
from time to time be varied by the representatives.
The Company has granted the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of
110,000 additional Series A Preferred Shares solely to cover over-allotments,
if any. If the Underwriters exercise their over-allotment option, the
Underwriters have severally agreed, subject to certain conditions, to purchase
approximately the same percentage thereof that the number of Series A Preferred
Shares to be purchased by each of them, as shown in the foregoing table, bears
to the 1,100,000 Series A Preferred Shares offered hereby.
The Company has agreed that, during the period beginning from the date
of this Prospectus and continuing to and including the date 90 days after the
date of this Prospectus, it will not offer, sell, contract to sell or otherwise
dispose of any securities of the Company which are substantially similar to the
Series A Preferred Shares or which are convertible or exchangeable into
securities which are substantially similar to the Series A Preferred Shares
without the prior written consent of the Representative, except for the Series
A Preferred Shares offered in connection with the Offering.
The Representative of the Underwriters has informed the Company that
it does not expect sales to accounts over which the Underwriters exercise
discretionary authority to exceed five percent of the total number of Series A
Preferred Shares offered by them.
Prior to the Offering, there has been no public market for the Series
A Preferred Shares.
The Company has filed an application to list the Series A Preferred
Shares, subject to official notice of issuance, on the Nasdaq National Market
(the "Exchange"). In order to meet one of the requirements for listing the
Series A Preferred Shares on the Exchange, the Underwriters have undertaken to
sell the Series A Preferred Shares to a minimum of 400 beneficial holders. The
Representative has advised the Company that it intends to make a market in
the Series A Preferred Shares prior to commencement of trading on the Exchange,
but is not obligated to do so and may discontinue any such market making at
any time without notice.
The Company and the Bank have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act.
Certain of the Underwriters or their affiliates have provided from
time to time, and expect to provide in the future, investment or commercial
banking services to affiliates of the Company,
92
<PAGE> 98
for which such Underwriters or their affiliates have received or will receive
customary fees and commissions.
EXPERTS
The balance sheet of D&N Capital Corporation as of April 4, 1997
included in this Prospectus has been so included in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
said firm as experts in auditing and accounting.
RATINGS
It is expected that the Series A Preferred Shares will be rated [ ] by
Duff & Phelps, Inc. A security rating is not a recommendation to buy, sell or
hold securities and may be subject to revision or withdrawal at any time by the
assigning rating organization. No person is obligated to maintain any rating on
the Series A Preferred Shares, and, accordingly, there can be no assurance that
the ratings assigned to the Series A Preferred Shares upon initial issuance
will not be lowered or withdrawn by the assigning rating organization at any
time thereafter.
CERTAIN LEGAL MATTERS
The validity of the Series A Preferred Shares offered hereby will be
passed upon for the Company by Silver, Freedman & Taff, L.L.P., Washington,
D.C. Certain tax matters described under "Federal Income Tax Considerations"
will be passed upon for the Company by Coopers & Lybrand L.L.P., Detroit,
Michigan. The validity of the Series A Preferred Shares will be passed upon for
the Underwriters by Honigman Miller Schwartz and Cohn, Detroit, Michigan.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement (of
which this Prospectus is a part) on Form S-11 (the "Registration Statement")
under the Securities Act, with respect to the Series A Preferred Shares offered
hereby. This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. For further information regarding the Company and the Series A
Preferred Shares offered hereby, reference is made to the Registration
Statement and the exhibits thereto.
93
<PAGE> 99
The Registration Statement and the exhibits forming a part thereof
filed by the Company with the Commission can be inspected at and copies can be
obtained from the Commission, Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, or at the following regional offices of the
Commission: 7 World Trade Center, 13th Floor, Suite 1300, New York, New York
10048 and Citicorp Center, 500 West Madison Street, 14th Floor, Suite 1400,
Chicago, Illinois 60661 and at the offices of the National Association of
Securities Dealers, 1735 K Street, N.W., Washington, D.C. 20006. Copies of
such materials can be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such material may also be accessed electronically by means of the
Commission's home page on the Internet at http://www.sec.gov.
The Certificate of Designation establishing the rights, preferences
and limitations of the Series A Preferred Shares provides that the Company
shall maintain its status as a reporting company under the Exchange Act for so
long as any of the Series A Preferred Shares are outstanding.
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<PAGE> 100
GLOSSARY
"Advisor" means the Bank in its role as advisor under the Advisory
Agreement.
"Advisory Agreement" means the agreement between the Bank and the
Company pursuant to which the Bank will (i) administer the day-to-day
operations of the Company, (ii) monitor the credit quality of the Mortgage
Assets held by the Company, (iii) advise the Company with respect to the
acquisition, management, financing and disposition of the Company's Mortgage
Assets and (iv) maintain custody of the documents related to the Company's
Mortgage Loans.
"ARM" or "adjustable rate mortgage" means a Mortgage Loan that
features adjustments of the underlying interest rate at predetermined times
based on an agreed margin to an established index. An ARM is usually subject to
periodic interest rate and/or payment caps and a lifetime interest rate cap.
"Automatic Exchange" means the automatic exchange on a share-for-share
basis of Series A Preferred Shares for Bank Preferred Shares upon the
occurrence of the Exchange Event.
"Bank" means D&N Bank, a thrift institution organized under the laws
of the United States, and the parent of the Company.
"Bank Preferred Shares" means the newly issued series of preferred
stock of the Bank for which the Series A Preferred Shares will be exchanged
automatically upon the occurrence of the Exchange Event.
"Board of Directors" means the board of directors of the Company.
"By-laws" means the by-laws of the Company.
"Certificate of Incorporation" means the Amended and Restated
Certificate of Incorporation of the Company.
"Classified" means a loan which, for financial institution regulatory
purposes, is designated as "substandard", "doubtful" or "loss". For such
purposes, a substandard asset is one that is deemed inadequately protected by
the current sound worth and paying capacity of the obligor or of the collateral
pledged, if any, because the asset has a well-defined weakness or weaknesses
that jeopardize the liquidation of the debt. An asset classified as doubtful
has all the weaknesses inherent in one classified substandard, with the added
characteristic that the weaknesses make collection or liquidation in full, on
the basis of currently existing facts, conditions and values, highly
questionable and improbable. Assets classified as loss are considered
uncollectible.
"Code" means the Internal Revenue Code of 1986, as amended.
95
<PAGE> 101
"Commercial Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a commercial real estate property.
"Commercial Mortgage Purchase Agreement" means the Commercial Mortgage
Loan Purchase and Warranties Agreement between the Company and the Bank.
"Commission" means the United States Securities and Exchange
Commission.
"Common Stock" means the common stock, par value $300.00 per share, of
the Company.
"Company" means D&N Capital Corporation, a Delaware corporation.
"D&N" means D&N Financial Corporation, a Delaware corporation and the
parent of the Bank.
"Directive" means the writing issued by the appropriate regulatory
agency directing the Automatic Exchange.
"DOL" means the United States Department of Labor.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Excess Shares" means the shares of any class or series of Preferred
Stock owned, or deemed to be owned, by or transferred to a stockholder in
excess of the Ownership Limit.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Event" means the appropriate regulatory agency directs in
writing an exchange of the Series A Preferred Shares for Bank Preferred Shares
because (i) the Bank becomes "undercapitalized" under prompt corrective action
regulations established pursuant to FDICIA, (ii) the Bank is placed into
conservatorship or receivership or (iii) the appropriate regulatory agency, in
its sole discretion and even if the Bank is not "undercapitalized," anticipates
the Bank becoming "undercapitalized" in the near term.
"FHLMC" means the Federal Home Loan Mortgage Corporation.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of
1980, as amended.
"Five or Fewer Test" means the Code requirement that not more than 50%
in value of the Company's outstanding stock may be owned, directly or
indirectly, by five or fewer individuals (as defined in the Code).
"FNMA" means Fannie Mae.
96
<PAGE> 102
"FNMA Required Net Yield" means (i) with respect to any Mortgage Loan
with an original term of 20, 25 or 30 years, FNMA's required net yield for
30-year fixed rate mortgages (covered by 60-day mandatory commitments) that was
in effect 45 days prior to the effective date of any conversion of such
Mortgage Loan and (ii) with respect to any Mortgage Loan with an original term
of 15 years, FNMA's required net yield for 15-year fixed rate mortgages
(covered by 60-day mandatory commitments) that was in effect 45 days prior to
the effective date of any conversion of such Mortgage Loan.
"Foreign Stockholders" means holders of Series A Preferred Shares that
are for United States federal income tax purposes (i) non-resident alien
individuals, (ii) foreign corporations and foreign partnerships or (iii)
foreign trusts and estates.
"Gross Margin" means, with respect to a Residential Mortgage Loan that
is an ARM, the applicable fixed percentage which, when added to the applicable
index, calculates to the current interest rate paid by the borrower of the
adjustable rate Mortgage Loan (without taking into account any interest rate
caps or minimum interest rates). Gross Margin is inapplicable to fixed rate
loans.
"Independent Directors" means the members of the Board of Directors
who are not current directors, officers or employees of the Company, D&N, the
Bank or any affiliate of the Bank or of any person or persons that, in the
aggregate, own more than one percent of the common stock of D&N.
"Initial Portfolio" means the initial portfolio of Mortgage Loans
purchased by the Company from the Bank.
"IRA" means an individual retirement arrangement under Section 408 of
the Code.
"IRS" means the United States Internal Revenue Service.
"LIBOR" means the London Inter-Bank Offered Rate.
"Lifetime interest rate cap" means, with respect to Mortgage Loans
that are ARMs, the maximum interest rate that may accrue during any period over
the term of such Mortgage Loan as stated in the governing instruments
evidencing such Mortgage Loan.
"Loan-to-Value Ratio" means, with respect to any Mortgage Loan, the
ratio (expressed as a percentage) of the original principal amount of such
Mortgage Loan to the lesser of (i) the appraised value at origination of the
mortgaged property underlying such Mortgage Loan and (ii) if the Mortgage Loan
was made to finance the acquisition of property, the purchase price of the
mortgaged property.
"Mortgage Assets" means real estate mortgage assets.
"Mortgage-Backed Securities" means securities that qualify as real
estate assets under Section 856(c)(6)(B) of the Code, that are rated by at
least one nationally recognized independent
97
<PAGE> 103
rating organization and that represent interests in or obligations backed by
pools of Mortgage Loans.
"Mortgage Loans" means whole loans secured by single-family (one- to
four-unit) residential real estate properties or by commercial real estate
properties.
"Nonaccrual Status" means a loan on which, in the opinion of
management, principal or interest is not likely to be paid in accordance with
the terms of the loan agreement or on which the principal or interest is past
due 90 days or more and collateral, if any, is insufficient to cover principal
and interest.
"Offering" means the offering of Series A Preferred Shares pursuant to
the Prospectus.
"Offering Circular" means the registration statement on Form OC
pursuant to which the Bank Preferred Shares are being registered with the OTS.
"One Hundred Persons Test" means the Code requirement that the capital
stock of the Company be owned by 100 or more persons during at least 335 days
of a taxable year or during a proportionate part of a shorter taxable year.
"One-Year ARM" means an ARM that adjusts annually beginning in the
month in which the 12th monthly payment is due.
"OTS" means the Office of Thrift Supervision, Department of the
Treasury.
"Ownership Limit" means the provision in the Company's Certificate of
Incorporation limiting any person from owning (including shares deemed to be
owned by the attribution provisions of the Code) more than 9.9% of any issued
and outstanding class or series of Preferred Stock.
"Periodic interest rate cap" means, with respect to ARMs, the maximum
change in the coupon rate permissible under the terms of the loan at each
coupon adjustment date. Periodic interest rate caps limit both the speed by
which the coupon rate can adjust upwards in a rising interest rate environment
and the speed by which the coupon rate can adjust downwards in a falling rate
environment.
"Plan" means a pension, profit-sharing, retirement or other employee
benefit plan.
"Plan Asset Regulation" means the DOL regulations determining the
assets of a Plan for purposes of ERISA and the related prohibited transaction
excise tax provisions of the Code.
"Preferred Stock" means preferred stock, par value $25.00 per share,
of the Company.
"Prime Rate" for any date means the lowest prime rate as published in
the "Money Rates" table of The Wall Street Journal for that date.
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<PAGE> 104
"Prospectus" means this prospectus, as the same may be amended.
"Rate Adjustment Date" means, with respect to any ARM, a date on which
the interest rate on such ARM adjusts.
"Registration Statement" means the registration statement filed by the
Company with the Commission on Form S-11 with respect to the Series A Preferred
Shares.
"REIT" means a real estate investment trust as defined pursuant to the
REIT Provisions, or any successor provisions thereof.
"REIT Provisions" and "REIT Requirements" means Sections 856 through
860 of the Code and the applicable Treasury Regulations.
"REIT taxable income" shall have the meaning set forth in "Federal
Income Tax Considerations--Taxation of the Company--Annual Distribution
Requirements".
"Residential Mortgage Loan" means a whole loan secured by a first
mortgage or deed of trust on a single family (one-to four-unit) residential
real estate property.
"Residential Mortgage Purchase Agreement" means the Residential
Mortgage Loan Purchase and Warranties Agreement between the Company and the
Bank.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Shares" means the shares of Preferred Stock of the
Company offered hereby.
"Servicer" means that Bank in its role as servicer of the Mortgage
Loans under the Servicing Agreements.
"Servicing Agreements" means the servicing agreements entered into by
the Bank with respect to the Residential Mortgage Loans and the Commercial
Mortgage Loans.
"Tax Event" means the receipt by the Company of an opinion of a
nationally recognized law or accounting firm experienced in such matters to the
effect that, as a result of (i) any amendment to, clarification of, or change
(including any announced prospective change) in the laws or treaties (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, (ii) any judicial
decision, official administrative pronouncement, ruling, regulatory procedure,
notice or announcement (including any notice or announcement of intent to adopt
such procedures or regulations) ("Administrative Action") or (iii) any
amendment to, clarification of, or change in the official position or the
interpretation of such Administrative Action or judicial decision or any
interpretation or pronouncement that provides for a position with respect to
such Administrative Action or judicial decision that differs from the
theretofore generally accepted position, in each case, by any
99
<PAGE> 105
legislative body, court, governmental authority or regulatory body,
irrespective of the manner in which such amendment, clarification or change is
made known, which amendment, clarification, or change is effective or such
pronouncement or decision is announced on or after the date of issuance of the
Series A Preferred Shares, there is more than an insubstantial risk that (a)
dividends payable by the Company with respect to the capital stock of the
Company are not, or will not be, fully deductible for United States federal
income tax purposes or (b) the Company is, or will be, subject to more than a
de minimis amount of other taxes, duties or other governmental charges.
"TIN" means Taxpayer Identification Number.
"Treasury Index" means the weekly average yield on U.S. Treasury
securities adjusted to a constant maturity of one year as published by the
Federal Reserve Board in Statistical Release H.15 (519) or any similar
publication or, if not so published, as reported by any Federal Reserve Bank or
by any U.S. Government department or agency.
"Treasury Regulations" means the income tax regulations promulgated
under the Code.
"Underwriters" means those underwriters to which the Company will sell
the Series A Preferred Shares pursuant to the terms of the Underwriting
Agreement.
"Underwriting Agreement" means the underwriting agreement by and among
the Company, the Bank and the Underwriters.
"United States Stockholders" means holders of Series A Preferred
Shares that are for United States federal income tax purposes (i) citizens or
residents of the United States, (ii) corporations, partnerships, or other
entities created or organized in or under the laws of the United States or of
any political subdivisions thereof, or (iii) an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source.
"USRPI" means United States real property interest.
100
<PAGE> 106
INDEX TO FINANCIAL STATEMENT
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . F-2
Balance Sheet of D&N Capital Corporation as of April 4, 1997 . . . . . . . F-3
Note to Financial Statement . . . . . . . . . . . . . . . . . . . . . . . . F-4
F-1
<PAGE> 107
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
D&N Capital Corporation
We have audited the accompanying balance sheet of D&N Capital Corporation (the
"Company") as of April 4, 1997. This financial statement is the responsibility
of the Company's management. Our responsibility is to express an opinion on
this financial statement 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of D&N Capital Corporation as of
April 4, 1997, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Detroit, Michigan
April 7, 1997
F-2
<PAGE> 108
D&N CAPITAL CORPORATION
BALANCE SHEET
April 4, 1997
ASSETS
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,000
STOCKHOLDER'S EQUITY
Common Stock, par value $1.00 per share, 1,000 shares
authorized; 1,000 shares issued and outstanding . . . . . . . $1,000
The Note to the Financial Statement is an integral part of this Statement.
F-3
<PAGE> 109
D&N CAPITAL CORPORATION
NOTE TO FINANCIAL STATEMENT
1. ORGANIZATION
D&N Capital Corporation (the "Company"), a wholly-owned subsidiary of
D&N Bank (the "Bank"), was incorporated on March 18, 1997 in the State of
Delaware.
The Company intends to invest in mortgage-related assets financed by
common and preferred stock offerings and expects to generate income for
distribution to its future preferred and common stockholders primarily from the
net interest income derived from its investments in mortgage-related assets.
The Company intends to purchase these mortgage-related assets from the Bank and
its affiliates at their estimated fair values. These assets will be recorded in
the Company's financial statements at the Bank's historical cost basis which
will approximate their estimated fair values. The Company intends to operate in
a manner that permits it to elect, and it intends to elect, to be subject to
tax as a real estate investment trust for federal income tax purposes. The
Company has not had any operations as of April 4, 1997.
The Company intends to sell preferred stock in an underwritten public
offering. The cost of this public offering will be paid by the Company out of
proceeds from a sale of common stock to the Bank. If the public offering is not
consummated, the Bank will pay any offering costs.
F-4
<PAGE> 110
ANNEX I
OFFERING CIRCULAR
1,100,000 SHARES
D&N BANK
[____%] NONCUMULATIVE PREFERRED STOCK, SERIES A
(LIQUIDATION PREFERENCE $25.00 PER SHARE)
The [__%] Noncumulative Preferred Stock, Series A, par value $25.00 per
share (the "Series A Preferred Shares"), of D&N Bank, ("D&N" or the "Bank"),
will be issued only upon the automatic exchange of the [____%] Noncumulative
Exchangeable Preferred Stock, Series A (the "Preferred Capital Shares") of D&N
Capital Corporation, a wholly owned subsidiary of the Bank, upon the occurrence
of certain events. See "Offering Circular Summary -- D&N Bank -- REIT
Preferred Offering." Dividends on the Series A Preferred Shares will be
payable at the same rate as the Preferred Capital Shares if, when and as
declared by the Board of Directors of the Bank. For a description of the terms
of the Series A Preferred Shares, see "Description of the Series A Preferred
Shares" herein.
The Series A Preferred Shares rank, in priority of payment of dividends
and rights upon the voluntary or involuntary dissolution, liquidation or
winding up of the Bank, junior to all claims of the Bank's creditors, including
the claims of the Bank's depositors. The Series A Preferred Shares rank
superior and prior to the issued and outstanding common stock of the Bank with
respect to dividend rights and rights upon voluntary or involuntary
dissolution, liquidation or winding up of the Bank, and to all other classes
and series of equity securities of the Bank hereafter issued, other than any
class or series expressly designated as being on parity with or senior to the
Series A Preferred Shares. The common stock of the Bank is the only class of
equity securities currently outstanding.
The Preferred Capital Shares have been registered with the Securities and
Exchange Commission (the "SEC") and an application for listing on the Nasdaq
National Market (the "NMS") has been filed to list the Preferred Capital
Shares, under the symbol ["______"]. In the event the Preferred Capital Shares
are exchanged into Series A Preferred Shares, the Bank does not intend to apply
for listing of the Series A Preferred Shares on any national securities
exchange or for quotation through the Nasdaq System.
AN INVESTMENT IN THE SERIES A PREFERRED SHARES INVOLVES A HIGH DEGREE OF
RISK. INVESTORS SHOULD CAREFULLY CONSIDER THE RISK FACTORS AND OTHER
CONSIDERATIONS RELATING TO THE BANK AND THE SERIES A PREFERRED SHARES. SEE
"RISK FACTORS AND OTHER CONSIDERATIONS."
_________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE OFFICE OF
THRIFT SUPERVISION, THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
SECURITIES AND EXCHANGE COMMISSION OR ANY OTHER FEDERAL AGENCY,
OR BY ANY STATE SECURITIES COMMISSION, NOR HAS SUCH OFFICE,
CORPORATION, COMMISSION, OTHER AGENCY OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS OFFERING CIRCULAR. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS DEPOSITS
AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR ANY OTHER GOVERNMENT AGENCY. THESE SECURITIES
ARE BEING OFFERED PURSUANT TO AN OFFERING CIRCULAR ON
FORM OC FILED WITH THE OFFICE OF THRIFT SUPERVISION.
The date of this Offering Circular is [_________, 1997].
<PAGE> 111
TABLE OF CONTENTS
PAGE
----
Available Information 2
Information With Respect to the Registrant 3
Offering Circular Summary 4
D&N Bank 4
Risk Factors and Other Considerations 16
Recent Developments - Legislative Action 21
Use of Proceeds 21
Capitalization 22
Description of the Series A Preferred Shares 23
Exchange 27
Experts 28
Legal Matters 28
Attachment A -- D&N Bank's Audited Financial Statements for the
Fiscal Year Ended December 31, 1996
Attachment B -- D&N Bank's Financial Statement for the quarter
ended March 31, 1997
AVAILABLE INFORMATION
The Bank is not subject to the information reporting requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"). However, the
Bank is wholly owned by D&N Financial Corporation which is subject to the
requirements of the Exchange Act and, in accordance therewith, files reports
and other information with the SEC. Such reports and other information may be
inspected without charge and copied at prescribed rates at the public reference
facilities maintained by the SEC at 450 Fifth Street, N.W. Room 1024,
Washington, D.C. 20549 and at the SEC's Regional Offices at Seven World Trade
Center, Suite 1300, New York, New York 10048 and 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. In addition, the SEC maintains a web site that
contains reports, proxy and information statements and other information
regarding the electronic filings of D&N Financial Corporation with the SEC.
The address of the SEC's web site is "http:// www.sec.gov".
The Bank has filed with the Office of Thrift Supervision, Department of
the Treasury ("OTS") a Registration Statement on Form OC (including any
amendments thereto, the "Form OC") with respect to the securities covered by
this Offering Circular. This Offering Circular does not contain all of the
information set forth in the Form OC, certain items of which are contained in
exhibits to the Form OC as permitted by the rules and regulations of the OTS.
For further information with respect to the Bank and the securities offered
hereby, reference is made to the Form OC, including the exhibits filed as a
part thereof. Statements contained in this Offering Circular as to the
contents of any contract or other document referred to are not necessarily
complete, and in each instance reference is made to the copy of such contract
or other document filed as an exhibit to the Form OC, each such statement being
qualified in all respects by such reference. The Form OC and the exhibits
thereto may be inspected without charge and copied at
OC-2
<PAGE> 112
prescribed rates at the public reference facilities maintained by the OTS at
1700 G Street, N.W., Washington, D.C. 20552.
INFORMATION WITH RESPECT TO THE REGISTRANT
As an integral part of this Offering Circular, the Bank has attached
complete copies (including exhibits) of its audited financial statements for
the fiscal year ended December 31, 1996 ("Attachment A") and its financial
statements for the quarter ended March 31, 1997 ("Attachment B"). All material
financial information as of these periods relating to the Bank can be found in
these documents. There has been no material change in the Bank's financial
affairs since the conclusion of these periods which has not otherwise been
disclosed by the Bank in such Attachment A or B or in this Offering Circular.
OC-3
<PAGE> 113
OFFERING CIRCULAR SUMMARY
This Offering Circular Summary, including the Selected Consolidated
Financial and Other Data, does not purport to be complete and is qualified in
its entirety by the more detailed information and financial statements and
notes thereto appearing elsewhere in this Offering Circular. Capitalized terms
used in the summary and not defined herein have the meanings ascribed to such
terms elsewhere in this Offering Circular.
D&N BANK
GENERAL
D&N Bank ("D&N" or the "Bank") is a federally chartered and
federally insured stock savings bank, headquartered in Hancock, Michigan. The
executive office of the Bank is located at 400 Quincy Street, Hancock, Michigan
49930, telephone (906) 482-2700. The Bank conducts its business through a
network of thirty-seven full-service community banking offices, including its
executive office, seven savings agency offices which provide depository
services and four mortgage banking offices. The Bank was founded in 1889 and
operated as a state-chartered mutual savings and loan association until
February 1984, when it converted to a federal charter. In 1985, the Bank
converted to a stock association, and in 1986, converted to a federal savings
Bank.
The Bank adopted a holding company structure in July 1988, with D&N as the
principal subsidiary of D&N Financial Corporation (the "Holding Company")
organized under the laws of the state of Delaware. In December 1993, the
Holding Company raised an additional $20.9 million of capital in a shareholder
rights offering and began to implement growth and expansion strategies.
D&N's primary business consists of attracting deposits from the general
public and making real estate loans and consumer loans and other types of
investments. The Bank's deposits are fully insured by the Savings Association
Insurance Fund ("SAIF") which is administered by the Federal Deposit Insurance
Corporation ("FDIC") up to the maximum permitted by law of $100,000 per insured
depositor. The Bank is a member of the Federal Home Loan Bank ("FHLB") of
Indianapolis, which is one of the twelve regional banks comprising the FHLB
System. The Bank is subject to comprehensive regulation, examination and
supervision by the OTS and by the FDIC. At December 31, 1996, the Bank was in
compliance with its regulatory capital requirements. With total assets of
$1.47 billion at December 31, 1996, D&N is the largest savings institution
headquartered in Michigan.
Like many savings institutions, the operations of the Bank are materially
affected by general economic conditions, the monetary and fiscal policies of
the federal government and the policies of the various regulatory authorities,
including the OTS, the FDIC and the Board of Governors of the Federal Reserve
System. Its results of operations are largely dependent upon its net interest
income which is the difference between the interest it receives on its loans
and investment securities, and the interest it pays on its liabilities.
OC-4
<PAGE> 114
BUSINESS OF THE BANK
The Bank, like most other savings institutions, has traditionally
concentrated its lending activities on first mortgage conventional loans
secured by residential real estate and, to a lesser extent, consumer loans and
income producing property loans. Approximately $377.0 million or 54% of the
Bank's total loans, excluding loans held for sale, secured by real estate as of
December 31, 1996, permit periodic interest rate adjustments.
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio in dollar amounts and
percentages, by type of loan.
<TABLE>
<CAPTION>
December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
----------------- ----------------- ------------------ ------------------ ----------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------- -------- -------- ------- ------- ------- ------ -------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(Dollars in thousands)
TYPE OF LOAN
REAL ESTATE
One- to-four family
Permanent $ 600,923 56.91% $597,892 62.78% $526,572 64.07% $387,252 59.89% $457,196 62.93%
Construction 13,201 1.25 19,982 2.10 2,159 0.26 2,083 0.32 1,289 0.18
Income producing property
Permanent 85,619 8.11 89,176 9.36 115,162 14.01 131,372 20.31 173,122 23.83
Construction 26,472 2.51 21,074 2.21 17,741 2.16 10,475 1.62 933 0.13
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total real estate loans 726,215 68.78 728,124 76.45 661,634 80.50 531,182 82.14 632,540 87.07
CONSUMER LOANS
Automobile loans 141,056 13.36 81,885 8.60 46,711 5.68 34,220 5.29 32,494 4.47
Home equity 82,305 7.79 60,003 6.30 39,939 4.86 23,058 3.57 18,702 2.58
Home improvement 46,545 4.41 41,542 4.36 39,279 4.78 40,017 6.19 46,368 6.38
Mobile home loans 289 0.03 417 0.04 619 0.08 776 0.12 1,170 0.16
Unsecured 15,172 1.44 19,637 2.06 22,197 2.70 20,328 3.14 8,539 1.18
Other 53,901 5.10 35,975 3.78 22,194 2.70 16,245 2.51 12,188 1.68
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total consumer loans 339,268 32.13 239,459 25.14 170,939 20.80 134,644 20.82 119,461 16.45
COMMERCIAL LOANS
Revolving business loans 2,363 0.22 1,119 0.12 -- -- -- -- -- --
Term business loans 9,982 0.95 6,650 0.70 4,748 0.58 -- -- -- --
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total commercial loans 12,345 1.17 7,769 0.82 4,748 0.58 -- -- -- --
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Loans receivable, gross 1,077,828 102.08 975,352 102.41 837,321 101.88 665,826 102.96 752,001 103.52
Less:
Discounts (premiums)
on loans purchased (2,035) (0.19) (1,709) (0.18) 999 0.12 2,896 0.45 5,448 0.75
Allowance for losses 11,042 1.05 10,081 1.06 8,349 1.02 11,570 1.79 15,611 2.15
Undisbursed portion
of loan proceeds 12,085 1.14 13,198 1.38 4,213 0.51 2,750 0.43 404 0.06
Deferred income 860 0.08 1,423 0.15 1,885 0.23 1,900 0.29 3,993 0.55
Unearned income on
consumer loans -- -- -- -- -- -- 1 -- 44 0.01
---------- ------ -------- ------ -------- ------ -------- ------ -------- ------
21,952 2.08 22,993 2.41 15,446 1.88 19,117 2.96 25,500 3.52
Loans receivable, net $1,055,876 100.00% $952,359 100.00% $821,875 100.00% $646,709 100.00% $726,501 100.00%
========== ====== ======== ====== ======== ====== ======== ====== ======== ======
</TABLE>
OC-5
<PAGE> 115
The total amount of loans, excluding loans held for sale, due after
December 31, 1997 which have fixed interest rates is $322.1 million, while the
amount of loans due after such date having floating or adjustable rates is
$627.4 million.
Loan Originations, Purchases And Sales. Federally chartered savings
institutions, like the Bank, have general authority to make real estate loans
throughout the United States. The Bank has originated residential mortgage
loans secured by property both within and outside the State of Michigan. The
Bank has also purchased residential mortgage loans secured by property located
in various states. In addition, the Bank has originated income producing
property loans secured by real estate located in the State of Michigan and has
purchased such loans secured by property located in Michigan and elsewhere.
Since 1990, the Bank has chosen to focus the activities of its community banking
offices on loan originations in their market areas. At December 31, 1996, 75%
of the Bank's real estate loans receivable (excluding government agency insured
or guaranteed mortgage-backed and derivative products) were secured by real
estate located in Michigan.
The Bank has sold loans and loan participations in the secondary market,
generally without recourse. Loans held for sale are recorded at the lower of
cost or market value. At December 31, 1996, the Bank had $5.2 million of net
loans held for sale consisting of 15- and 30-year fixed rate loans. These sales
have provided additional funds for loan originations and investments and also
generated income. The Bank generally continues, after the sale, to service the
loans and loan participations sold. Loan sales are made on a yield basis with a
portion of the difference between the yield to the purchaser and the amount paid
by the borrower constituting servicing income to the Bank. On occasion, the
Bank also purchased mortgage loan servicing rights from others in order to
maintain its loan servicing portfolio economies of scale. During 1994, the Bank
decided to sell the majority of its portfolio of purchased mortgage loan
servicing rights in order to reduce the Bank's interest rate risk and balance
sheet volatility. The scale of loan servicing operations has been reduced as
the Bank concentrates its loan servicing activities on originated loans. The
weighted average servicing fee for loans serviced for others was .29% at
December 31, 1996. At December 31, 1996, the Bank serviced for others
approximately $415 million in loans and loan participations.
OC-6
<PAGE> 116
The following table shows origination, purchase, sale and repayment
activities of the Bank, including mortgage-backed securities, for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
(In thousands)
ORIGINATIONS
Real estate:
One- to four-family residential ......... $194,357 $182,800 $ 81,279 $ 147,246 $ 121,468
Income producing property ............... 33,816 17,614 17,620 13,014 2,711
Non-real estate:
Consumer ................................ 271,622 195,109 132,836 95,129 85,254
Commercial .............................. 11,437 3,739 4,478 -- --
-------- -------- -------- --------- ---------
Total originations ..................... 511,232 399,262 236,213 255,389 209,433
PURCHASES
Real estate:
One- to four-family residential ......... 148,405 103,524 188,481 72,125 5,662
Income producing property ............... -- -- 1,852 -- 4,989
Mortgage-backed securities .............. 58,892 -- 68,392 108,749 86,464
-------- -------- -------- --------- ---------
Total purchases ........................ 207,297 103,524 258,724 180,874 97,115
-------- -------- --------- --------- ---------
Total additions ........................ 718,529 502,786 494,937 436,263 306,548
SALES
Real estate:
One- to four-family residential ......... 68,024 107,080 45,311 106,167 40,610
Mortgage-backed securities(1) ........... -- 4,210 50,658 126,932 110,737
Non-real estate:
Consumer loans .......................... 2,810 2,976 2,894 2,229 2,934
-------- -------- -------- --------- ---------
Total sales ............................ 70,834 114,266 98,863 235,328 154,281
Principal repayments ..................... 426,291 288,485 239,816 316,624 400,042
-------- -------- -------- --------- ---------
Total reductions ....................... 497,125 402,751 338,679 551,952 554,323
Transfers to other real estate owned ..... (3,373) (1,936) (2,861) (9,380) (6,259)
Increase (decrease) in other items, net .. 9,033 8,801 1,079 (19,622) 4,477
-------- -------- -------- --------- ---------
Net increase (decrease) ................ $227,064 $106,900 $154,476 $(144,691) ($249,557)
======== ======== ======== ========= =========
</TABLE>
- ------------------------
(1) Includes sales of mortgage derivative products which were carried at the
lower of cost or market.
Outstanding loan commitments of the Bank at December 31, 1996 amounted to
$36.7 million for one- to four-family residential real estate loans and $32.7
million for commercial real estate loans.
NONPERFORMING ASSETS AND RISK ELEMENTS
Nonperforming assets, including other real estate owned, decreased to $8.1
million at December 31, 1996 compared to $9.7 million at December 31, 1995. The
ratio of nonperforming assets to total assets was 0.55% at December 31, 1996
compared to 0.79% at December 31, 1995. Allowances for losses represented 136%
of nonperforming assets at December 31, 1996.
OC-7
<PAGE> 117
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio:
<TABLE>
<CAPTION>
March 31, December 31,
----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- --------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Nonaccruing loans . . . . . . . . . . $ 4,488 $ 6,621 $ 8,225 $ 17,995 $ 30,102 $ 44,703
Accruing loans delinquent
more than 90 days . . . . . . . . -- -- 24 5 13 --
Restructured loans . . . . . . . . . -- -- -- -- 166 167
-------- -------- -------- -------- -------- --------
Total nonperforming loans . . . . 4,488 6,621 8,249 18,000 30,281 44,870
Other real estate owned (OREO) . . . 1,226 1,470 1,452 6,520 13,312 11,186
-------- -------- -------- -------- -------- --------
Total nonperforming assets . . . $ 5,714 $ 8,091 $ 9,701 $ 24,520 $ 43,593 $ 56,056
======== ======== ======== ======== ======== ========
Nonperforming loans as a
percentage of total loans . . . . 0.41% 0.62% 0.86% 2.17% 4.60% 6.05%
======== ======== ======== ======== ======== ========
Nonperforming assets as a
percentage of total assets . . . 0.37% 0.55% 0.79% 2.17% 4.04% 4.47%
======== ======== ======== ======== ======== ========
Allowance for loan losses as a
percentage of nonperforming
loans . . . . . . . . . . . . . . 244.81% 166.77% 122.21% 46.38% 38.21% 34.79%
======== ======== ======== ======== ======== ========
Allowances for loan and OREO losses
as a percentage of
nonperforming assets . . . . . . 192.28% 136.47% 105.29% 35.40% 28.03% 30.08%
======== ======== ======== ======== ======== ========
</TABLE>
ALLOWANCE FOR LOAN LOSSES
Loss allowances are established at levels considered appropriate based on
management's judgment of potential losses in residential, income producing and
consumer loan portfolios. The loan portfolios are reviewed at least quarterly
for changes in performance, collateral value and overall quality. Allocated
allowances are established for problem loans with expected losses, and in
addition, allowances are established for unidentified potential losses.
Regulatory agencies, as an integral part of their examination process,
periodically review the Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based upon their
judgment of the information available to them at the time of their examination.
A $1.1 million provision for potential loan losses was made in 1996, compared to
$2.4 million in 1995 and $100,000 in 1994. Management's judgment in determining
the level of the allowance for loan losses is influenced by several factors
during the quarterly reviews. These factors include, but are not limited to,
past loan performance and loss experience, current economic and market
conditions, collateral location and market values, industry and geographic
concentrations and delinquency statistics and ratios. Management also considers
the different levels of risk between income producing property loans,
installment loans and one- to four-family residential loans. In addition,
management considers the level of nonperforming assets and classified assets,
the level of lending activity and the overall size of the loan portfolio.
OC-8
<PAGE> 118
The following table sets forth an analysis of the Bank's allowance for
loan losses:
<TABLE>
<CAPTION>
Three
Months
Ended
March 31, Year Ended December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
-------- -------- --------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year . . . . $ 11,042 $ 10,081 $ 8,349 $ 11,570 $ 15,611 $ 18,744
Charge-offs:
Single family . . . . . . . . . . 53 314 169 110 1,136 329
Income producing property . . . . -- -- 1,019 3,109 2,584 2,180
Installment . . . . . . . . . . . 381 1,216 999 773 681 1,000
Commercial . . . . . . . . . . . . -- -- -- -- -- --
-------- -------- --------- -------- -------- --------
474 1,530 2,187 3,992 4,401 3,509
Recoveries:
Single family . . . . . . . . . . -- 3 917 9 25 --
Income producing property . . . . -- 1,098 245 300 8 3
Installment . . . . . . . . . . . 79 290 357 362 327 256
Commercial . . . . . . . . . . . . -- -- -- -- -- --
-------- -------- --------- -------- -------- --------
79 1,391 1,519 671 360 259
Net charge-offs . . . . . . . . . . . 355 139 668 3,321 4,041 3,250
Provision charged to operations . . . 300 1,100 2,400 100 -- 117
-------- -------- --------- -------- -------- --------
Balance at end of year . . . . . . . $ 10,977 $ 11,042 $ 10,081 $ 8,349 $ 11,570 $ 15,611
======== ======== ========= ======== ======== ========
Net charge-offs as a percentage
of average loans . . . . . . . 0.13% 0.01% 0.07% 0.43% 0.59% 0.42%
======== ======== ========= ======== ======== ========
Allowance for loan losses as a
percentage of total loans. . . . 1.01% 1.03% 1.05% 1.01% 1.76% 2.10%
======== ======== ========= ======== ======== ========
</TABLE>
REIT PREFERRED OFFERING
A registration statement has been filed with the SEC for the public
issuance of $27.5 million of Preferred Capital Shares by a new real estate
investment trust ("REIT") subsidiary of the Bank (the "REIT Subsidiary"). The
Preferred Capital Shares which would be automatically exchanged for Series A
Preferred Shares upon the occurrence of certain trigger events (specifically, if
the appropriate regulatory agency directs in writing an exchange of the
Preferred Capital Shares for Series A Preferred Shares because (i) the Bank
becomes "undercapitalized" under prompt corrective action regulations
established pursuant to FDICIA, (ii) the Bank is placed into conservatorship or
receivership, or (iii) the appropriate regulatory agency, in its sole
discretion, anticipates the Bank's, becoming "undercapitalized" in the near
term), are designed to qualify as core capital of the Bank under the regulatory
capital requirements applicable to the Bank. The automatic exchange feature was
designed to ensure that the Preferred Capital Shares provide the same level of
capital support to the Bank on a consolidated basis as other forms of core
capital by making the capital represented by the Preferred Capital Shares
directly available to creditors of the Bank in certain circumstances. Proceeds
from the issuance of the Preferred Capital Shares, together with capital
contributions from the Bank to the REIT Subsidiary, will be used by the REIT
Subsidiary to purchase certain REIT-qualified assets from the Bank's mortgage
loan portfolio. Because the REIT Subsidiary will elect to qualify as a REIT for
federal income tax purposes, dividends payable on the REIT Preferred Capital
Shares will be deductible by the REIT Subsidiary for income tax purposes. The
treatment of the REIT Preferred Capital Shares as core capital of the Bank and
the REIT
OC-9
<PAGE> 119
Subsidiary's ability to deduct, for income tax purposes, the dividends payable
on the REIT Preferred Capital Shares will provide the Bank with a more
cost-effective means of obtaining regulatory capital than if the Bank were to
issue preferred stock itself.
The mortgage loans expected to be transferred to the REIT Subsidiary by
the Bank have been selected from the Bank's existing portfolio of fixed and
adjustable-rate mortgage loans. The Bank will determine the values of the
selected mortgage loans using discounted cash flow analyses based on current
market conditions.
OC-10
<PAGE> 120
THE OFFERING
<TABLE>
<S> <C>
Securities Offered . . . . . . . . . . . . 1,100,000 Series A Preferred Shares.
Exchange . . . . . . . . . . . . . . . . . The Series A Preferred Shares are to be issued, if ever, in
connection with an exchange of the Preferred Capital Shares
of D&N Capital Corporation, a wholly owned subsidiary of
the Bank. See "Exchange."
Ranking . . . . . . . . . . . . . . . . . The Series A Preferred Shares rank senior to the Bank's
common stock, par value $0.01 per share (the "Common
Stock") and junior to all claims of the Bank's creditors,
including the claims of the Bank's depositors. Additional
shares of preferred stock ranking senior to the Series A
Preferred Shares may not be issued without the approval of
holders of at least 2/3 of the Series A Preferred Shares.
Dividends . . . . . . . . . . . . . . . . Dividends on the Series A Preferred Shares are payable at
the rate of [___]% per annum of the initial liquidation
preference (an amount equal to $[____] per annum per
share), if, when, and as declared by the Board of Directors
of the Bank. If declared, dividends are payable quarterly
in arrears on the last day of March, June, September and
December in each year, or, if such day is not a business
day, on the next business day. Dividends on the Series A
Preferred Shares are not cumulative and, accordingly, if no
dividend is declared on the Series A Preferred Shares by
the Bank for a quarterly dividend period, holders of the
Series A Preferred Shares will have no right to receive a
dividend for that period, and the Bank will have no
obligation to pay a dividend for that period, whether or
not dividends are declared and paid for any future period.
</TABLE>
OC-11
<PAGE> 121
<TABLE>
<S> <C>
Upon the exchange of Preferred Capital Shares for
Series A Preferred Shares, any accrued and unpaid dividends
for the most recent quarter of the Preferred Capital Shares
at the time of the exchange will be deemed to be accrued and
unpaid dividends on the Series A Preferred Shares. See
"Description of the Series A Preferred Shares --
Dividends." The Bank's ability to pay cash dividends
is subject to regulatory and other restrictions
described herein.
Liquidation Preference . . . . . . . . . . . . . The liquidation preference for each Series A Preferred
Share is $25.00, plus an amount equal to the accrued
and unpaid dividends for the most recent quarter,
if any, thereon for the then-current dividend period
to the date fixed for liquidation. See "Description of
Series A Preferred Shares -- Rights Upon Liquidation."
Redemption . . . . . . . . . . . . . . . . . . . The Bank may not redeem the Series A Preferred Shares
before [______], 2002. After such date, the Series A
Preferred Shares may be redeemed for cash at the option
of the Bank, in whole or in part, at any time and from
time to time, at the redemption price of $25.00 per
share, plus the accrued and unpaid dividends for the
most recent quarter thereon, to the date fixed for
redemption, if any, thereon. Redemption of the Series A
Preferred Shares will be subject to compliance with applicable
regulatory and other restrictions. See "Description of
Series A Preferred Shares -- Redemption."
Voting Rights . . . . . . . . . . . . . . . . . . Holders of Series A Preferred Shares will not have any
voting rights, except as expressly provided herein. On
any matter on which holders of the Series A Preferred
Shares may vote, each Series A Preferred Share will be
entitled to one vote. See "Description of Series A
Preferred Shares -- Voting Rights."
</TABLE>
OC-12
<PAGE> 122
Use of Proceeds. . . . . . . The Series A Preferred Shares will only be issued
in connection with an exchange for the Preferred
Capital Shares. The proceeds from the sale of the
Preferred Capital Shares were used by D&N Capital
Corporation to purchase a portfolio of mortgage
assets and to pay expenses associated with the
formation and offering of the Preferred Capital
Shares. The conversion of Preferred Capital Shares
into Class A Preferred Shares will produce no
proceeds to the Bank. See "Use of Proceeds."
Absence of a There is currently no public market for the Series
Public Market. . . . . . . . A Preferred Shares as such shares have not been
issued and such shares will not be listed on any
securities exchange or for quotation through the
Nasdaq System.
RISK FACTORS
See "Risk Factors and Other Considerations" for a
discussion of the risk factors and other considerations
relating to the Bank and the Series A Preferred Shares.
OC-13
<PAGE> 123
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The selected consolidated financial and other data of
the Bank herein as of and for the years ended December 31,
1996, 1995, 1994, 1993 and 1992 have been derived from the
Consolidated Financial Statements of D&N Financial Corporation.
<TABLE>
<CAPTION>
At or
For the Three At or
Months Ended For the Year
March 31, December 31,
------------- --------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total assets $ 1,528,466 $ 1,472,988 $ 1,228,495 $ 1,128,730 $ 1,080,324 $ 1,252,955
Net loans receivable 1,081,837 1,055,876 952,359 821,875 646,709 726,501
Nonperforming assets 5,714 8,091 9,701 24,520 43,593 56,056
Mortgage-backed securities 273,460 251,256 127,709 151,293 171,983 241,040
Excess of cost over net assets of
association acquired 0 -- -- 384 845(1) 36,380
Mortgage servicing rights 1,404 1,443 1,113 968 9,870 29,198
Deposits 1,007,508 964,133 922,932 817,674 844,012 916,644
Borrowings 417,485 404,037 216,295 226,956 101,648 174,232
Stockholder's Equity 83,291 80,014 71,108 57,545 55,971 101,698
Tangible stockholder's equity 82,299 79,003 69,985 57,484 56,133 67,232
Number of offices 48 48 46 41 38 40
SELECTED RATIOS:
Return on average assets 0.89% 0.69% 0.90% 0.33% (5.50)% 0.28%
Net interest margin 3.13 3.26 3.04 2.31 1.95 2.28
General and administrative expenses
to average assets 2.31 2.42 2.45 2.42 1.83
Nonperforming assets to total assets 0.37 0.55 0.79 2.17 4.04 4.47
Allowance for loan losses to
nonperforming loans 244.81 166.77 122.21 46.38 38.21 34.79
Allowance for loan losses to total loans 1.01 1.03 1.05 1.01 1.76 2.10
Net loan charge-offs to average loans 0.13 0.01 0.07 0.43 0.59 0.42
Tangible capital ratio 5.15 5.11 5.41 5.05 4.89 4.32
Core capital ratio 5.15 5.11 5.41 5.09 4.97 5.32
Tier 1 risk-based capital ratio 8.69 8.72 9.20 8.92 8.95 9.34
Risk-based capital ratio 9.85 9.94 10.45 10.08 10.21 10.57
</TABLE>
- ------------------
(1) Includes cumulative effect of change in accounting for
goodwill of ($34,754,000).
OC-14
<PAGE> 124
<TABLE>
<CAPTION>
For the Three For the
Months Ended Year Ended
March 31, December 31,
------------ --------------------------------------------------------------
1997 1996 1995 1994 1993 1992
------------ --------- --------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
FOR THE YEAR:
INTEREST INCOME
Loans $ 21,937 $ 86,151 $ 72,550 $ 58,274 $ 58,906 $ 72,729
Mortgage-backed securities 4,436 10,930 10,577 7,875 12,935 31,878
Investments and deposits 1,962 7,228 7,638 5,462 8,233 12,921
--------- --------- --------- -------- -------- ---------
TOTAL INTEREST INCOME 28,335 104,309 90,765 71,611 80,074 117,528
INTEREST EXPENSE
Deposits 11,288 43,859 38,639 29,806 33,815 46,607
Securities sold under agreement to repurchase 759 2,193 1,450 808 1 159
FHLB advances and other borrowed money 5,030 15,558 13,445 7,446 9,757 21,997
Interest rate instruments -- -- 2,521 9,812 15,309 18,876
--------- --------- --------- -------- -------- ---------
TOTAL INTEREST EXPENSE 17,077 61,610 56,055 47,872 58,882 87,639
--------- --------- --------- -------- -------- ---------
NET INTEREST INCOME 11,258 42,699 34,710 23,739 21,192 29,889
Provision for loan losses 300 1,100 2,400 100 -- 117
--------- --------- --------- -------- -------- ---------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSS 10,958 41,599 32,310 23,639 21,192 29,772
NONINTEREST INCOME
Loan servicing and administrative fees, net 521 1,914 1,882 2,228 (13,964) 3,431
Deposit related 921 3,621 3,147 3,098 3,002 3,356
Gain on loans held for sale 26 1,031 882 227 777 (44)
Other 135 470 222 1,173 672 765
--------- --------- --------- -------- -------- ---------
TOTAL OPERATING NONINTEREST INCOME 1,603 7,036 6,133 6,726 (9,513) 7,508
Gain (loss) on investment securities available
for sale -- 188 (120) (221) 470 962
Gain on sale of loans and mortgage-backed
securities available for sale 5 -- 899 843 (12,968) 333
Gain on sale of loan servicing rights -- -- -- 140 475 4,594
--------- --------- --------- -------- -------- ---------
TOTAL NONINTEREST INCOME 1,608 7,224 6,912 7,488 (21,536) 13,397
NONINTEREST EXPENSE
Compensation and benefits 4,064 16,868 15,723 14,572 13,344 12,564
Occupancy 780 2,834 2,273 1,987 2,044 2,137
Other expense 2,495 11,429 10,481 9,902 14,171 11,581
--------- --------- --------- -------- -------- ---------
GENERAL AND ADMINISTRATIVE EXPENSE 7,339 31,131 28,477 26,461 29,559 26,282
Other real estate owned, net (22) 71 (999) (2,136) 2,340 2,919
Amortization of intangibles -- -- 370 448 767 1,933
FDIC insurance 176 7,894 2,431 2,639 2,275 2,207
--------- --------- --------- -------- -------- ---------
TOTAL NONINTEREST EXPENSE 7,493 39,096 30,279 27,412 34,941 33,341
--------- --------- --------- -------- -------- ---------
INCOME BEFORE INCOME TAX EXPENSE 5,073 9,727 8,943 3,715 (35,285) 9,828
Federal income tax expense (credit) 1,781 349 (1,675) 150 (3,738) 4,254
--------- --------- --------- -------- -------- ---------
INCOME BEFORE EXTRAORDINARY ITEMS 3,292 9,378 10,618 3,565 (31,547) 5,574
Extraordinary items and accounting changes,
net of taxes -- -- -- -- (35,575) (1,572)
--------- --------- --------- -------- -------- ---------
NET INCOME $ 3,292 $ 9,378 $ 10,618 $ 3,565 $(67,122) $ 4,002
========= ========= ========= ======== ======== =========
</TABLE>
OC-15
<PAGE> 125
RISK FACTORS AND OTHER CONSIDERATIONS
An investment in the Series A Preferred Shares involves a high degree
of risk. Investors should carefully consider the following risk factors and
other considerations relating to the Bank and the Series A Preferred Shares.
BANK PREFERRED SHARES WILL NOT BE LISTED ON THE NASDAQ SYSTEM
Although the Preferred Capital Shares will be listed on the Nasdaq
System, the Bank does not intend to apply for listing of the Series A Preferred
Shares, for which the Preferred Capital Shares will be exchanged automatically
on a one-for-one basis upon the occurrence of an Exchange Event as defined
hereafter under "Exchange", on any national securities exchange or for
quotation of the Series A Preferred Shares through the Nasdaq System.
Consequently, there can be no assurance as to the liquidity of the trading
markets for the Series A Preferred Shares, if issued, or that an active public
market for the Series A Preferred Shares would develop or be maintained.
DIVIDEND AND OTHER REGULATORY RESTRICTIONS ON OPERATIONS OF THE BANK
Federal regulatory authorities have the right to examine the Bank and
its activities. Under certain circumstances, including any determination that
the Bank's activities constitute an unsafe and unsound banking practice, such
regulatory authorities will have the authority to restrict the ability of the
Bank to transfer assets, to make distributions to its stockholders (including
dividends to the holders of Series A Preferred Shares, as described below), or
to redeem shares of preferred stock. Furthermore, in the event the Bank is
placed into conservatorship or receivership, the Bank would be unable to pay
dividends on the Series A Preferred Shares. In addition, in the event of a
liquidation of the Bank, the claims of the Bank's depositors and of its
secured, senior, general and subordinated creditors would be entitled to a
priority of payment over the dividend and other claims of holders of equity
interests such as the Series A Preferred Shares issued pursuant to the
Automatic Exchange.
Payment of dividends on the Series A Preferred Shares could also be
subject to regulatory limitations if the Bank became "undercapitalized" for
purposes of the OTS prompt corrective action regulations, which is currently
defined as having a total risk-based capital ratio of less than 8.0%, a Tier 1
risk-based capital ratio of less than 4.0% and a core capital (or leverage)
ratio of less than 4.0%. At December 31, 1996, the Bank was in compliance with
all of its regulatory capital requirements. As of that date, the Bank's total
risk-based capital ratio was 9.94%, its Tier 1 risk-based capital ratio was
8.72% and its core capital (or leverage) ratio was 5.11%. Such ratios,
adjusted to give effect to the sale of Preferred Capital Shares in the
Offering, would be 13.10%, 11.89% and 6.84%, respectively.
Under OTS regulations, the ability of thrift institutions such as the
Bank to make "capital distributions" (defined to include payment of dividends,
stock repurchases, cash-out mergers and other distributions charged against the
capital accounts of an institution) varies depending primarily on the
institution's earnings and regulatory capital levels. The OTS retains general
OC-16
<PAGE> 126
discretion to prohibit any otherwise permitted capital distribution on general
safety and soundness grounds and must be given 30 days advance notice of all
capital distributions. Dividends on the Series A Preferred Shares in excess of
the Bank's net income would be treated as "capital distributions" by the OTS,
in which case the Bank's payment of such dividends would be subject to
restrictions under the OTS capital distribution regulations. Under these
regulations, institutions are divided into tiers. Tier 1 institutions are
those in compliance with their "fully phased-in" capital requirements and which
have not been notified by the OTS that they are "in need of more than normal
supervision." Tier 1 institutions may make capital distributions without
regulatory approval of up to the greater of (i) 100% of net income for the
calendar year to date, plus up to one-half of the institution's surplus capital
(i.e., the excess of capital over the fully phased-in requirement) at the
beginning of the calendar year in which the distribution is made or (ii) 75% of
net income for the most recent four quarters. Tier 1 institutions that make
capital distributions under the foregoing rules must continue to meet the
applicable capital requirements on a pro forma basis after giving effect to
such distributions. Tier 1 institutions may seek OTS approval to pay dividends
beyond these amounts.
The category of Tier 2 institutions, which are defined as institutions
that are in compliance with their current, but not their "fully phased-in"
capital requirements, is no longer relevant because all deductions from capital
requirements have been fully phased-in as of July 1, 1996.
Tier 3 institutions have capital levels below their current required
minimum levels and may not make any capital distributions without the prior
written approval of the OTS.
As of December 31, 1996, the Bank had sufficient levels of capital to
be a Tier 1 institution. However, the OTS retains discretion under its capital
distribution regulations to treat an institution that it believes is in need of
more than normal supervision (after written notice) as a Tier 3 institution.
Moreover, deteriorating collateral values or general economic conditions could
result in recognition of losses on D&N's loan and REO portfolios and a
consequent reduction in capital.
DIVIDENDS NOT CUMULATIVE
Dividends on the Series A Preferred Shares are not cumulative.
Consequently, if the Board of Directors does not declare a dividend on the
Series A Preferred Shares for any quarterly period, the holders of the Series A
Preferred Shares would not be entitled to recover such dividend whether or not
funds are or subsequently become available. The Board of Directors may
determine, in its business judgment, that it would be in the best interests of
the Bank to pay less than the full amount of the stated dividends on the Series
A Preferred Shares or no dividends for any quarter notwithstanding that funds
are available. Factors that would be considered by the Board of Directors in
making this determination are the Bank's financial condition and capital needs,
the impact of legislation and regulations as then in effect or as may be
proposed, economic conditions, and such other factors as the Board may deem
relevant.
The Series A Preferred Shares will be issued upon an exchange of the
Preferred Capital Shares. Each Preferred Capital Share will be exchanged
automatically for one Series A Preferred
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Share if the appropriate regulatory agency directs in writing an exchange of
the Preferred Capital Shares for Series A Preferred Shares because (i) the Bank
becomes "undercapitalized" under prompt corrective action regulations
established pursuant to FDICIA, (ii) the Bank is placed into conservatorship or
receivership or (iii) the appropriate regulatory agency, in its sole
discretion, anticipates the Bank's becoming "undercapitalized" in the near
term. The OTS' prompt corrective action regulations prohibit "capital
distributions" (including dividends) unless an institution is at least
"adequately capitalized." Thus, at the time of the exchange, by regulation,
the Bank may not be permitted to pay dividends on the Series A Preferred
Shares. In addition, the Bank's ability to pay dividends on the Series A
Preferred Shares even if the Bank were "adequately capitalized" following the
exchange would be subject to various restrictions under OTS regulations.
INTEREST RATE RISK
Many of the Bank's mortgage loans bear interest at adjustable rates.
If there is a decline in interest rates (as measured by the indices upon which
the interest rates of the mortgage loans are based), then the Bank will
experience a decrease in income available to be distributed to its
stockholders. In such an interest rate environment, the Bank may experience an
increase in prepayments on its residential mortgage loans and may find it more
difficult to originate additional mortgage loans bearing rates sufficient to
support payment of the dividends on the Series A Preferred Shares. In
addition, certain residential mortgage loan products which the Bank holds could
allow borrowers in such an interest rate environment to convert an adjustable
rate mortgage to a fixed rate mortgage, thus "locking in" a low fixed interest
rate. Because the rate at which dividends are required to be paid on the
Series A Preferred Shares is fixed, there can be no assurance that an interest
rate environment in which there is a significant decline in interest rates
would not adversely affect the Bank's ability to pay dividends on the Series A
Preferred Shares.
RISKS ASSOCIATED WITH MORTGAGE LOANS GENERALLY
An investment in the Series A Preferred Shares may be affected by,
among other things, a decline in real estate values. In the event the mortgage
assets held by the Bank become nonperforming, the Bank may not have sufficient
income or capital to pay dividends on the Series A Preferred Shares. Factors
that could affect the value of the mortgage assets held by the Bank include the
following:
Geographic Concentration. Certain geographic regions of the United
States may from time to time experience natural disasters or weaker regional
economic conditions and housing markets, and, consequently, may experience
higher rates of loss and delinquency on mortgage loans generally. Any
concentration of the mortgage loans in such a region may present risks in
addition to those present with respect to mortgage loans generally.
Substantially all of the residential properties underlying the Bank's
residential mortgage loans are located in Michigan. All of the commercial
properties underlying its commercial mortgage loans are located in Michigan.
These mortgage loans may be subject to a greater risk of default than other
comparable mortgage loans in the event of adverse economic, political or
business developments or natural hazards that may affect this region and the
ability of property owners in this region to make payments of principal
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and interest on the underlying mortgages. In the event of any such natural
disaster, the Bank's ability to pay dividends on the Series A Preferred Shares
could be adversely affected.
Special Risks Relating to Commercial loans. The Bank's portfolio of
mortgage assets contains commercial mortgage loans. Commercial mortgage loans
have certain distinct risk characteristics. Commercial mortgage loans generally
lack standardized terms, which may complicate their structure. Commercial real
estate properties themselves tend to be unique and are more difficult to value
than residential real estate properties. Commercial mortgage loans also tend to
have shorter maturities than residential mortgage loans and may not be fully
amortizing, meaning that they may have a significant principal balance or
"balloon" payment due on maturity. In addition, commercial real estate
properties, particularly industrial and warehouse properties, are generally
subject to relatively greater environmental risks than non-commercial properties
and to the corresponding burdens and costs of compliance with environmental laws
and regulations. See "--Environmental Considerations." Also, there may be
costs and delays involved in enforcing rights of a property owner against
tenants in default under the terms of leases with respect to commercial
properties. For example, tenants may seek the protection of the bankruptcy
laws, which could result in termination of lease contracts.
REAL ESTATE MARKET CONDITIONS
The results of the Bank's operations will be affected by various factors,
many of which are beyond the control of the Bank, such as: (i) local and other
economic conditions affecting real estate value, (ii) the ability of tenants to
make lease payments, (iii) the ability of a property to attract and retain
tenants, which may in turn be affected by local conditions such as an oversupply
of space or a reduction in demand for rental space in the area, the
attractiveness of properties to tenants, competition from other available space,
the ability of the owner to pay leasing commissions, provide adequate
maintenance and insurance, pay tenant improvement costs and make other tenant
concessions, (iv) interest rate levels and the availability of credit to
refinance such loans at or prior to maturity and (v) increased operating costs,
including energy costs, real estate taxes and costs of compliance with
environmental controls and regulations. The results of the Bank's operations
depend on, among other things, the level of interest income generated by the
Bank's mortgage assets, the market value of such mortgage assets and the supply
of and demand for such mortgage assets. Further, no assurance can be given that
the values of the properties securing the mortgage loans have remained or will
remain at the levels existing on the dates of origination of such mortgage
loans.
LEGAL CONSIDERATIONS
Applicable state laws may regulate interest rates and other charges and
require certain disclosures to borrowers. In addition, most states have other
laws, public policy and general principles of equity relating to the protection
of consumers, unfair and deceptive practices and practices which may apply to
the servicing and collection of the mortgage loans. Depending on the provisions
of the applicable law and the specific facts and circumstances involved,
violations of these laws, policies and principles may limit the ability of the
Bank to collect all or part of the
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principal of or interest on the mortgage loans, may entitle the borrower to a
refund of amounts previously paid and, in addition, could subject the Bank to
damages and administrative sanctions.
ENVIRONMENTAL CONSIDERATIONS
In the event that the Bank is forced to foreclose on a defaulted mortgage
loan to recover its investment in such mortgage loan, the Bank may be subject to
environmental liabilities in connection with the underlying real property which
could exceed the value of the real property. Although the Bank intends to
exercise due diligence to discover potential environmental liabilities prior to
the acquisition of any property through foreclosure, hazardous substances or
wastes, contaminants, pollutants or sources thereof (as defined by state and
federal laws and regulations) may be discovered on properties during the Bank's
ownership or after a sale thereof to a third party. If such hazardous substances
are discovered on a property which the Bank has acquired in foreclosure or
otherwise, the Bank may be required to remove those substances and clean up the
property. There can be no assurances that in such a case the Bank would not
incur full recourse liability for the entire costs of any removal and clean-up,
that the cost of such removal and clean-up would not exceed the value of the
property or that the Bank could recoup any of such costs from any third party.
The Bank may also be liable to tenants and other users of neighboring
properties. In addition, the Bank may find it difficult or impossible to sell
the property prior to or following any such clean-up.
RISK OF FUTURE REVISIONS IN POLICIES AND STRATEGIES BY BOARD OF DIRECTORS
The Board of Directors has established the investment policies and
operating policies and strategies of the Bank, certain of which are described in
the Offering Circular. These policies may be amended or revised from time to
time at the discretion of the Board of Directors (in certain circumstances
subject to the approval of a majority of the Independent Directors) without a
vote of the Bank's stockholders, including holders of the Series A Preferred
Shares. The ultimate effect of any change in the policies and strategies set
forth in the Offering Circular on a holder of Series A Preferred Shares may be
positive or negative.
NO MARKET FOR SERIES A PREFERRED SHARES
Prior to the Exchange Event, there has been no market for the Series A
Preferred Shares as no such shares will have been issued, and there can be no
assurance that an active trading market will develop or be sustained or at what
price the Series A Preferred Shares may be resold.
RISK RELATING TO ELIMINATION OF THRIFT CHARTER
Congress has considered legislation in various forms that would require
federal thrifts, like the Bank, to convert their charters to national or state
bank charters. Recent legislation requires the merger of the Bank Insurance
Fund ("BIF") and the SAIF into a single Deposit Insurance Fund on January 1,
1999 but only if the thrift charter is eliminated by that date. The Treasury
Department was required to submit a comprehensive study on thrift charter issues
by March 31, 1997. In the absence of appropriate "grandfather" provisions, such
legislation could have a
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material adverse effect on the Bank because, among other things, the regulatory
capital and accounting treatment for banks and thrifts differs in certain
respects. The Bank cannot determine whether, or in what form, such legislation
will eventually be enacted and there can be no assurances that any such
legislation that is enacted will contain adequate grandfather rights for the
Bank. See "Recent Developments--Legislative Action."
RECENT DEVELOPMENTS
LEGISLATIVE ACTION
On September 30, 1996, President Clinton signed into law the Economic
Development and Regulatory Paperwork Reduction Act of 1996 (the "Act"). The
Act's principal provisions relate to recapitalization of SAIF, but it also
contains numerous regulatory relief measures, some of which are directly
applicable to the Bank.
Pursuant to the Act, as of January 1, 1997, commercial banks will be
required to share in the payment of interest due on Financial Corporation
("FICO") bonds used to rescue the savings and loan industry in the 1980's.
Annual FICO assessments to be added to deposit insurance premiums are expected
to equal approximately 6.4 basis points for SAIF members and 1.3 basis points
for BIF members from January 1, 1997 through December 31, 1999, and
approximately 2.4 basis points for both BIF and SAIF members thereafter.
Although this provision of the Act establishes a time frame for the
eventual elimination of the thrift charter, it contains no provisions concerning
the form the current thrift charter may be required to take. The Bank cannot
determine at this time what effect this provision will have on its financial
position or operations. See "Risk Factors--Risks Relating to Elimination of
Thrift Charter."
The Act also increases the Bank's commercial lending authority from 10% to
20% of assets, provided that the additional 10% consists of small business
loans.
Finally, the Act contains several other provisions designed to reduce
regulatory burdens associated with compliance with various consumer and other
laws applicable to the Bank, including for example, provisions designed to
coordinate the disclosure and other requirements under the Truth-in-Lending and
Real Estate Settlement Procedures Act, modify certain insider lending
restrictions, permit OTS to allow exemptions to anti-tying prohibitions an
exempt certain transactions and simplify certain disclosures under the
Truth-in-Lending Act.
USE OF PROCEEDS
The Series A Preferred Shares are to be issued, if ever, in connection with
an exchange of the Preferred Capital Shares, which shares were sold pursuant to
an effective registration statement filed with the SEC. The proceeds from the
sale of the Preferred Capital Shares were used by D&N Capital Corporation to
purchase a portfolio of mortgage assets. The exchange of Preferred Capital
Shares into Series A Preferred Shares will produce no proceeds to the Bank.
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CAPITALIZATION
The following table sets forth the actual capital of the Bank at December
31, 1996 and as adjusted as of such date to give effect to (i) the issuance of
the Preferred Capital Shares by D&N Capital Corporation and (ii) an exchange of
the Preferred Capital Shares into Series A Preferred Shares of the Bank. This
table should be read in conjunction with the Consolidated Financial Statements
of the Bank and the notes thereto included elsewhere in this Offering Circular.
<TABLE>
<CAPTION>
DECEMBER 31, 1996,
---------------------------
ACTUAL AS ADJUSTED(1)
----------- --------------
<S> <C> <C>
(DOLLARS IN THOUSANDS)
LIABILITIES:
Deposits $ 964,133 $ 964,133
Borrowings 404,037 404,307
Other 24,804 24,804
---------- ----------
Total liabilities 1,392,974 1,392,974
STOCKHOLDER'S EQUITY:
[ ]% Noncumulative Preferred Stock, Series A, $25.00 par
value, 2,500,000 shares authorized; issued and outstanding,
as adjusted --- 27,500
Common stock, $.01 par value, 10,000,000 shares authorized,
3,650,636 shares, issued and outstanding 37 37
Capital contributed in excess of par 48,590 48,590
Retained earnings 30,144 30,144
Net unrealized holding gains 1,243 1,243
---------- ----------
Total stockholder's equity 80,014 107,514
---------- ----------
Total liabilities and stockholder's equity $1,472,988 $1,500,488
========== ==========
REGULATORY CAPITAL RATIO
Tangible 5.11% 6.84%
Core (or leverage) 5.11% 6.84%
Total risk-based 9.94% 13.10%
Tier 1 risk based capital 8.72% 11.87%
</TABLE>
- ------------
(1) Adjusted to give effect to the issuance of the Preferred Capital Shares by
D&N Capital Corporation and an exchange of the Preferred Capital Shares
into Series A Preferred Shares of the Bank.
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DESCRIPTION OF THE SERIES A PREFERRED SHARES
The following summary sets forth the material terms and provisions of the
Series A Preferred Shares, and is qualified in its entirety by reference to the
terms and provisions of the Certificate of Designation establishing the Series A
Preferred Shares and the Bank's charter, as amended, the forms of which have
been filed with the OTS as exhibits to the registration statement of which this
Offering Circular forms a part.
GENERAL
The Series A Preferred Shares form an initial series of preferred stock of
the Bank, which preferred stock may be issued from time to time in one or more
series with such rights, preferences and limitations as are determined by the
Bank's Board of Directors or, if then constituted, a duly authorized committee
thereof. The Board of Directors has authorized the Bank to issue the Series A
Preferred Shares.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and nonassessable. The holders of the Series A Preferred Shares will have
no preemptive rights with respect to any shares of the capital stock of the Bank
or any other securities of the Bank convertible into or carrying rights or
options to purchase any such shares. The Series A Preferred Shares will not be
convertible into shares of Common Stock or any other class or series of capital
stock of the Bank and will not be subject to any sinking fund or other
obligation of the Bank for their repurchase or retirement.
The transfer agent, registrar and dividend disbursement agent for the
Series A Preferred Shares will be Illinois Stock Transfer Company. The
registrar for the Series A Preferred Shares will send notices to shareholders of
any meetings at which holders of such shares have the right to elect directors
of the Bank or to vote on any other matter.
DIVIDENDS
Holders of Series A Preferred Shares shall be entitled to receive, if,
when, and, as declared by the Board of Directors of the Bank out of assets of
the Bank legally available therefor, cash dividends at the rate of [__]% per
annum of the initial liquidation preference (equivalent to $[______] per share
per annum). If declared, dividends on the Series A Preferred Shares shall be
payable quarterly in arrears on the last day of March, June, September, and
December of each year, or, if such day is not a business day, on the next
business day, at such annual rate. Dividends in each quarterly period will
accrue from the first day of such period. Each declared dividend shall be
payable to holders of record as they appear at the close of business on the
stock register of the Bank on such record dates, not exceeding 45 days preceding
the payment dates thereof, as shall be fixed by the Board of Directors of the
Bank or a duly authorized committee thereof. Upon the exchange of Preferred
Capital Shares for Series A Preferred Shares, any accrued and unpaid dividends
for the most recent quarter of the Preferred Capital Shares at the time of the
conversion will be deemed to be accrued and unpaid dividends for the most
recent quarter on the Series A Preferred Shares.
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The right of holders of Series A Preferred Shares to receive dividends is
noncumulative. Accordingly, if the Board of Directors fails to declare a
dividend on the Series A Preferred Shares for a quarterly dividend period, then
holders of the Series A Preferred Shares will have no right to receive a
dividend for that period, and the Bank will have no obligation to pay a dividend
for that period, whether or not dividends are declared and paid for any future
period with respect to either the preferred stock or the Common Stock. If the
Bank fails to declare and pay or declare and set aside for payment a quarterly
dividend on the Series A Preferred Shares, holders of the preferred stock of the
Bank, including the Series A Preferred Shares, will be entitled to elect two
directors. See " --Voting Rights."
If full dividends on the Series A Preferred Shares for any dividend period
shall not have been declared and paid, or declared and a sum sufficient for the
payment thereof shall not have been set apart for such payments, no dividends
shall be declared and paid or set aside for payment and no other distribution
shall be declared or made or set aside for payment upon the Common Stock or any
other capital stock of the Bank ranking junior to or on a parity with the Series
A Preferred Shares as to dividends or amounts upon liquidation, nor shall any
Common Stock or any other capital stock of the Bank ranking junior to or on a
parity with the Series A Preferred Shares as to dividends or amounts upon
liquidation be redeemed, purchased or otherwise acquired for any consideration
(or any monies to be paid to or made available for a sinking fund for the
redemption of any such stock) by the Bank, except by conversion into, or
exchange for, other capital stock of the Bank ranking junior to the Series A
Preferred Shares as to dividends and amounts upon liquidation), until such time
as dividends on all outstanding Series A Preferred Shares have been (i) declared
and paid or declared and a sum sufficient for the payment thereof has been set
apart for payment for three consecutive dividend periods and (ii) declared and
paid or declared and a sum sufficient for the payment thereof has been set apart
for payment for the fourth consecutive dividend period.
If any Series A Preferred Shares are outstanding, no full dividends shall
be declared and paid or set apart for payment and no other distribution shall be
declared and made or set aside for payment on any series of capital stock of the
Bank ranking, as to dividends, on a parity with or junior to the Series A
Preferred Shares for any dividend period unless full dividends have been or
contemporaneously are declared and paid, or declared and a sum sufficient for
the payment thereof is set apart for such payments on the Series A Preferred
Shares, for the then-current dividend period. When dividends are not paid in
full (or a sum sufficient for such full payment is not set apart) upon the
Series A Preferred Shares and the shares of any other series of capital stock
ranking on a parity as to dividends with the Series A Preferred Shares, all
dividends declared upon Series A Preferred Shares and any other series of
capital stock ranking on a parity as to dividends with the Series A Preferred
Shares shall be declared pro rata so that the amount of dividends declared per
share on the Series A Preferred Shares and such other series of capital stock
shall in all cases bear to each other the same ratio that full dividends, for
the then-current dividend period, per share on the Series A Preferred Shares,
which shall not include any accumulation in respect of unpaid dividends for
prior dividend periods, and full dividends, including required or permitted
accumulations, if any, on such other series of capital stock bear to each other.
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<PAGE> 134
REDEMPTION
The Series A Preferred Shares will not be redeemable prior to [_______],
2002. On or after such date, the Series A Preferred Shares will be redeemable
at the option of the Bank, in whole or in part, at any time or from time to
time on not less than 30 nor more than 60 days' notice by mail, at a redemption
price of $25.00 per share, plus the accrued and unpaid dividends for the most
recent quarter to the date of redemption, if any, thereon.
Any such redemption must comply with the prompt corrective action and
capital distribution regulations of the OTS, which may prohibit a redemption or
require the OTS' prior approval of a redemption. Unless full dividends on the
Series A Preferred Shares have been, or contemporaneously are, declared and
paid or declared and a sum sufficient for the payment thereof has been set
apart for payment for the then current dividend period, no Series A Preferred
Shares shall be redeemed unless all outstanding Series A Preferred Shares are
redeemed and the Bank shall not purchase or otherwise acquire any Series A
Preferred Shares; provided, however, that the Bank may purchase or acquire
Series A Preferred Shares pursuant to a purchase or exchange offer made on the
same terms to holders of all outstanding Series A Preferred Shares.
VOTING RIGHTS
Except as expressly required by applicable law, or except as indicated
below, the holders of the Series A Preferred Shares will not be entitled to
vote. In the event the holders of Series A Preferred Shares are entitled to
vote as indicated below, each Series A Preferred Share will be entitled to one
vote on matters on which holders of the Series A Preferred Shares are entitled
to vote.
If at the time of any annual meeting of the Bank's stockholders, the Bank
has declared and failed to pay or declared and failed to set aside for payment
a quarterly dividend during any of the four preceding quarterly dividend
periods on any series of preferred stock of the Bank, including the Series A
Preferred Shares, the number of directors then constituting the Board of
Directors of the Bank will be increased by two (if not already increased by two
due to a default in preference dividends), and the holders of the Series A
Preferred Shares, voting together as a single class with the holders of all
other series of preferred stock as a single class will be entitled to elect
such two additional directors to serve on the Bank's Board of Directors at each
such annual meeting. Each director elected by the holders of shares of the
preferred stock shall continue to serve as such director until the later of (i)
the expiration of the term of such director or (ii) the payment of four
consecutive quarterly dividends on the Series A Preferred Shares.
The affirmative vote or consent of the holders of at least 66-2/3% of the
outstanding shares of each series of preferred stock of the Bank, including the
Series A Preferred Shares, voting as a single class without regard to series,
will be required (a) to create any class or series of stock which shall have
preference as to dividends or distribution of assets over any outstanding
series of preferred stock of the Bank other than a series which shall not have
any right to object to such creation or (b) to alter or change the provisions
of the Bank's Charter (including the Certificate of Designation establishing
the Series A Preferred Shares) so as to adversely affect the voting
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<PAGE> 135
powers, preferences or special rights of the holders of a series of preferred
stock of the Bank; provided that if such amendment shall not adversely affect
all series of preferred stock of the Bank, such amendment need only be approved
by at least 66-2/3% of the holders of shares of all series of preferred stock
adversely affected thereby.
RIGHTS UPON LIQUIDATION
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Bank, the holders of the Series A Preferred Shares at the time
outstanding will be entitled to receive or have funds set aside for such
payments out of assets of the Bank available for distribution to stockholders,
before any payment or distribution of assets is made to holders of Common Stock
or any other class of stock ranking junior to the Series A Preferred Shares upon
liquidation, liquidating distributions in the amount of $25.00 per share, plus
the accrued and unpaid dividends for the most recent quarter thereon, if any,
to the date of liquidation.
After receipt of payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series A Preferred
Shares will have no right or claim to any of the remaining assets of the Bank.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up, the available assets of the Bank are insufficient to
pay the amount of the liquidation distributions on all outstanding Series A
Preferred Shares and the corresponding amounts payable on all shares of other
classes or series of capital stock of the Bank ranking on a parity with the
Series A Preferred Shares in the distribution of assets upon any liquidation,
dissolution or winding up of the affairs of the Bank, then the holders of the
Series A Preferred Shares and such other classes or series of capital stock
shall share ratably in any such distribution of assets in proportion to the full
liquidating distributions to which they would otherwise be respectively
entitled.
For such purposes, the consolidation or merger of the Bank with or into any
other entity or the sale, lease or conveyance of all or substantially all of the
property or business of the Bank, shall not be deemed to constitute liquidation,
dissolution or winding up of the Bank.
APPROVAL OF INDEPENDENT DIRECTORS
The Bank's Certificate of Designation establishing the Series A Preferred
Shares requires that, so long as any Series A Preferred Shares are outstanding,
certain actions by the Bank be approved by a majority of the Independent
Directors of the Bank. At any time that there are only two Independent
Directors, any action that requires the approval of a majority of Independent
Directors must be approved by both Independent Directors. "Independent Director"
means any director of the Bank who (i) is not a current director, officer or
employee of the Bank, of D&N Capital Corporation or of D&N Financial Corporation
or of any affiliate of the Bank; and (ii) is not a person or persons that, in
the aggregate, own more than one percent of the Common Stock of D&N Financial
Corporation. In addition, any members of the Board of Directors of the Bank
elected by holders of preferred stock, including the Series A Preferred Shares,
will be deemed to be independent directors for purposes of approving actions
requiring the approval of a majority of the Independent Directors. The actions
which require the prior approval of a majority of the Independent Directors
include:
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(i) the issuance of a series of preferred stock on a parity with the
Series A Preferred Shares; and
(ii) the redemption of any shares of Common Stock.
In assessing the benefits to the Bank of any proposed action requiring their
consent, the Independent Directors shall take into account the interests of
holders of both the Common Stock and the preferred stock, including, without
limitation, the holders of the Series A Preferred Shares. In considering the
interests of the holders of the preferred stock, including without limitation
holders of the Series A Preferred Shares, the Independent Directors shall owe
the same duties which the Independent Directors owe to holders of Common Stock.
CERTAIN DEFINITIONS
"FDIC" means the Federal Deposit Insurance Corporation or any successor
thereto.
"FHLB" means any of the regional Federal Home Loan Banks.
"OTS" means the Office of Thrift Supervision or any successor thereto.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Regulatory Capital Requirements" means the minimum amount of capital
required to meet each of the industry-wide regulatory capital requirements
applicable to the Bank pursuant to 12 U.S.C. Section 1464(t) and 12 C.F.R.
Section 567 (and any amendment to either thereof) or any successor law or
regulation, or such higher amount of capital as the Bank, individually, is
required to maintain in order to meet any individual minimum capital standard
applicable to the Bank pursuant to 12 U.S.C. Section 1464(s) and 12 C.F.R.
Section 567.3 (and any amendment to either such Section) or any successor law or
regulation.
"Series A Preferred Shares" means the 1,100,000 shares of the [___%]
Noncumulative Series A Preferred Shares of the Bank.
EXCHANGE
The Series A Preferred Shares are to be issued, if ever, in connection with
an exchange of the Preferred Capital Shares. The Preferred Capital Shares are
subject to an automatic exchange in whole and not in part, on a share-for-share
basis, into Series A Preferred Shares if the appropriate regulatory agency
directs in writing an exchange of the Preferred Capital Shares for Series A
Preferred Shares because (i) the Bank becomes "undercapitalized" under prompt
corrective action regulations established pursuant to FDICIA, (ii) the Bank is
placed into conservatorship or receivership or (iii) the appropriate
regulatory agency, in its sole discretion, anticipates the Bank's becoming
"undercapitalized" in the near term (an "Exchange
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Event"). The Bank has registered with the OTS a total of 1,210,000
Series A Preferred Shares to cover an Exchange Event, if necessary, of the
1,100,000 Preferred Capital Shares offered by D&N Capital Corporation and the
110,000 share over-allotment option granted to the underwriters of the
Preferred Capital Shares.
EXPERTS
The Consolidated Financial Statements of D&N Bank and subsidiaries as
of December 31, 1996 and 1995, and for each of the three years in the period
ended December 31, 1996, have been audited by Coopers & Lybrand L.L.P.,
independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
LEGAL MATTERS
The legality of the securities offered by this Offering Circular has
been passed upon for the Bank by Silver, Freedman & Taff, L.L.P., Washington,
D.C., a partnership including professional corporations and for the
underwriters by Honigman Miller Schwartz and Cohn, Detroit, Michigan.
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<PAGE> 138
ATTACHMENT A
[COOPERS & LYBRAND LETTERHEAD]
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholder of
D&N Bank
We have audited the Consolidated Statements of Condition of D&N Bank and
Subsidiaries as of December 31, 1996 and 1995, and the related Consolidated
Statements of Income, Stockholder's Equity and Cash Flows for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of D&N Bank and
Subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Detroit, Michigan
January 22, 1997
<PAGE> 139
CONSOLIDATED STATEMENTS OF CONDITION
D&N BANK
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
----------------------------
(In thousands)
<S> <C> <C>
ASSETS
Cash and due from banks $ 2,845 $ 9,262
Federal funds sold 8,600 --
Interest-bearing deposits in other banks 1,342 13,176
Total cash and cash equivalents 12,787 22,438
Investment securities
(market value of $60,783,000 in 1996 and $55,368,000 in 1995) 60,739 55,239
Investment securities available for sale (at market value) 59,038 41,197
Mortgage-backed securities
(market value of $213,304,000 in 1996 and $73,647,000 in (1995) 214,690 72,668
Mortgage-backed securities available for sale (at market value) 36,566 55,041
Loans receivable (including loans held for sale of $5,218,000 in 1996
and $21,713,000 in 1995) 1,066,918 962,440
Allowance for loan losses (11,042) ( 10,081)
----------------------------
Net loans receivable 1,055,876 952,359
Other real estate owned, net 1,470 1,319
Federal income taxes 6,002 5,374
Office properties and equipment, net 15,764 14,850
Other assets 10,056 8,010
----------------------------
$ 1,472,988 $1,228,495
LIABILITIES
Checking and NOW accounts $ 107,550 $ 91,621
Money market accounts 89,321 86,080
Savings deposits 149,226 149,728
Time deposits 617,102 594,044
Accrued interest 934 1,459
----------------------------
Total deposits 964,133 922,932
Securities sold under agreements to repurchase 58,040 --
FHLB advances and other borrowed money 345,997 216,232
Advance payments by borrowers and investors held in escrow 11,808 11,329
Payable to DNFC 6,105 879
Other liabilities 6,891 6,015
----------------------------
Total liabilities 1,392,974 1,157,387
STOCKHOLDER'S EQUITY
Preferred stock (1,000,000 shares authorized; none issued) -- --
Common stock, $.01 par value per share (shares authorized - 10,000,000;
shares issued - 3,650,636 in 1996 and 1995) 37 37
Additional paid-in capital 48,590 48,590
----------------------------
Total paid-in capital 48,627 48,627
Retained earnings - substantially restricted 30,144 20,766
Unrealized holding gains on debt securities available for sale, net of tax 1,243 1,715
----------------------------
Total stockholder's equity 80,014 71,108
----------------------------
$ 1,472,988 $1,228,495
============================
</TABLE>
See Notes to Consolidated Financial Statements.
A-1
<PAGE> 140
CONSOLIDATED STATEMENTS OF INCOME
D&N BANK
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1996 1995 1994
--------------------------------------------
(In thousands)
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 86,151 $ 72,550 $ 58,274
Mortgage-backed securities 10,930 10,577 7,875
Investments and deposits 7,228 7,638 5,462
--------------------------------------------
TOTAL INTEREST INCOME 104,309 90,765 71,611
INTEREST EXPENSE
Deposits 43,859 38,639 29,806
Securities sold under agreements to repurchase 2,193 1,450 808
FHLB advances and other borrowed money 15,558 13,445 7,446
Interest rate instruments -- 2,521 9,812
--------------------------------------------
TOTAL INTEREST EXPENSE 61,610 56,055 47,872
--------------------------------------------
NET INTEREST INCOME 42,699 34,710 23,739
Provision for loan losses 1,100 2,400 100
--------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSS 41,599 32,310 23,639
NONINTEREST INCOME
Loan servicing and administrative fees, net 1,914 1,882 2,228
Deposit related 3,621 3,147 3,098
Gain on sale of loans held for sale 1,031 882 227
Other 470 222 1,173
--------------------------------------------
TOTAL OPERATING NONINTEREST INCOME 7,036 6,133 6,726
Gain (loss) on investment securities available for sale 188 (120) (221)
Gain on sale of loans and mortgage-backed securities
available for sale -- 899 843
Gain on sale of loan servicing rights -- -- 140
--------------------------------------------
TOTAL NONINTEREST INCOME 7,224 6,912 7,488
NONINTEREST EXPENSE
Compensation and benefits 16,868 15,723 14,572
Occupancy 2,834 2,273 1,987
Other expense 11,429 10,481 9,902
--------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSE 31,131 28,477 26,461
Other real estate owned, net 71 (999) (2,136)
Amortization of intangibles -- 370 448
FDIC insurance 7,894 2,431 2,639
--------------------------------------------
TOTAL NONINTEREST EXPENSE 39,096 30,279 27,412
--------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 9,727 8,943 3,715
Federal income tax expense (credit) 349 (1,675) 150
--------------------------------------------
NET INCOME $ 9,378 $ 10,618 $ 3,565
============================================
</TABLE>
See Notes to Consolidated Financial Statements
A-2
<PAGE> 141
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
D&N BANK
<TABLE>
<CAPTION>
Unrealized
Holding
Gains
(Losses)
Additional on Securities Total
Common Paid-In Retained Available Stockholder's
Stock Capital Earnings For Sale Equity
-----------------------------------------------------------------------
(Dollars In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1993 $ 37 $ 48,543 $ 6,583 $ 808 $ 55,971
Net income 3,565 3,565
Capital contribution 1 1
Change in value of securities
available for sale (1,992) (1,992)
-----------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 $ 37 $ 48,544 $ 10,148 $ (1,184) $ 57,545
Net income 10,618 10,618
Capital contribution 46 46
Change in value of securities
available for sale 2,899 2,899
-----------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 $ 37 $ 48,590 $ 20,766 $ 1,715 $ 71,108
Net income 9,378 9,378
Change in value of securities
available for sale (472) (472)
-----------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 $ 37 $ 48,590 $ 30,144 $ 1,243 $ 80,014
=======================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
A-3
<PAGE> 142
CONSOLIDATED STATEMENTS OF CASH FLOWS
D&N BANK
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,378 $ 10,618 $ 3,565
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 1,100 2,400 100
Depreciation and amortization of office properties and equipment 1,954 1,843 1,841
Amortization of net premiums (discounts) on purchased
loans and securities (73) (2,395) 1,132
Originations and purchases of loans held for sale (56,132) (91,203) (15,432)
Proceeds from sales of loans held for sale 73,658 75,928 48,181
(Gain)loss on investment securities available for sale (188) 120 221
Gain on loans and mortgage-backed securities available for sale -- (899) (843)
Gain on sale of loan servicing rights -- -- (140)
Amortization and writedowns of mortgage servicing rights 300 476 1,754
Other (2,750) (7,925) 2,871
-------------------------------------------
Net cash provided (used) by operating activities 27,247 (11,037) 43,250
INVESTING ACTIVITIES
Proceeds from sales of investment securities available for sale 298 10,070 20,779
Proceeds from maturities of investment securities 83,970 44,025 138,879
Purchases of investment securities to be held to maturity (107,012) (60,309) (135,304)
Proceeds from sales of mortgage-backed securities available for sale -- 4,145 52,348
Proceeds from sales of loans -- 33,535 --
Principal collected on mortgage-backed securities 54,951 22,077 38,860
Purchases of mortgage-backed securities (58,661) -- (66,922)
Loans purchased (148,405) (103,524) (190,333)
Net change in loans receivable (94,006) (43,299) (20,931)
(Increase) decrease in other real estate owned (151) 4,871 6,472
Proceeds from sales of loan servicing rights -- -- 7,288
Change in payable to Parent Company 5,225 102 (421)
Purchases of office properties and equipment (2,868) (2,333) (785)
-------------------------------------------
Net cash used by investing activities (266,659) (90,640) (150,070)
FINANCING ACTIVITIES
Net change in time deposits 23,058 94,581 5,863
Net change in other deposits 18,666 10,510 (31,070)
Proceeds from notes payable, securities sold under agreements
to repurchase and other borrowed money 309,040 203,000 255,627
Payments on maturity of notes payable, securities sold under
agreements to repurchase and other borrowed money (121,482) (213,851) (130,652)
Net change in advance payments by borrowers and investors held in escrow 479 (4,022) (51,626)
-------------------------------------------
Net cash provided by financing activities 229,761 90,218 48,142
-------------------------------------------
Decrease in cash and cash equivalents (9,651) (11,459) (58,678)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,438 33,897 92,575
-------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,787 $ 22,438 $ 33,897
===========================================
</TABLE>
A-4
<PAGE> 143
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Interest paid $ 61,753 $ 60,262 $ 49,984
Income taxes paid (refunded) $ 299 397 (4,650)
Noncash investing activities:
Transfer of loans to other real estate owned $ 3,373 $ 1,936 $ 2,861
Loans to facilitate sale of other real estate owned $ -- $ -- $ 782
Securitizations of loans into mortgage-backed securities $ 119,717 $ -- $ 15,086
</TABLE>
See Notes to Consolidated Financial Statements.
A-5
<PAGE> 144
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
D&N BANK, DECEMBER 31, 1996
NOTE A: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
D&N Bank ("the Bank" or "the Company"), a federally-chartered stock
savings bank is a wholly-owned subsidiary of D&N Financial Corporation
("DNFC"). The Bank's primary business is the delivery of financial services to
consumers and businesses through its network of 48 community banking and
financial services offices in Michigan.
Principles of Consolidation: The consolidated financial statements
include the accounts and transactions of the Bank and the Bank's wholly-owned
subsidiaries. Significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements: The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash and cash equivalents represent short-term
highly liquid investments with original maturities of three months or less and
include cash, demand deposits in other banks and interest-bearing deposits in
other banks.
Investment Classifications: Securities are classified as either held to
maturity (amortized cost), available for trading (fair value, with unrealized
gains and losses reported in income), or available for sale (fair value, with
unrealized gains and losses reported directly in equity, net of taxes).
Investment and Mortgage-Backed Securities: Investment and mortgage-backed
securities which the Bank has the ability and the intent to hold until maturity
are stated at amortized cost. Investment and mortgage-backed securities
available for sale are carried at fair value. Fair value adjustments are
included in stockholders' equity, net of tax. Gains or losses realized on the
sale of investment and mortgage- backed securities are determined by the
specific identification method and are included in securities gains (losses).
Interest income is adjusted using the level-yield method for amortization of
premiums and accretion of discounts.
A-6
<PAGE> 145
Mortgage Derivative Products: The Bank's interest only certificates are
classified as available for sale and are recorded at fair value. Fair value
adjustments are included in stockholders' equity and are classified on the
Statements of Condition with mortgage-backed securities.
Allowance for Loan Losses: The Bank adopted SFAS 114, "Accounting by
Creditors for Impairment of a Loan", as amended by SFAS 118, as of January 1,
1994. Under this standard, a loan is considered impaired, based on current
information and events, if it is probable that the Bank will be unable to
collect the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. The measurement of impaired loans
is generally based on the present value of expected future cash flows
discounted at the historical effective interest rate, except that all
collateral-dependent loans are measured for impairment based on the fair value
of the collateral. The adoption of SFAS 114 did not result in any additional
provision for loan losses as of January 1, 1994.
The allowance for possible losses on loans is maintained at a level
believed adequate by management to absorb potential losses from impaired loans
as well as losses from the remainder of the portfolio. Management's
determination of the level of the allowance is based upon evaluation of the
portfolio, past experience, current economic conditions, size and composition
of the portfolio, collateral location and values, cash flow positions, industry
concentrations, delinquencies and other relevant factors.
Mortgage Loans Held for Sale: The Bank enters into commitments to
originate and does originate mortgage loans for sale to investors and in the
secondary market.
Loans held for sale are carried at the lower of cost or market value,
determined on an aggregate basis. Commitment fees are amortized either over
the commitment period or the combined commitment and loan period depending upon
the probability of performance under the commitment.
Interest on Loans: Interest on loans is credited to income when earned.
An allowance for interest on loans is provided when management considers the
collection of these loans doubtful and the accrual of interest is suspended
when a loan becomes more than 90 days past due.
Loan Fees: Loan origination and commitment fees and certain direct loan
origination costs are deferred and recognized over the lives of the related
loans as an adjustment of the yields using the level-yield method.
Other Real Estate Owned: Real estate acquired through foreclosure and
A-7
<PAGE> 146
similar proceedings is recorded at the lower of the related loan balance or
estimated fair value of the property at the acquisition date. Subsequent to
the acquisition date, properties are carried at their fair value, less cost to
sell. Operating expenses of such properties, net of any income, are charged to
expense.
Depreciation: Provisions for depreciation are computed using the
straight-line method over the estimated useful lives of office properties and
equipment.
Securities Sold Under Agreements to Repurchase: The Bank enters into
sales of investment and mortgage-backed securities under agreements to
repurchase the same or essentially identical securities. The agreements are
short-term and are accounted for as secured borrowings. The obligations to
repurchase securities sold are reflected as a liability and the securities
which collateralize the agreements are reflected as an asset in the
Consolidated Statement of Condition.
Interest Rate Instruments: Interest rate instruments are used to adjust
the maturity structure of liabilities and assets to manage the Bank's
exposure to fluctuating interest rates. These instruments include interest
rate exchange agreements and interest rate floors and caps. These instruments
are used only to hedge specifically identified assets and liabilities and not
for speculative purposes. Fees associated with swaps, floors and caps are
amortized to expense on a straight-line basis over the lives of the agreements.
Gains or losses upon termination of these instruments are deferred and
amortized over the shorter of the remaining term to maturity of the related
hedged asset or liability or the remaining life of the instrument. Interest
paid or received associated with interest rate swap, floor or cap agreements,
is reflected as a component of net interest margin. At December 31, 1996 and
1995, the Bank was not party to any interest rate instruments.
Mortgage Servicing Rights: The Bank services mortgage loans for
investors. Fees earned for and in connection with this activity are recognized
as income when the related mortgage payments are received. Mortgage servicing
costs are charged to expense as incurred.
In May 1995, the Financial Accounting Standards Board issued SFAS 122,
"Accounting For Mortgage Servicing Rights", which requires the Bank to
recognize as separate assets rights to service mortgage loans for others,
however those servicing rights are acquired. As the Bank acquires mortgage
servicing rights through either the purchase or origination of mortgage loans
and sells or securitizes those loans with servicing rights retained, it must
allocate the total cost of the mortgage loans to the mortgage servicing rights
and the loans (without the mortgage servicing rights) based on their relative
fair values. The capitalized cost of mortgage servicing rights is amortized in
proportion to, and over the period
A-8
<PAGE> 147
of, estimated net servicing income (servicing revenue in excess of servicing
costs).
Capitalized mortgage servicing rights are periodically assessed for
impairment based on the fair value of those rights calculated on a discounted
basis. This assessment is performed on a disaggregate basis, stratified by
mortgage type, term and rate. Identified impairments are recognized through a
valuation allowance.
As permitted by SFAS 122, the Bank adopted the provisions of the
Statement effective July 1, 1995. The effect of adopting SFAS 122 was to
increase net income for the year ended December 31, 1995 by $621,000.
Income Taxes: The Bank and its subsidiaries file a consolidated federal
tax return with its parent, DNFC. Taxes are allocated to the Bank as if it had
filed a separate consolidated income tax return. Deferred income taxes result
from temporary differences between the tax bases of assets and liabilities
and the bases reported in the consolidated financial statements. The deferred
taxes are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
Reclassifications: Certain amounts in previously issued consolidated
financial statements have been reclassified to conform with the current year
presentation.
NOTE B: BUSINESS COMBINATION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb") was merged
into the Bank. At the time of the merger, Macomb had assets and stockholders'
equity (unaudited) of $41,932,000 and $6,268,000, respectively. DNFC issued
716,497 shares of common stock and cash in lieu of fractional shares for all of
the oustanding shares of Macomb. The merger was accounted for as a
pooling-of-interests and accordingly, the financial statements have been
restated to include the results of Macomb.
A reconciliation of previously reported net interest income and net
income is as follows:
<TABLE>
<CAPTION>
1995 1994
--------- ---------
(In thousands)
<S> <C> <C>
Net interest income (as previously reported) $ 33,592 $ 22,567
Macomb Federal Savings Bank - net interest income 1,118 1,172
--------- ---------
Total Net Interest Income $ 34,710 $ 23,739
========= =========
Net income (as previously reported) 10,341 3,273
Macomb Federal Savings Bank - net income 277 292
--------- ---------
Total Net Income $ 10,618 $ 3,565
========= =========
</TABLE>
A-9
<PAGE> 148
NOTE C: RESTRICTIONS ON CASH AND NONINTEREST-BEARING BALANCES
The Bank is required to maintain reserve balances with the Federal
Reserve Bank. The average amounts of those reserve balances for the years
ended December 31, 1996 and December 31, 1995 were $418,000 and $491,000,
respectively.
NOTE D: INVESTMENT SECURITIES
Investment securities consisted of the following:
<TABLE>
<CAPTION>
December 31
------------------------------------------------------
1996 1995
------------------------------------------------------
Book Market Book Market
Value Value Value Value
------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 40,737 $ 40,781 $ 35,100 $ 35,229
Other securities 20 20 -- --
Investment in Federal Home Loan Bank stock 19,959 19,959 19,953 19,953
Other equity securities 23 23 186 186
--------------------- ---------------------
Held to maturity 60,739 60,783 55,239 55,368
U.S. Treasury securities 57,996 58,000 40,656 40,899
Other securities 1,032 1,038 110 298
Valuation allowances 10 -- 431 --
-- -- --- --
--------------------- ---------------------
Available for sale 59,038 59,038 41,197 41,197
--------------------- ---------------------
$119,777 $119,821 $ 96,436 $ 96,565
===================== =====================
</TABLE>
An analysis of gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------------------
1996 1995
----------------------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity
U.S. Treasury securities $ 79 $ (35) $ 137 $ (7)
-----------------------------------------------------------
79 (35) 137 (7)
Available for sale
U.S. Treasury securities 31 (27) 244 --
Other equity securities 6 -- 187 --
-----------------------------------------------------------
37 (27) 431 --
-----------------------------------------------------------
$ 116 $ (62) 568 $ (7)
===========================================================
</TABLE>
A-10
<PAGE> 149
Proceeds from sales of investment securities available for sale
during 1996 were $298,000. Gross gains of $188,000 were realized on those
sales. Proceeds from sales of investment securities available for sale during
1995 were $10,070,000. Gross losses of $120,000 were realized on those sales.
Proceeds from sales of investment securities available for sale during 1994
were $20,779,000. Gross losses of $221,000 were realized on those sales.
The book value and market value of debt securities at December 31,
1996, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Less than one year 1 - 5 Years
-------------------------------------------------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
-------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
U.S. Treasury securities held to maturity $20,146 $20,165 5.93% $20,591 $20,616 6.02%
Other securities held to maturity -- -- -- 20 20 6.00
-------------------------------------------------------------------
20,146 20,165 5.93% 20,611 20,636 6.02%
U.S. Treasury securities available for sale 53,975 53,959 5.62% 4,021 4,041 6.33%
-------------------------------------------------------------------
$74,121 $74,124 5.71% $24,632 $24,677 6.07%
===================================================================
</TABLE>
NOTE E: MORTGAGE-BACKED SECURITIES
Mortgage-backed securities consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
1996 1995
---------------------------------------------------
Book Market Book Market
Value Value Value Value
---------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 127,677 $ 126,576 $ 12,149 $ 12,451
Collateralized mortgage obligations 85,755 85,311 60,305 60,550
Accrued interest receivable 1,417 1,417 646 646
Net discounts (159) -- (432) --
----------------------------------------------------
Held to maturity 214,690 213,304 72,668 73,647
Government agency securities 18,815 19,255 28,324 29,135
Collateralized mortgage obligations 14,767 15,005 22,810 23,110
Interest-only certificates 639 2,023 984 2,400
Accrued interest receivable 283 283 396 396
Net premiums 160 -- 421 --
Valuation allowances 1,902 -- 2,106 --
----------------------------------------------------
Available for sale 36,566 36,566 55,041 55,041
----------------------------------------------------
$ 251,256 $ 249,870 $ 127,709 $ 128,688
====================================================
</TABLE>
Mortgage-backed securities with a carrying value of $44,847,000 are
specifically pledged as collateral for advances from the Federal Home Loan Bank
of Indianapolis (FHLB). Mortgage-backed securities with a carrying value of
$9,160,000 are pledged as collateral for other borrowings.
A-11
<PAGE> 150
An analysis of gross unrealized gains and losses is as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------
1996 1995
-------------------------------------------------------
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
-------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Government agency securities $ 764 $ (2,119) $ 302 $ --
Collateralized mortgage obligations 294 (325) 711 (34)
-----------------------------------------------------
Held to maturity 1,058 (2,444) 1,013 (34)
Government agency securities 287 (11) 425 (16)
Collateralized mortgage obligations 270 (28) 314 (33)
Interest only certificates 1,384 -- 1,416 --
------------------------------------------------------
Available for sale 1,941 (39) 2,155 (49)
-----------------------------------------------------
$ 2,999 $ (2,483) $ 3,168 $ (83)
=====================================================
</TABLE>
There were no sales of mortgage-backed securities during 1996.
Proceeds from sales of mortgage-backed securities available for sale during
1995 were $4,145,000. Gross gains of $267,000 were realized on those sales.
Proceeds from sales of mortgage-backed securities available for sale during
1994 were $52,348,000. Gross gains of $865,000 and gross losses of $22,000
were realized on those sales.
The book value and market value of mortgage-backed securities at
December 31, 1996, by contractual maturity, were as follows:
<TABLE>
<CAPTION>
Held to Maturity Available For Sale
-----------------------------------------------------------------
Book Market Average Book Market Average
Value Value Yield Value Value Yield
-----------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Government agency securities
Less than one year $ -- $ -- -- % $ -- $ -- -- %
One to five years -- -- -- -- -- --
Five to ten years 1,832 1,778 6.78 -- -- --
After ten years 126,099 124,798 7.10 18,979 19,255 6.64
-----------------------------------------------------------------
127,931 126,576 7.09 18,979 19,255 6.64
Collateralized mortgage obligations
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years 224 229 17.63 -- -- --
After ten years 85,118 85,082 6.90 14,763 15,005 7.02
-----------------------------------------------------------------
85,342 85,311 6.93 14,763 15,005 7.02
Interest only certificates
Less than one year -- -- -- -- -- --
One to five years -- -- -- -- -- --
Five to ten years -- -- -- 5 16 430.67
After ten years -- -- -- 634 2,007 110.68
-----------------------------------------------------------------
-- -- -- 639 2,023 113.18
-----------------------------------------------------------------
$ 213,273 $211,887 7.03 % $ 34,381 $ 36,283 8.78%
=================================================================
</TABLE>
A-12
<PAGE> 151
Mortgage-backed securities will mature according to the repayment
characteristics of the underlying mortgage loans which collateralize the
securities. Expected maturities for mortgage-backed securities will differ
from contractual maturities because borrowers have the right to prepay.
The aggregate book value and aggregate market value of the securities
of any one issuer, other than U.S. Government agencies, did not exceed 10% of
stockholders' equity at December 31, 1996 or 1995.
NOTE F: LOANS RECEIVABLE
The carrying amounts and fair values of loans receivable consisted of
the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------
1996 1995
-------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Residential mortgages $ 592,712 $ 598,390 $ 573,089 $ 570,798
Residential mortgages held for sale 5,218 5,218 21,713 21,963
Mortgages on income producing property 84,983 79,704 88,491 79,985
Construction loans 39,535 39,404 40,882 37,160
Consumer loans 337,178 338,180 237,873 235,557
Commercial loans 12,262 11,959 7,717 7,298
Accrued interest receivable
5,940 5,940 5,588 5,588
-------------------------- ---------------------------
1,077,828 1,078,795 975,353 958,349
Less:
Discounts on purchased loans (2,035) -- (1,709) --
Allowance for loan losses 11,042 -- 10,081 --
Undisbursed portion of loan proceeds 12,085 -- 13,198 --
Deferred income 860 -- 1,424 --
-------------------------- ---------------------------
$ 1,055,876 $ 1,078,795 $ 952,359 $ 958,349
========================== ===========================
</TABLE>
Credit is extended based on evaluation of the borrower's financial
condition, the value of the collateral and, in the case of income producing
property, the sufficiency of net cash flows from the property's operation to
service the debt. When loans are made to businesses, personal guarantees may
also be required of owners or partners.
A-13
<PAGE> 152
Loans collateralized by income producing property are categorized as
follows:
<TABLE>
<CAPTION>
December 31
----------------------------------
1996 1995
----------------------------------
(In thousands)
<S> <C> <C>
Multi-family apartments $ 25,404 $ 29,337
Motels/hotels 13,540 14,105
Shopping centers 23,582 20,232
Mobile home parks 3,625 3,781
Offices 6,667 8,698
Industrial 4,565 6,584
Other 7,600 5,754
-------- --------
$ 84,983 $ 88,491
======== ========
</TABLE>
Loans collateralized by income producing property categorized by state
are as follows:
<TABLE>
<CAPTION>
December 31
----------------------------------
1996 1995
----------------------------------
(In thousands)
<S> <C> <C>
Michigan $ 65,645 $ 67,048
California 11,738 12,202
New York 2,037 3,413
Pennsylvania 607 1,396
Other 4,956 4,432
-------- --------
$ 84,983 $ 88,491
======== ========
</TABLE>
Changes in the allowance for loan losses are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 10,081 $ 8,349 $ 11,570
Provisions for loan losses 1,100 2,400 100
Transfers -- -- 300
Net charge-offs (139) (668) (3,621)
------------------------------------------------
Balance at end of year $ 11,042 $ 10,081 $ 8,349
================================================
</TABLE>
At December 31, 1996 and 1995, the total recorded investment in
impaired loans, as defined by SFAS 114, was $7,241,000 and $8,619,000,
respectively. In 1996 the amount of the recorded investment in impaired loans
for which there is a related allowance for loan losses is $145,000, and the
amount of the recorded investment for which there is no related allowance for
loan losses is $7,096,000. In 1995 none of the
A-14
<PAGE> 153
impaired loans required a specific allowance for loan losses. Interest income
on impaired loans is recognized primarily on a cash basis. During 1996 and
1995, the amount of interest income recognized on impaired loans was
insignificant. The balance of nonaccrual loans was $6,621,000 and $8,225,000 at
December 31, 1996 and 1995, respectively.
Changes in capitalized mortgage servicing rights, included in other assets
in the Consolidated Statements of Condition, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 1,113 $ 968 $ 9,870
Additions 630 621 --
Amortization, sales and writedowns (300) (476) (8,902)
---------------------------------------
Balance at end of year $ 1,443 $ 1,113 $ 968
=======================================
</TABLE>
Changes in the valuation allowance for mortgage servicing rights are
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 291 $ -- $ --
Additions:
Purchased mortgage servicing rights 151 222 --
Originated mortgage servicing rights 55 77 --
--------------------------------------
Total additions 206 299 --
Reductions:
Purchased mortgage servicing rights 158 8 --
Originated mortgage servicing rights 118 -- --
--------------------------------------
Total reductions 276 8 --
--------------------------------------
Balance at end of year $ 221 $ 291 $ --
======================================
</TABLE>
At December 31, 1996, and 1995, the fair value of capitalized mortgage
Servicing rights was $1,770,000 and $1,161,000, respectively.
Loans serviced for others amounted to $415,156,000, $278,051,000, and
$243,834,000 at December 31, 1996, 1995 and 1994, respectively.
A-15
<PAGE> 154
NOTE G: OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consisted of the following:
<TABLE>
<CAPTION>
December 31
---------------------------------------
1996 1995
---------------------------------------
(In thousands)
<S> <C> <C>
Real estate acquired through foreclosure $ 1,365 $ 1,226
Real estate in judgment 105 226
---------------------------
1,470 1,452
Less allowance for losses -- 133
---------------------------
$ 1,470 $ 1,319
===========================
</TABLE>
Changes in the allowance for possible losses on OREO are summarized as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 133 $ 330 $ 650
Provision for losses -- 150 --
Net charge-offs (133) (347) (320)
----------------------------------------
Balance at end of year $ -- $ 133 $ 330
========================================
</TABLE>
The Bank recorded writedowns of other real estate owned amounting to
$75,000 during 1996. The Bank did not record any writedowns of other real
estate owned in 1995 or 1994.
The Bank recognized gains on sale of OREO amounting to $164,000, $1,139,000
and $2,407,000 during 1996, 1995 and 1994 respectively.
NOTE H: OFFICE PROPERTIES AND EQUIPMENT
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31
----------------------------
1996 1995
----------------------------
(In thousands)
<S> <C> <C>
Cost:
Land $ 2,634 $ 2,634
Buildings and improvements 17,174 16,229
Furniture and equipment 16,839 15,780
----------------------------
36,647 34,643
Less accumulated depreciation 20,883 19,793
----------------------------
$ 15,764 $ 14,850
============================
</TABLE>
A-16
<PAGE> 155
Depreciation and amortization expense was $1,954,000, $1,843,000 and
$1,841,000 in 1996, 1995 and 1994, respectively.
Rental expense for leased properties and equipment was $938,000, $643,000
and $488,000 in 1996, 1995 and 1994, respectively. The aggregate minimum
annual rental commitments under these leases are approximately $1,003,000 in
1997, $771,000 in 1998, $619,000 in 1999, $573,000 in 2000, $500,000 in 2001 and
$992,000 thereafter.
NOTE I: DEPOSITS
The carrying amounts and fair values of deposits and the nominal rate of
interest paid were as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------------------------------
1996 1995
---------------------------------------------------------------------------
Weighted Weighted
Carrying Fair Average Carrying Fair Average
Amount Value Rate Amount Value Rate
---------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Checking accounts $ 46,882 $ 46,882 --% $ 37,939 $ 37,939 -- %
NOW accounts 60,668 60,668 1.52 53,682 53,682 1.52
Money market accounts 89,321 89,321 4.01 86,080 86,080 4.18
Savings deposits 149,226 149,226 2.82 149,728 149,728 2.91
Certificates of deposit 617,102 622,040 5.79 594,044 598,070 6.00
Accrued interest 934 934 -- 1,459 1,459 --
------------------------------------------------------------------------
$ 964,133 $ 969,071 4.61% $ 922,932 $ 926,958 4.82 %
========================================================================
</TABLE>
Included in deposits are $107,386,000 and $81,442,000 of deposit accounts
with balances in excess of $100,000 as of December 31, 1996 and 1995,
respectively.
Certificates had the following maturities at December 31, 1996:
<TABLE>
<CAPTION>
Weighted
Amount Average Rate
------------------------------------
(Dollars in thousands)
<S> <C> <C>
1997 $ 392,752 5.54%
1998 159,122 6.12
1999 25,894 6.93
2000 8,655 6.64
2001 and beyond 30,679 6.04
---------------------------------
$ 617,102 5.79%
=================================
</TABLE>
A-17
<PAGE> 156
The average balance, interest expense and average rate on deposits
were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------
Average Interest Average Average Interest Average Average Interest Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
----------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Checking accounts $ 40,349 $ -- --% $ 36,886 $ -- --% $ 36,138 $ -- --%
NOW and money
market accounts 146,863 4,490 3.06 137,867 4,261 3.09 133,079 3,197 2.40
Savings deposits 153,701 4,446 2.89 139,685 3,723 2.67 172,875 4,174 2.41
Certificates of deposit 597,571 34,923 5.84 537,944 30,655 5.70 480,020 22,435 4.67
--------------------------------------------------------------------------------------------
$938,484 $43,859 4.67% $ 852,382 $38,639 4.53% $ 822,112 $ 29,806 3.63%
============================================================================================
</TABLE>
NOTE J: SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase, in which the Bank will
repurchase identical securities, consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------------------------------------------------
1996 1995
----------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Collateral pledged:
Mortgage-backed securities with a book
value including accrued interest of
$59,835,000 and a market value of
$59,750,000 $ 58,040 $ 58,040 $ -- $ --
========================================================
</TABLE>
Securities sold under agreements to repurchase averaged $40,095,000
and $24,020,000 during 1996 and 1995, respectively, and the maximum amounts
outstanding at any month-end during 1996 and 1995 were $74,621,000 and
$52,579,000, respectively.
The securities underlying the agreements were delivered to the dealers
who arranged the transactions. The dealers may have sold, loaned or otherwise
disposed of such securities to other parties in the normal course of their
operations, and have agreed to resell to the Bank essentially identical
securities at the maturities of the agreements.
A-18
<PAGE> 157
Agreements to repurchase as of December 31, 1996, are as follows:
<TABLE>
<CAPTION>
Interest
Broker Borrowing Rate Maturity Date
- ------------------------------------------------- ----------- ---------- ---------------------
(In thousands)
<S> <C> <C> <C>
Morgan Stanley $23,397 5.52% January 1997
Federal National Mortgage Association 34,643 5.76 January 1997
-------- ----
Total Reverse Repurchase Agreements $58,040 5.66%
======= ====
</TABLE>
NOTE K: FHLB ADVANCES AND OTHER BORROWED MONEY
The carrying amounts and fair values of FHLB advances and other
borrowed money consisted of the following:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------------------------------------------
1996 1995 1996 1996 1995 1995
--------------------------------------------------------------------------------------
Year of Weighted Carrying Fair Carrying Fair
Maturity Average Rate Amount Value Amount Value
--------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Advances from Federal Home
Loan Bank of Indianapolis:
Variable rate of interest:
5.81 - 6.38 %. . . . . . . 1996 --% 5.86% $ -- $ -- $124,000 $124,065
5.47 - 6.80. . . . . . . . 1997 5.58 5.86 206,000 206,047 61,000 61,027
Fixed rate of interest:
5.20 - 5.42 %. . . . . . . 1997 5.25 5.42 45,000 44,977 10,000 9,977
5.47 - 5.91. . . . . . . . 1998 5.77 5.47 43,000 42,566 10,000 9,965
5.81 - 5.95. . . . . . . . 1999 5.84 -- 43,000 42,233 -- --
4.00. . . . . . . 2005 4.00 4.00 1,003 802 1,003 857
--------------------------------------------------------------------------------------
338,003 336,625 206,003 205,891
Other borrowed money:
Collateralized mortgage obligations 7,994 8,606 10,292 11,250
--------------------------------------------------
$345,997 $345,231 $216,295 $217,141
==================================================
</TABLE>
The Bank is required to maintain qualifying loans, investments and
mortgage-backed securities as collateral for the FHLB advances.
The collateralized mortgage obligation (CMO) was issued through a
special purpose finance subsidiary established in 1986. The CMO is secured by
mortgage-backed securities with unpaid principal balances of $9,160,000 and
$11,709,000 at December 31, 1996 and December 31, 1995, respectively. The
notes underlying the obligations bear interest, payable quarterly, at rates
varying from 7.27% to 7.33%, with contractual maturity dates ranging from 2008
to 2010.
A-19
<PAGE> 158
NOTE L: FEDERAL INCOME TAXES
Federal income tax expense (credit) consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current $ -- $ 100 $ 150
Deferred 3,228 3,959 1,199
Change in valuation allowance
for deferred tax assets (2,879) (5,734) (1,199)
------------------------------------------------
$ 349 $ (1,675) $ 150
================================================
</TABLE>
Deferred income tax expense (credit) included in stockholders' equity
related to unrealized holding gains (losses) on securities available for sale
for 1996, 1995 and 1994 amounted to $(181,000), $850,000 and $-0-, respectively.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35.00% 35.00% 35.00%
Effect of:
Change in valuation allowance
for deferred tax assets (30.81) (68.54) (38.79)
Adjustment to net operating loss
carryforward -- 12.46 --
Other items, net (0.56) 2.35 7.83
----------------------------------------------------
Effective tax rate 3.63% (18.73)% 4.04%
====================================================
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Bank's deferred and other tax assets and liabilities are as follows:
<TABLE>
<CAPTION>
December 31
--------------------------
1996 1995
----------------------------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Bad debt reserves not previously deducted $ 3,036 $ 3,545
Net deferral required by SFAS 91 229 400
Pension and other benefit obligations 695 580
Tax effect of net of operating loss carryforward 3,258 6,307
</TABLE>
A-20
<PAGE> 159
<TABLE>
<S> <C> <C>
Other items, net 381 416
------------------------
Total deferred tax assets 7,599 11,248
Valuation allowance for deferred tax assets -- (2,879)
------------------------
Total deferred tax assets less valuation allowance 7,599 8,369
Deferred tax liabilities:
Securities marked to market for tax purposes* 289 433
Tax over book depreciation 662 723
FHLB stock dividends 1,075 1,075
Valuation adjustment on CMO residuals 1,408 1,333
Excess general valuation allowances over base year reserves -- 448
Other items, net 68 92
------------------------
Total deferred tax liabilities 3,502 4,104
------------------------
Total net deferred tax assets 4,097 4,265
Current income tax receivable due to net operating loss
carrybacks and other overpayments 1,905 1,109
------------------------
Total net federal income tax assets $ 6,002 $ 5,374
========================
</TABLE>
* The amount shown is net of the $669,000 and $822,000 tax effect of SFAS
115 unrealized holding gains at December 31, 1996 and December 31, 1995
respectively.
As of December 31, 1996, the Bank had a net operating loss carryforward for
income tax purposes of $9,310,000 which expires on December 31, 2009.
NOTE M: REGULATORY MATTERS
OTS regulations governing the payment of dividends by savings institutions
provide that an institution may only pay dividends with regulatory approval.
During 1996, the Bank paid a one-time charge of $5.5 million pretax, ($3.6
million after tax) as the mandated contribution to replenish the Federal Deposit
Insurance Corporation's depleted Savings Association Insurance Fund ("SAIF").
This charge is the result of federal legislation passed and signed into law on
September 30, 1996, which requires all thrifts to pay a one-time assessment to
restore the SAIF fund to its statutory reserve level. The assessment is 65.7
basis points (b.p.) of the institution's deposits as of March 31, 1995.
On December 7, 1989, new capital standards were imposed on the thrift
industry as a result of the Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 ("FIRREA"). Regulatory standards impose the following
capital requirements: a risk-based capital standard expressed as a percent of
risk-adjusted assets, a leverage ratio of core capital to total adjusted assets,
and a
A-21
<PAGE> 160
tangible capital ratio expressed as a percent of total adjusted assets. As of
December 31, 1996, the Bank exceeded all regulatory capital standards.
The table below summarizes as of December 31, 1996, the Bank's capital
requirements under FIRREA and its actual capital ratios at that date:
<TABLE>
<CAPTION>
Regulatory Bank Actual
Requirements Capital
----------------------------------------------------------
Amount Percent Amount Percent
----------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Risk-based capital $ 69,740 8.00% $ 86,669 9.94%
Core capital 44,598 3.00 76,012 5.11
Tangible capital 22,299 1.50 76,012 5.11
</TABLE>
The FDIC Improvement Act of 1992 ("FDICIA") requires each federal banking
agency to implement prompt corrective actions for institutions that it
regulates. The OTS has adopted rules, based upon FDICIA's five capital tiers:
well capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized. Under FDICIA, the OTS is
required to take supervisory action against institutions that are not deemed
either "well capitalized" or "adequately capitalized". The rules generally
provide that a savings institution is "well capitalized" if its total risk-based
capital ratio is 10% or greater, its ratio of core capital to risk-based assets
(tier 1 risk-based capital) is 6% or greater, its core capital (leverage) ratio
is 5% or greater, and the institution is not subject to a capital directive. The
Bank's tier 1 risk-based capital ratio at December 31, 1996 was 8.72%. At
December 31, 1996, the Bank was considered adequately capitalized.
NOTE N: EMPLOYEE BENEFIT PLANS
The Bank sponsors an employee savings and investment plan in which all
employees may participate after completing a minimum of 1,000 hours in an
eligibility period. The plan allows participants to make contributions by
salary deductions equal to 15% or less of their salary pursuant to Section
401(k) of the Internal Revenue Code. Employee contributions are matched by the
Bank at the rate of 100 cents per dollar, up to 6% of the employee's salary.
Employees vest immediately in their own contributions and over a six-year period
in a variety of investments, including the Bank's contributions. Employee
contributions may be invested in a variety of investments including the DNFC's
common stock. The first 3% of the Bank's contribution for each individual is
invested in the DNFC's common stock, the remainder of the Bank's contribution,
(up to 6%, total) is invested at the direction of the participant. The Bank's
contributions to the plan were $621,000, $273,000 and $193,000 in 1996, 1995 and
1994, respectively.
A-22
<PAGE> 161
The Bank terminated its noncontributory defined benefit retirement
plan during 1996, with all assets being distributed to participants. No gain
or loss was recorded on this transaction.
The following table sets forth the market value of assets and
distribution thereof on December 16, 1996, the date of distribution.
<TABLE>
<CAPTION>
Before Effect of After
Termination Termination Termination
----------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Assets and obligations:
Accumulated benefit obligation $ (8,419) $ 8,419 $ 0
Plan assets at fair value 11,238 (11,238) 0
----------- ----------- -----------
Excess assets $ 2,819 $ (2,819) $ 0
=========== =========== ============
</TABLE>
Benefits under the plan were based on years of service and the
employee's compensation during the last five years of employment.
Pension expense included the following components:
<TABLE>
<CAPTION>
1996* 1995* 1994
-------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost-benefits earned during the period $ -- $ 620 $ 728
Interest cost on projected benefit obligation -- 1,071 1,055
Return on plan assets -- (2,030) (362)
Net amortization -- 512 (1,046)
-------------------------------------
$ -- $ 173 $ 375
=====================================
</TABLE>
* Benefits were frozen as of September 30, 1995, therefore, no cost
or amortization was subsequently recorded.
NOTE O: POSTRETIREMENT BENEFITS
The Bank has a contributory unfunded benefit plan which provides
postretirement medical benefits to certain employees who have retired prior to
September 30, 1995. The Bank is recognizing its accumulated postretirement
benefit obligation over a prospective 20-year period. During 1994, the plan
was changed to provide certain caps on benefits for existing retirees and
eliminate benefits for future retirees. The effect of the plan change was to
reduce the accumulated postretirement benefit obligation by approximately
$1,425,000.
A-23
<PAGE> 162
The following table sets forth the plan's status and amounts
recognized in the Bank's Consolidated Statement of Condition:
<TABLE>
<CAPTION>
December 31,
1996 1995
---------------------------
(In thousands)
<S> <C> <C>
Accumulated postretirement benefit obligation $ 1,358 $ 1,322
Unrecognized net loss (233) (178)
Unrecognized transition obligation (829) (877)
--------------------------
Accrued postretirement benefit cost $ 296 $ 267
==========================
</TABLE>
Postretirement benefit expense included the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ -- $ -- $ 44
Interest cost 97 99 132
Amortization of transition obligation 48 49 80
-----------------------------------------
$ 145 $ 148 $ 256
========================================
</TABLE>
A weighted average discount rate of 7.00% in 1996 and 1995 was used in
determining the accumulated post retirement benefit obligation. The 1996
health care trend rate was projected to be 9.5% for participants under the age
of 65, and this rate is assumed to trend downward until it reaches 5.5% and
remains at that level thereafter. This trend rate assumption does not have a
significant effect on the plan; therefore, a one percent change in the trend
rate is not material in the determination of the accumulated postretirement
benefit obligation or the ongoing expense.
NOTE P: STOCK OPTION PLAN
DNFC has stock option plans in which common shares of DNFC's common stock
are granted to employees and directors of the Bank. Under the plans, the
exercise price of any option will not be less than the fair market value of the
common stock on the date of grant. The dates on which the options are first
exercisable is determined by the Stock Option Committee of the Board of
Directors and have generally vested over a two year period from the date of
grant. The term on any option may not exceed ten years from the date of grant.
During 1996, the Bank adopted the disclosure requirements of Statement of
Financial Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." Accordingly, the fair value of each option grant to Bank
employees and Directors in 1996 and 1995 was estimated using the Black-Scholes
option pricing model with the following assumptions used:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Estimated weighted average fair value
per share of options granted $4.61 $2.63
Assumptions:
Annualized dividend yield .................................................... -- --
Common-stock price volatility ................................................ 25.1% $25.1%
Weighted average risk free rate of return .................................... 5.9% 7.4%
Weighted average expected option term (in years) ............................. 5 4
</TABLE>
The Bank has elected to continue to measure compensation cost using the
intrinsic value method, in accordance with APB Opinion No. 25, "Accounting for
Stock Issued to Employees." Accordingly, since all options are granted at a
fixed price not less than the fair market value of DNFC's common stock on the
date of grant, no compensation cost has been recognized for the stock option
grants. Had stock option costs of these plans been determined based on the fair
value at the 1996 and 1995 grant dates for award under those plans consistent
with the methodology of SFAS 123, the pro forma effects on the Bank's net income
and earnings per share would be as follows:
<TABLE>
<CAPTION>
1996 1995
----------- ------------
(In thousands)
<S> <C> <C>
Net income (as reported) ........................ $9,378 $10,618
Stock option compensation cost .................. (396) (74)
---- ---
Pro forma net income ........................... $8,982 $10,544
====== =======
</TABLE>
NOTE Q: LITIGATION
The Bank is a defendant, in a number of matters of litigation,
substantially all of which have arisen in the ordinary course of business. It
is the opinion of management that the resulting liabilities, if any, from these
actions will not materially affect the Consolidated Financial Statements.
D&N Bank is a plaintiff, like approximately 120 other institutions, in
a currently pending claim in the United States Court of Federal Claims seeking
substantial damages as a result of the 1989 Financial Institutions Reform,
A-24
<PAGE> 163
Recovery and Enforcement Act's mandatory phase-out of the regulatory capital
treatment of supervisory goodwill. Arguments concerning the extent of damages
in the cases of three initial plaintiffs, are scheduled to begin March 17,
1997. The other cases, including the Bank's are scheduled to be considered
after the initial cases are resolved. The ultimate outcome of these matters
cannot be ascertained at this time.
NOTE R: FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is party to financial instruments with off-balance sheet risk
(in the normal course of it's business) to meet the financial needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments may include commitments to originate or purchase
loans, standby letters of credit, recourse arrangements on sold assets, and
forward commitments. The instruments involve, to varying degrees, elements of
credit and interest rate risk in addition to the amounts recognized in the
Consolidated Statements of Condition. The contract amounts of those
instruments reflect the extent of the Bank's involvement in particular classes
of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for loan commitments, standby
letters of credit and recourse arrangements is represented by the contractual
amount of those instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as for on-balance sheet instruments.
For forward commitments, the contract amounts do not represent exposure to
credit loss. The Bank controls the credit risk of those instruments through
credit approvals, limits and monitoring procedures.
The following table sets forth financial instruments with off-balance
sheet risk and their contract amounts and fair values:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------
1996 1996 1995 1995
-----------------------------------------------
Contract Fair Contract Fair
Amount Value Amount Value
-----------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Financial instruments whose contract amounts
represent credit risk
Commitments to originate and purchase loans $ 69,383 $ (694) $ 60,443 $ (604)
Unused lines of credit 78,303 (783) 56,867 (569)
Standby letters of credit 367 (4) 1,210 (12)
Loans sold with recourse 3,004 (150) 3,563 (178)
Financial instruments whose contract amounts
exceed the amount of credit risk:
Forward commitments to sell loans 4,000 (40) -- --
</TABLE>
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
A-25
<PAGE> 164
and may require payment of a fee. Since some of the commitments are expected to
expire without being drawn on, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
evaluation of the borrower's creditworthiness.
Standby letters of credit are conditional commitments issued by the Company
to guarantee the performance by a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. Additionally, the Bank has retained
credit risk on certain residential and commercial mortgage loans sold with
recourse with outstanding balances at December 31, 1996 of $1,430,000 and
$1,574,000, respectively. These balances as of December 31, 1995 were
$1,769,000 and $1,794,000, respectively. The maximum amount of loss to which
the Bank is subject, which under the recourse provisions, is $1,587,000 at
December 31, 1996. Management does not believe the recourse provisions subject
the Bank to any material risk of loss. This credit risk is considered to be no
more onerous than that existing on similar loans in the Bank's loan portfolio.
Forward commitments to sell loans are contracts the Bank negotiates for the
purpose of reducing the market risk associated with rate lock agreements with
customers for new loan applications that we have not yet been closed. In order
to fulfill a forward commitment, the Bank typically exchanges through FNMA,
FHLMC or GNMA, its current production of loans for mortgage-backed securities,
which are then delivered to a national securities firm at a future date at
prices or yields specified by the contracts. Risks may arise from the possible
inability of the Bank to originate loans to fulfill the contracts, in which case
the Bank would normally purchase securities in the open market to deliver
against the contracts.
NOTE S: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of
financial instruments at the dates indicated. SFAS 107, "Disclosures about Fair
Value of Financial Instruments", defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a current
transaction between willing parties, other than in a forced or liquidation sale.
<TABLE>
<CAPTION>
December 31
----------------------------------------------------
1996 1995
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-----------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 12,787 $ 12,787 $ 22,438 $ 22,438
Investment securities (Note D) 119,777 119,821 96,436 96,565
Mortgage-backed securities (Note E) 251,256 249,870 127,709 128,688
Loans receivable (Note F) 1,055,876 1,078,795 952,359 958,349
Deposits (Note I) (964,133) (969,071) (922,932) (926,958)
</TABLE>
A-26
<PAGE> 165
<TABLE>
<S> <C> <C> <C> <C>
Securities sold under agreement
to repurchase (Note J) (58,040) (58,040) -- --
Debt (Note K) (345,997) (345,231) (216,295) (217,141)
Commitments to originate and
purchase loans (Note Q) -- (694) -- (604)
Unused lines of credit (Note Q) -- (783) -- (569)
Standby letters of credit (Note Q) -- (4) -- (12)
Loans sold with recourse (Note Q)
Forward commitments to sell loans (Note Q) -- (40) -- --
</TABLE>
ESTIMATION OF FAIR VALUES
SFAS 107 requires disclosure of fair value information about financial
instruments, whether or not recognized in the Statement of Condition, for which
it is practicable to estimate that value. In cases where quoted market prices
are not available, fair values are based on estimates using present value or
other valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could
not be realized in immediate settlement of the instrument. SFAS 107 excludes
certain financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented do not represent the underlying value of the Company.
The carrying amounts reported in the Statement of Condition for cash
and cash equivalents approximate those assets' fair value.
Fair values for investment securities and mortgage-backed securities
are based on quoted market prices, where available. If quoted market prices
are not available, fair values are based on quoted market prices of comparable
instruments.
Fair values for the Bank's loans are estimated using discounted cash
flow analyses, using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality. The carrying amount of
accrued interest approximates its fair value.
The fair values of checking and NOW accounts, money market accounts
and savings deposits are the amounts payable on demand at the reporting date.
The fair value for fixed-maturity time deposits is estimated using a discounted
cash flow analyses using the rates currently offered for deposits with similar
remaining maturities.
The fair values of securities sold under agreement to repurchase and
the Bank's debt are estimated using discounted cash flow analyses, based on the
Bank's current incremental borrowing rates for debt with similar terms and
remaining maturities.
A-27
<PAGE> 166
Fair values for the Bank's off-balance sheet instruments ( guarantees and
credit commitments) are based on current settlement or termination values and on
fees currently charged to enter into similar agreements, given the remaining
terms of the agreements and the counterparties' credit standing.
A-28
<PAGE> 167
Management's Discussion and Analysis
of Financial Condition and Results of Operations
General
D&N Bank (D&N or the Bank) is a savings bank and wholly-owned subsidiary of
D&N Financial Corporation (the Company).D&N's primary focus is the delivery of
financial services through its community banking offices in Michigan and
consumer loan origination network in the Great Lakes states. This discussion
highlights important trends and events that have shaped the Bank's financial
performance in 1996.
In 1996, D&N reported income, before one-time regulatory charges, of $13.4
million. Net income in 1995 was $10.6 million, and in 1994 the Bank earned
$3.6 million.
D&N Bank incurred a one-time charge in 1996 as its mandated contribution to
replenish the Federal Deposit Insurance Corporation's (FDIC) depleted Savings
Association Insurance Fund (SAIF). The third quarter assessment was $5.5
million before consideration of its impact on federal taxes, and is expected to
reduce the Bank's annual deposit insurance premiums by approximately $1.6
million.
Also during the third quarter of 1996, the Bank recognized a $500,000
adjustment to its balance of deferred tax assets following the enactment in
August of federal legislation which resolved the recapture status of previously
allowed accelerated deductions for bad debts. Historically, thrift institutions
such as the Bank had been permitted to deduct a portion of their income as bad
debt allowances. This practice was more advantageous than the specific-loss
method of deduction which was mandated for other classes of financial
institutions. The opportunity to use the percentage-of-income method expired in
1995, but the status of previously accelerated deductions remained in question
until the 1996 legislation was enacted. Notably, the presence of unresolved
prior deductions was felt to be a hindrance to evolution and consolidation of
the financial services industry because thrift institutions that had recorded
such accelerated deductions were required to repay them before charter
conversions or acquisitions by non-thrift institutions could be approved. The
new legislation required that accelerated deductions recorded after 1987 would
have to be repaid, but forgave that portion of institutions' accelerated loan
loss deductions that were recorded before 1988.
Including the non-recurring charges associated with the recapitalization of the
SAIF and the recapture of previously recorded post-1987 bad debt deductions,
the Bank's net income for 1996 was $9.4 million.
On December 31, 1996, the Bank's balance sheet included total assets of $1.47
billion, compared to $1.23 billion at the end of 1995. This 20% growth
reflected primarily the Bank's loan origination success, with $518 million of
new loans funded in 1996. Outstanding loan balances totaled $1.07 billion at
December 31, 1996, an increase of 11% during the year. Mortgage backed
securities also increased by 97% to $251 million as the Bank securitized $120
million of its residential mortgage loan production with the Federal National
Mortgage Association (FNMA or Fannie Mae).
Equity and capital support for D&N's robust growth in 1996 came from the
retention of earnings and as a consequence of the Bank's merger, in April, with
Macomb Federal Savings Bank (Macomb). The acquisition, accounted for as a
pooling of interests, added retail deposits, a quality loan portfolio, and a
prime community banking location in St. Clair Shores, Michigan to the D&N
franchise. In addition, the
<PAGE> 168
strong capital base of Macomb helped to support the robust loan production that
D&N experienced throughout its networks.
In 1996 the Bank made provisions for loan losses of $1.1 million, after making
provisions of $2.4 million and $100,000 in 1995 and 1994, respectively. At
December 31, 1996, the allowance for loan losses was $11.0 million, or 1.03% of
outstanding loans. D&N's portfolio of nonperforming assets declined during 1996
by $1.6 million or 17% to $8.1 million. At December 31, 1996, the allowance for
loan losses was 167% of the loans deemed to be nonperforming. This ratio was
122% in 1995 and 46.4% in 1994.
Noninterest income from operations increased by 14.7% in 1996 after
experiencing a decline in 1995. In 1994 the Bank sold a substantial portion of
its portfolio of purchased mortgage loan servicing rights, and focused its
servicing efforts on its own customers' loans. The increases in both loan
related and deposit related fee income experienced in 1996 reflects the
successful implementation of servicing strategies designed to complement the
Bank's community banking focus.
Results of Operations
Net Interest Income
The Bank's primary source of earnings is its net interest income, defined as
the difference between the interest earned on its loans and investments and the
interest paid on its deposits and other liabilities. Interest income and
interest expense each increased in 1996 as the average size of the Bank's
earning assets grew substantially. Interest income increased by $13.5 million,
or 14.9%, in 1996. The average yield on earning assets increased by 2 basis
points to 7.95% in 1996, from 7.93% in 1995. In 1994, earning assets yielded
6.95%. Driving the interest income gains in 1996 was D&N's 14.7% increase in
average earning balances, while 1995's gains were more evenly attributable to
larger balances and higher average earning rates.
Interest expense increased by $5.6 million, or 9.9%, in 1996 as the average
balance of interest-bearing liabilities increased by 14.6%, more than
off-setting the 22 basis point decrease in the average rate paid on those
liabilities. In 1996, interest-bearing liabilities had an average cost of
4.93%, compared to 5.15% in 1995 and 4.89% in 1994. Because the average yield
on interest-earning assets increased and the average cost of interest-bearing
liabilities decreased in 1996, the Bank's interest rate spread increased from
2.79% in 1995 to 3.02% in 1996. In 1994 the spread was 2.06%. Similarly, the
Bank's net interest margin, or ratio of net interest income to average
interest-earning assets, increased from 3.04% in 1995 to 3.26% in 1996. In 1994
the net interest margin was 2.31%. Average interest-earning assets exceeded
average interest-bearing liabilities by $64.5 million in 1996 compared to $55.3
million in 1995 and $52.1 million in 1994.
Spread and margin improvements in 1996 reflect the expiration, in late 1995, of
the last of the Bank's portfolio of interest rate exchange agreements. In 1995
those contracts added 23 basis points to the average cost of interest bearing
liabilities, while the burden was 100 basis points in 1994.
Average balances of loans outstanding were higher in 1996 than 1995, as the
Bank's loan originations increased significantly. Average balances of
mortgage-backed securities were slightly higher, while the investment
securities category declined. Loans increased by $169.7 million, or 19.0%;
mortgage-backed securities increased by $6.5 million, or 4.6%; and investment
securities declined by $7.6 million, or 6.8%. Average earning rates on loans
and mortgage-backed securities were lower in 1996 than 1995, while the average
earning rate on the investment portfolios increased modestly. In 1996,
<PAGE> 169
loans earned an average yield of 8.11% compared to 8.13% in 1995.
Mortgage-backed securities earned an average of 7.46% in 1996, versus an
average rate of 7.55% in 1995. Investment securities earned 6.96% in 1996, up
from 6.85% in 1995. Even though average loan yields fell from the previous
year, overall earning-asset performance increased as a greater proportion of
the earning-asset portfolio was comprised of more profitable loan assets in
1996 than in 1995.
<PAGE> 170
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
The average balances of loan assets and mortgage-backed securities also
increased from 1994 to 1995. As in 1996, average investment balances fell in
1995, reflecting the Bank's application of surplus liquidity assets to fund
loan growth.
Average deposit balances increased 10.1% to $938 million in 1996, from $852
million in 1995. The average cost of deposits increased 14 basis points, to
4.67%, in 1996, from 4.53% in 1995. From 1994 to 1995, average deposit balances
increased by $30 million, or 3.7%. In 1994, the average cost of deposits was
3.63%.
The average balance of borrowed funds increased by 31.0%, to $310 million in
1996, from $236 million in 1995. In 1994, the average balance of borrowed funds
was $155 million.
In 1995 and 1994, D&N's interest expense included the net costs of interest
rate hedging instruments. During 1995, contracts written in the 1980s to
exchange fixed interest payments for variable receipts ("interest rate swaps")
resulted in net charges to interest expense of $2.5 million. During 1994, these
costs totaled $9.8 million. The swap contracts, originally executed as hedges
against rising interest rates, have expired, with the final contract maturing
in November of 1995.
Noninterest Income
D&N's noninterest income includes recurring fees from loan and deposit-related
activities, recurring income from the marketing of assets that are originated
for sale, and non-recurring gains and losses from events such as securities
sales and sales of non-earning and depreciated assets.
D&N's loan and deposit-related fee income totaled $5.5 million in 1996, up
$509,000 or 10.1% from 1995, reflecting primarily the Bank's successful
introduction of a new line of retail checking account products.
In 1996, net loan servicing and administrative fees were unchanged from 1995 at
$1.9 million. Deposit-related fees, on the other hand, increased by 15.1% in
1996.
Gains on sales of loans totaled $1.0 million in 1996, up from $882,000 in 1995.
In 1996, $66.1 million of D&N's residential mortgages were sold to secondary
market investors, compared to $67.4 million in 1995. In each year, D&N Bank
retained the rights to service all of these loans.
Other income increased from $222,000 in 1995 to $470,000 in 1996 as D&N Bank's
subsidiary, Quincy Insurance Agency, successfully initiated sales of annuities
and other investment products.
Noninterest Expense
General and administrative expenses in 1996 included $1.4 million of
non-recurring costs associated with the Bank's merger with Macomb Federal
Savings Bank. Excluding these costs, general and
<PAGE> 171
administrative expenses were up by $1.5 million, or 5.1%, in 1996, following an
increase of $2.0 million, or 7.6% in 1995. These increases reflect the costs of
D&N's expanding retail delivery network, as the number of Bank and D&N Mortgage
Company offices increased from 41 at the end of 1994 to 48 at the end of 1996.
In 1996, noninterest expense included $71,000 of net operating costs related to
other real estate owned (OREO). In 1995 and 1994, net recoveries on sales of
OREO properties exceeded operating costs resulting in credits in this category
of $1.0 million and $2.1 million, respectively.
In 1995 and 1994, D&N's noninterest expense included amortization costs for
goodwill associated with the Bank's 1982 merger with First Federal Savings and
Loan Association of Flint, Michigan.
Excluding the FDIC's SAIF recapitalization assessment of $5.5 million, deposit
insurance premiums in 1996 were $2.4 million, unchanged from the 1995 level,
and down from $2.6 million in 1994.
Income Taxes
The Bank's effective income tax rates were 3.63% in 1996, (18.73%) in 1995, and
4.04% in 1994, primarily as a result of reductions in each year of a portion of
the valuation allowance for deferred tax assets provided in prior years, when
the Bank incurred substantial net operating losses. The valuation allowance
has been eliminated as of December 31, 1996.
<PAGE> 172
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
Financial Condition
Balance Sheet Trends
AT DECEMBER 31, 1996, D&N'S ASSETS TOTALED $1.47 BILLION, AN INCREASE OF $245
MILLION, OR 20%, FROM THE PREVIOUS YEAR END. THE BANK'S BALANCE SHEET GROWTH
HAS BEEN FUELED BY SUBSTANTIAL LOAN PRODUCTION AND INCREASED CAPITALIZATION.
In 1996, net loans receivable increased by $104 million, or 10.9%, reflecting
continued strong demand for the Bank's consumer loan products. Balances of
mortgage-backed securities increased $124 million, or 97%, primarily as a
consequence of securitization of $120 million of the Bank's residential
mortgage loans. All of the servicing rights for sold and securitized mortgages
were retained, resulting in an increase in the balances of loans serviced for
others from $278 million to $415 million during the year.
The Bank's liabilities increased by 20%, or $230 million, to $1.39 billion at
December 31, 1996, compared to $1.16 billion at the end of 1995. Overall
deposit balances increased by 4.5%, or $41.2 million, while core deposits
experienced a 5.7% increase from $327.4 million at December 31, 1995, to $346.1
million at year end 1996. Borrowed funds increased by 87%, or $188 million, in
1996, while advance payments by borrowers and investors held in escrow
increased from $11.3 million to $11.8 million.
In 1996, D&N's stockholders' equity rose from $72.0 million to $86.1 million.
Profitable operations contributed $9.0 million to the Bank's retained earnings
while the exercise of warrants and options resulted in $5.5 million of net
capital contributions in 1996. An additional source of equity in 1996 was $1.2
million of excess market value attributable to investment and mortgage-backed
securities held for sale. In accordance with the provisions of SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities," unrealized
gains such as these are recorded in the stockholders' equity section of the
Bank's Statement of Financial Condition, but are not recognized through the
Statement of Income.
Under its federal charter, the Bank must maintain adequate levels of capital to
assure the safety and soundness of its operations. At December 31, 1996, the
Bank had a tangible capital ratio of 5.11%, a core capital ratio of 5.11%, and
a risk-based capital ratio of 9.94%. D&N Bank's ratios continue to exceed the
levels specified in the Financial Institutions Reform, Recovery and Enforcement
Act (FIRREA) as minimally acceptable standards. At the close of 1996, those
minimum standards were tangible capital of 1.50%, core capital of 3.0% (with a
proposed regulation which would raise the core capital requirement to between
4.00% and 5.00%), and risk-based capital of 8.00%.
The Bank's primary regulator, the Office of Thrift Supervision (OTS), has
issued its final rules adding an interest rate risk component to the total
capital that certain rate-sensitive institutions must maintain. The rule
requires the OTS to measure an institution's interest rate risk as the
percentage change in
<PAGE> 173
market value of its portfolio resulting from a hypothetical 200 basis point
shift in interest rates. At December 31, 1996, D&N's level of interest rate
risk was such that no additional capital was required.
Liquidity and Capital Resources
The OTS also requires that institutions maintain liquid assets in the form of
cash, short-term U.S. Government securities and other qualifying assets, in
amounts equal to at least 5% of net withdrawable accounts and borrowed funds
payable in one year or less. For the month of December 1996, the Bank's average
liquidity ratio was 6.61%, down from the December 1995 ratio of 8.3%.
Borrowing capacity can be viewed as a supplemental source of liquidity for the
Bank. D&N's government bond and mortgage-backed securities portfolios include
high quality investment securities which are readily acceptable as collateral
for additional borrowed funds, obtainable from either the FHLB system or from
other financial institutions. Also, much of the Bank's residential mortgage
loan portfolio would be acceptable as collateral to support new advances from
the FHLB. In the aggregate, by virtue of its inventory of unpledged security
and mortgage loan collateral, D&N had approximately $180 million of unused
borrowing capacity at December 31, 1996.
Loan Portfolio
D&N's investment in loans increased by $104 million, or 10.9%, in 1996.
Consumer loans and commercial loans experienced the most significant percentage
increases, while residential mortgages grew at a more modest rate. The Bank's
investment in mortgages on income-producing properties decreased for the sixth
consecutive year and the year-end balance of construction loans was down
slightly from the previous year. Consumer loans increased by $99.8 million, or
41.7% in 1996. Commercial loans increased by $4.6 million, or 58.9%, while
residential mortgage loans increased during the year by $3.0 million, or 0.5%.
Mortgages on income-producing properties decreased by $3.6 million, or 4.0%, as
construction loan balances declined by $1.4 million, or 3.4%. At the end of
1996, 44% of the Bank's loan balances were in consumer or commercial-related
loans, compared to a 38% weighting at the end of 1995.
D&N originated $518 million of loans in 1996, up $113 million, or 28.0% from
$405 million originated in 1995. Aggregate mortgage loan production was $228
million, an increase of $24 million, or 11.9%, from 1995. Construction lending
accounted for $42.9 million of this total, up 8.6% from $39.5 million in 1995.
Consumer loan production totaled $272 million in 1996, up by $76.5 million, or
39.2%, from 1995. Within the consumer category, home equity credit line (HECL)
production was again strong, increasing by $12.8 million, or 23.4%, over 1995.
Credit Risk Management and Provision for
Losses on Loans and Other Assets
At December 31, 1996, the Bank's nonperforming assets totaled $8.1 million,
down from $9.7 million at the end of the previous year and $24.5 million at the
end of 1994. The 1996 balance was comprised of $6.6 million of nonperforming
loans and $1.5 million of other real estate owned (OREO). At the end of 1996,
nonperforming loans comprised just 0.62% of the loan portfolio, and the
allowance for loan losses stood at 167% of the total balances of nonperforming
loans.
<PAGE> 174
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
Allowances for losses on the loan portfolio increased by $1.0 million in 1996.
Losses of $1.5 million were charged off and $1.4 million were recovered, as new
provisions for loan losses of $1.1 million were recorded during the year. At
December 31, 1996, the allowance for loan losses was $11.0 million, 1.03% of
the total outstanding loan portfolio balance.
At the end of 1996, $6.3 million of the allowance for loan losses was allocated
to the commercial real estate mortgage portfolio while $3.5 million of the
allowance was allocated to the consumer loan portfolio.
Analysis of Cash Flows
The Bank's balances of cash and cash equivalents declined from $22.4 million to
$12.8 million in 1996. During the year, $230 million of cash was provided from
financing activities, primarily from expanded borrowings and increases in
customers' deposit balances. Investing activities utilized $267 million of
available cash and cash equivalents as loan purchases, mortgage-backed security
purchases, and purchases of investment securties exceeded repayments in these
categories. Operating activities provided $27.2 million of net cash in 1996.
Asset/Liability Management
The Bank's objectives for the management of assets and liabilities include
achieving and maintaining adequate and stable levels of both net interest
income and market value for the Bank's net assets. The level of net interest
income that can be attained is enhanced by assuming credit, liquidity and
interest rate risks and by striving to keep nonearning asset balances to a
minimum. Net interest income and market value of portfolio equity (MVPE)
stability is enhanced across various interest rate scenarios by properly
matching maturity structures of assets and liabilities.
<PAGE> 175
Management's Discussion and Analysis
of Financial Condition and Results of Operations (continued)
The Bank employs various tools, including gap analysis, duration analysis and
simulation analysis, to assess the sensitivity of its net interest income and
MVPE to changes in interest rates.
The difference between interest-earning assets and interest-bearing liabilities
reflects an imbalance between repricing opportunities for the two sides of the
balance sheet. The consequence of a negative cumulative gap at the end of one
year suggests that, if interest rates were to fall, the Bank's earnings stream
would be enhanced as more liability balances would reprice to lower rates than
would asset balances. Similarly, the negative cumulative gap suggests that if
interest rates were to rise, liability costs would increase more quickly than
asset yields, placing negative pressure on earnings.
With a cumulative one-year gap of -10.3%, D&N's balance sheet is somewhat
liability sensitive. At year-end, however, 46.0% of the Bank's loan portfolio
carried variable or adjustable interest rates, and a growing proportion of the
fixed-rate loan portfolio was comprised of relatively shorter-term installment
consumer loans.
The balances presented reflect contractual repricings for certificates of
deposit. Certain demand deposit accounts and regular savings accounts, however,
have been classified as repricing beyond one year. While these accounts are
subject to immediate withdrawal, experience has shown them to be relatively
rate insensitive. If these accounts were included in the 0-3 month category,
the gap in that time frame would be negative $379 million and the cumulative
gap at twelve months would be negative $317 million.
Significant Litigation
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act
(FIRREA) was passed, significantly altering the regulatory environment in which
depository institutions in general, and the Bank in particular, would
subsequently operate. A provision of the Act provided for the elimination, over
time, of one form of regulatory capital that many institutions, including D&N
Bank, had utilized in their capital structures. The phased elimination of
supervisory goodwill, an intangible asset previously created when Companies
such as D&N acquired weaker institutions at the request of Government-sponsored
deposit insurance funds, resulted in many of the affected companies
experiencing capital shortfalls. In D&N's case, $42 million of unamortized
supervisory goodwill was permitted to be counted as regulatory capital in 1989
at the time of the Act's passage, while $37 million remained in 1993 when its
phase-out as qualifying capital was complete. The loss of this significant
portion of D&N's regulatory capital base precipitated drastic changes in the
Bank's strategic plans, including the 56% shrinkage of the balance sheet from
$2.3 billion in 1988 to $1.0 billion in 1993, the closure of the Bank's
national network of mortgage origination offices and the elimination of many
jobs.
A number of institutions, including D&N, that were adversely affected by the
FIRREA legislation subsequently initiated legal actions against the United
States. The institutions have claimed that the
<PAGE> 176
inducements offered by federal regulatory agencies to acquire weakened or
insolvent thrifts constituted contractual guarantees that the goodwill created
through the acquisition transactions would qualify as regulatory capital.
FIRREA's mandated phase-out of regulatory capital treatment for supervisory
goodwill, then, has been alleged to be a breach of a contract right. The United
States Court of Federal Claims has registered approximately 120 similar cases,
including D&N's, which seek damages for such breach.
Early cases were bifurcated into questions of liability and damages, with the
trial courts reasoning that, until the question of the government's liability
was unequivocally established, efforts to determine damages or to develop
damage theories were potentially irrelevant. Three early cases have proceeded
through the Court of Claims, and after consolidation, through the Federal
Circuit of the United States Court of Appeals, and the United States Supreme
Court. In July of 1996, the Supreme Court found generally that the United
States was liable for damages under a theory of contractual breach, and that
claims of governmental immunity were not applicable in these cases. The cases
were remanded to the Court of Claims where arguments concerning the extent of
damages are scheduled to begin on March 17, 1997.
In consideration of the complexities of the pending litigation, the similarity
of issues in the various cases, and the potential magnitude of the damage
amounts that might ultimately be awarded, the Court of Claims has issued a case
management order on the remaining cases, in essence creating an orderly
procedure for these lawsuits to proceed. At this time estimation of potential
damages from this action is speculative.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board ("FASB") issued SFAS
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." SFAS 125 provides accounting and reporting
standards for the subject matter based on consistent application of a financial
component's approach that focuses on control. The standard will be adopted
effective January 1, 1997 and is not expected to have any material effect on
the financial statements.
In March 1997, the FASB issued SFAS 128, "Earnings Per Share". SFAS 128
supersedes APB 15, "Earnings Per Share", and simplifies the computation of
earnings per share ("EPS") by replacing the "primary" EPS requirements of APB
15 with a "basic" EPS computation based upon weighted shares outstanding. The
new standard requires a dual presentation of basic and diluted EPS. Diluted EPS
is similar to "fully diluted" EPS
<PAGE> 177
ATTACHMENT B
D&N BANK
CONSOLIDATED STATEMENTS OF CONDITION
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
-------------------------------------
(In thousands)
-------------------------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,798 $ 2,845
Federal funds sold 1,300 8,600
Interest-bearing deposits in other banks 747 1,342
-------------------------------------
Total cash and cash equivalents 3,845 12,787
Investment securities
(market value of $98,517,00 in 1997 and $60,783,000 in 1996) 98,639 60,739
Investment securities available for sale (at market value) 40,868 59,038
Mortgage-backed securities
(Market value $235,830,000 in 1997 and $213,304,000 in 1996) 240,264 214,690
Mortgage-backed securities available for sale (at market value) 33,196 36,566
Loans receivable (including loans held for sale
of $219,000 in 1997 and $5,218,000 in 1996) 1,092,824 1,066,918
Allowance for loan losses (10,987) (11,042)
-------------------------------------
Net loans receivable 1,081,837 1,055,876
Other real estate owned, net 1,226 1,470
Federal income taxes 3,025 6,002
Office properties and equipment, net 16,006 15,764
Other assets 9,560 10,056
-------------------------------------
$ 1,528,466 $ 1,472,988
=====================================
LIABILITIES
Checking and Now accounts $ 103,248 $ 107,550
Money market accounts 90,154 89,321
Savings deposits 151,673 149,226
Time deposits 661,435 617,102
Accrued interest 998 934
------------------------------------
Total deposits 1,007,508 964,133
Securities sold under agreements to repurchase 71,886 58,040
FHLB advances and other borrowed money 345,599 345,997
Advance payments by borrowers and investors held in escrow 9,527 11,808
Payable to DNFC 5,510 6,105
Other liabilities 5,145 6,891
------------------------------------
Total liabilities 1,445,175 1,392,974
STOCKHOLDERS' EQUITY
Preferred stock (1,000,000 shares authorized; none issued)
Common stock, $.01 par value per share (shares authorized - 10,000,000;
shares outstanding - 3,650,636 in 1997 and 1996) 37 37
Additional paid-in capital 48,590 48,590
------------------------------------
Total paid-in capital 48,627 48,627
Retained earnings - substantially restricted 33,436 30,144
Unrealized holding gains on debt securities
available for sale, net of tax 1,228 1,243
------------------------------------
Total stockholders' equity 83,291 80,014
------------------------------------
$ 1,528,466 $ 1,472,988
====================================
</TABLE>
B-1
<PAGE> 178
D&N BANK
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
-------------------------------
(In thousands)
-------------------------------
<S> <C> <C>
INTEREST INCOME
Loans $ 21,937 $ 19,980
Mortgage-backed securities 4,436 2,276
Investments and deposits 1,962 1,744
------------------------------
TOTAL INTEREST INCOME 28,335 24,000
INTEREST EXPENSE
Deposits 11,288 11,050
Securities sold under agreements to repurchase 759 94
FHLB advances and other borrowed money 5,030 3,185
------------------------------
TOTAL INTEREST EXPENSE 17,077 14,329
------------------------------
NET INTEREST INCOME 11,258 9,671
Provision for loan losses 300 300
------------------------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 10,958 9,371
NONINTEREST INCOME
Loan servicing and administrative fees, net 521 324
Deposit related fees 921 820
Gain on loans held for sale 26 486
Other 135 95
------------------------------
TOTAL OPERATING NONINTEREST INCOME 1,603 1,725
Gain on loans and MBS available for sale 5 5
------------------------------
TOTAL NONINTEREST INCOME 1,608 1,730
NONINTEREST EXPENSE
Compensation and benefits 4,064 4,079
Occupancy 780 712
Other expense 2,495 2,867
------------------------------
7,339 7,658
Other real estate owned, net (22) 40
FDIC insurance 176 636
------------------------------
TOTAL NONINTEREST EXPENSE 7,493 8,334
------------------------------
INCOME BEFORE INCOME TAX EXPENSE (CREDIT) 5,073 2,767
Federal income tax expense (credit) 1,781 (799)
------------------------------
NET INCOME $ 3,292 $ 3,566
==============================
</TABLE>
B-2
<PAGE> 179
D&N BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
---------------------------
(In thousands)
---------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,292 $ 3,566
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 300 300
Depreciation and amortization of
office properties and equipment 501 522
Amortization of net premuium (discounts) on
purchased loans and securities 108 (773)
Originations and purchases of loans held for sale (5,297) (12,121)
Proceeds from sales of loans held for sale 11,377 26,930
Amortization and writedowns of loan servicing rights 73 201
Other 640 (199)
--------------------------
Net cash provided by operating activities 10,994 18,424
INVESTING ACTIVITIES
Proceeds from maturities of investment securities 22,988 39,946
Purchases of investment securities (42,713) (8,848)
Principal collected on mortgage-backed securities 14,213 10,213
Purchases of mortgage-backed securities (36,684) --
Loans purchased (27,215) (73,160)
Net change in loans receivable (5,165) (14,610)
Decrease in other real estate owned 244 246
Change in payable to Parent Company 594 (335)
Purchase of office properties and equipment (733) (827)
--------------------------
Net cash used by investing activities (74,371) (47,375)
FINANCING ACTIVITIES
Net change in time deposits 44,333 2,469
Net change in other deposits (1,022) 10,826
Proceeds from notes payable, securities sold under
agreements to repurchase and other borrowed money 120,846 58,600
Payments on maturity of notes payable, securities
sold under agreements to repurchase and other
borrowed money (107,440) (28,680)
Net change in advance payments by borrowers
and investors held in escrow (2,281) (1,258)
--------------------------
Net cash provided by financing activities 54,436 41,957
--------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (8,941) 5,771
Cash and cash equivalents at beginning of period 12,786 22,438
--------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,845 $ 35,446
==========================
</TABLE>
See notes to consolidated financial statements.
B-3
<PAGE> 180
D&N BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting solely of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three month periods ended March 31, 1997 and 1996 are not necessarily
indicative of the results that may be expected for the full year.
NOTE 2: ALLOWANCE FOR LOAN LOSSES
The allowance for possible losses on loans is maintained at a level believed
adequate by management to absorb potential losses from impaired loans as well
as losses from the remainder of the portfolio. Management's determination of
the level of the allowance is based upon evaluation of the portfolio, past
experience, current economic conditions, size and composition of the portfolio,
collateral location and values, cash flow positions, industry concentrations,
delinquencies, and other relevant factors. The allowance is increased by a
provision for losses charged against income.
Changes in the allowance for loan losses are summarized as follows:
Three Months Ended
March 31,
1997 1996
-----------------------------
(In thousands)
Balance at beginning of period $ 11,042 $ 9,931
Charge-offs:
Single family 53 49
Income producing property -- --
Commercial -- --
Installment 381 257
------------------------
Total 434 306
Recoveries:
Single family -- --
Income producing property -- --
B-4
<PAGE> 181
Commercial -- --
Installment 79 66
------------------------
Total 79 66
------------------------
Net charge-offs 355 240
Provision charged to operations 300 300
------------------------
Balance at end of period $ 10,987 $ 9,991
========================
NOTE 3: FEDERAL INCOME TAXES
A federal income tax credit was recorded in the 1996 reporting period as the
Bank offset taxes ordinarily payable by a realization, through a reduction in
the valuation allowance previously provided, of prior years' net operating loss
carryforwards.
NOTE 4: ACQUISITION
On April 10, 1996, Macomb Federal Savings Bank ("Macomb"), a $43 million asset
savings bank, was merged into the Bank. The Bank's Parent, D&N Financial
Corporation, issued 716,497 shares of common stock and cash in lieu of
fractional shares for all of the outstanding shares of Macomb. The merger was
accounted for as a pooling-of-interests. No changes in accounting methods
resulted from the business combination.
NOTE 5: RECLASSIFICATIONS
Certain amounts in the 1996 consolidated financial statements have been
reclassified to conform with the current period presentation.
B-5
<PAGE> 182
D&N BANK
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis provides information regarding
D&N Bank's ("D&N or the Bank") financial condition and results of operations
for the three-month periods ended March 31, 1997 and 1996. Ratios for the
three-month periods are stated on an annualized basis. Results of operations
for the 1997 period are not necessarily indicative of results which may be
expected for the entire year. This discussion and analysis should be read in
conjunction with the consolidated financial statements and the notes thereto
appearing elsewhere in this document.
RESULTS OF OPERATIONS
NET INCOME
The Bank recorded net income for the first quarter ended March 31, 1997
of $3.3 million, compared to net income of $3.6 million in the first quarter of
1996. Return on average assets and return on average equity were 0.89% and
16.13%, respectively, during the quarter ended March 31, 1997, compared to
1.15% and 19.60%, respectively, during the quarter ended March 31, 1996. The
decrease in net income was due primarily to a tax credit usage of $799,000 in
the first quarter of 1996, versus a tax expense of $1,781,000 in the first
quarter of 1997. This shift of $2.6 million in taxes, was partially offset by
an increase of $1.6 million in net interest income and a decrease in
noninterest expense of $800,000.
NET INTEREST INCOME
Net interest income, or the difference between interest earned on
interest earning assets such as loans and investment securities and interest
paid on sources of funds such as deposits and borrowings, is a significant
component of the Bank's earnings. Net interest income is affected by changes
in both the balance of and the rates on interest earning assets and interest
bearing liabilities and the amount of interest earning assets funded with
non-interest or low-interest bearing funds.
B-6
<PAGE> 183
Net interest income increased $1.6 million to $11.3 million for the
quarter ended March 31, 1997 compared to $9.7 million for the quarter ended
March 31, 1996. The increase was due to increased volume and improved yields
on loans originated and to lower relative expense on the Bank's borrowings due
to repricing and more significantly aided by decreases in interest rates on
deposits due to general decreases in market interest rates.
By increasing its consumer and commercial lending activities, the
Company has been able to increase its net interest earning assets and to
realize increased net yields. The result of these factors is that net interest
income has steadily improved during recent quarters.
PROVISION FOR LOAN LOSSES
A provision for loan losses is charged to income based on the size and
quality of the loan portfolio measured against prevailing economic conditions.
This process is accomplished through a formal review analysis. The provision
is recorded in sufficient amounts to maintain the allowance for possible loan
losses at a level in excess of that expected by management to be required to
cover specific exposures in the portfolio.
The Bank recorded a $300,000 provision for loan losses during the
quarter ended March 31, 1997 and during the quarter ended March 31, 1996. The
allowance for loan losses has been maintained at approximately 1.00% of gross
loans even as the loan portfolio has experienced significant growth over the
past several fiscal quarters.
NONINTEREST INCOME
Total noninterest income decreased to $1.6 million during the quarter
ended March 31, 1997, from $1.7 million recorded during the quarter ended March
31, 1996. The majority of this decrease was due to reduction in gain on sale
of loans available for sale. Net loan servicing and administrative fees
increased $198,000 as the Company recorded recoveries on its portfolio of
mortgage servicing rights due to increased market values caused primarily by
lower loan prepayment experience. Deposit related fees were up approximately
$100,000 in the current year quarter primarily due to an increase in NSF fee
income.
B-7
<PAGE> 184
NONINTEREST EXPENSE
Total noninterest expense decreased $800,000 to $7.5 million during
the quarter ended March 31, 1997, from $8.3 million recorded in the first
quarter of 1996. Decreases in other expense represents D&N's continuing
commitment to cost control. The primary areas of decrease were general were
general office, furniture and equipment, marketing, legal and state tax
expenses.
FEDERAL INCOME TAXES
The first quarter of 1997 is presented on a fully-taxed basis versus
a federal income tax credit of $818,000 being recorded in the first quarter
of 1996.
FINANCIAL CONDITION
Total assets at March 31, 1997 were $1.53 billion, an increase of
$55.5 million from December 31, 1996. Earning assets represented approximately
98% of total assets as of March 31, 1997, substantially the same as at year-end
1996.
CASH, DEPOSITS AND INVESTMENT SECURITIES
Cash, deposits and investment securities were $143.3 million at March
31, 1997, up $10.7 million from December 31, 1996.
MORTGAGE-BACKED SECURITIES
Mortgage-backed securities increased $22.2 million from year-end 1996
to $273.5 million at March 31, 1997. The increase was due to purchase of
several short-term tranche CMO's of $36.4 million, reduced by repayments and
amortization of $14.3 million.
NET LOANS RECEIVABLE
Net loans receivable increased $26.0 million during the period to
$1.10 billion at March 31, 1997. Loan originations of $100.6 million and
purchases of $27.1 million exceeded repayments and sales. Loan originations
and purchases
B-8
<PAGE> 185
during the three months ended March 31, 1997 were: consumer loans; $58.5
million, while residential mortgage loans and commercial loans were $56.1
million and $13.1 million, respectively.
NONPERFORMING ASSETS AND RISK ELEMENTS
The following table sets forth the amounts and categories of risk
elements in the Bank's loan portfolio.
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
-------------------------------
(Dollars in thousands)
<S> <C> <C>
Nonaccruing loans $ 4,488 $ 6,621
Accruing loans delinquent more
than 90 days -- --
Restructured loans -- --
-------------------------
Total nonperforming loans 4,488 6,621
Other real estate owned (OREO) 1,226 1,470
-------------------------
Total nonperforming assets $ 5,714 $ 8,091
=========================
Nonperforming loans as a
percentage of total loans 0.41% 0.62%
=========================
Nonperforming assets as a
percentage of total assets 0.37% 0.55%
=========================
Allowance for loan losses as a
percentage of nonperforming loans 244.81% 166.77%
=========================
Allowances for loan and OREO
losses as a percentage of
nonperforming assets 192.28% 136.47%
=========================
</TABLE>
Nonperforming assets, before allowances for loan and OREO losses,
decreased $2.4 million during the period primarily as a large commercial real
estate loan secured by a shopping center was restored to accrual status
after sale of the property.
B-9
<PAGE> 186
MORTGAGE SERVICING RIGHTS (MSRS)
The Bank's net investment in MSRs increased during the period to $1.4
million at March 31, 1997. The following table details activity in the
portfolio for the periods indicated.
<TABLE>
<CAPTION>
Three Months Year
Ended Ended
March 31, 1997 December 31, 1996
------------------------------------
(Dollars in thousands)
<S> <C> <C>
Balance at beginning of period $ 1,443 $ 1,113
Additions:
Capitalized servicing 34 630
Reductions:
Scheduled amortization (72) (267)
Additional amortization due
to changes in prepayment
assumptions (1) (33)
--------- -----------
Total (73) (300)
--------- -----------
Balance at end of period $ 1,404 $ 1,443
========= ===========
Fair market value at end of period $ 1,836 $ 1,770
========= ===========
</TABLE>
DEPOSITS
Deposits increased $43.4 million during the period to $1.01 billion at
March 31, 1997. Certificates of deposit increased $44.3 million and savings
deposits increased $2.5 million while checking accounts decreased $4.3 million
and money market accounts increased $900,000. The Bank's cost of deposits
increased to 4.73% at March 31, 1997, compared to 4.61% at December 31, 1996, a
result of general increase in market rates of interest.
BORROWINGS
Total borrowings increased $13.4 million during the period to $417.5
million at March 31, 1997 in order to fund loan demand. The Bank's cost of
borrowings was 5.79% at March 31, 1997, compared to 5.73% at December 31, 1996.
B-10
<PAGE> 187
CAPITAL
According to federal regulations, the Bank must meet certain minimum
capital ratios. As the following table indicates, the Bank's capital ratios at
March 31, 1997 exceeded these requirements.
<TABLE>
<CAPTION>
Tier 1
Tangible Core Risk-Based Risk-based
Capital Capital Capital Capital
--------- --------- ---------- -------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Actual capital $ 79,332 $ 79,332 $ 89,897 $ 79,332
Required capital 23,114 46,228 73,034 36,517
--------- -------- -------- ---------
Excess capital $ 56,218 $ 33,104 $ 16,863 $ 42,815
========= ======== ======== ========
Actual ratio 5.15% 5.15% 9.85% 8.69%
========= ======== ======== ========
Required ratio 1.50% 3.00% 8.00% 4.00%
========= ======== ======== ========
</TABLE>
Consolidated stockholders' equity was $83.3 million at March 31, 1997
and represents 5.45% of consolidated assets.
LIQUIDITY
Liquidity is the ability to meet financial obligations when due.
Regulatory authorities require that thrift institutions maintain liquidity
consisting of cash, short-term U. S. Government Securities and other specified
assets, equal to at least 5% of net withdrawable accounts and borrowings
payable in one year or less. For March, 1997, the Bank's average liquidity
ratio was 6.54%. At March 31, 1997, unused borrowing capacity as measured by
the Bank's inventory of readily available but unpledged collateral was
approximately $172 million. The Company considers its current liquidity and
other funding sources sufficient to fund its outstanding loan commitments and
scheduled liability maturities.
B-11
<PAGE> 188
No person has been authorized
to give any information or to make
any representations other than
those contained in this Prospectus,
and, if given or made, such
information or representations must
not be relied upon as having been
authorized. This Prospectus does
not constitute an offer to sell or
a solicitation of an offer to buy
any securities other than the
securities to which it relates or
an offer to sell or a solicitation
of an offer to buy such securities
sin any circumstances in which such
offer or solicitation is unlawful.
Neither the delivery of this
Prospectus nor any sale made
hereunder shall, under any
circumstances, create any
implication that there has been no
change in the affairs of the
Company since the date hereof or
that information contained herein
is correct as of any time
subsequent to this date.
__________________
<TABLE>
<S> <C>
Table of Contents. . . . . . . . . . . . . i
Prospectus Summary . . . . . . . . . . . . 1
The Formation . . . . . . . . . . . . . . 8
Business and Strategy . . . . . . . . . . 8
Tax Status of the Company . . . . . . . . 12
Risk Factors . . . . . . . . . . . . . . 12
The Company . . . . . . . . . . . . . . 22
Use of Proceeds . . . . . . . . . . . . . 24
Capitalization . . . . . . . . . . . . . . 26
Business and Strategy . . . . . . . . . . 27
Management . . . . . . . . . . . . . . . . 48
Certain Transactions Constituting the
Formation. . . . . . . . . . . . . . . . 52
Description of Series A Preferred Shares . 55
Description of Capital Stock . . . . . . . 61
Federal Income Tax Considerations . . . . 65
ERISA Considerations . . . . . . . . . . . 76
Certain Information Regarding the Bank . . 79
Underwriting . . . . . . . . . . . . . . . 91
Experts . . . . . . . . . . . . . . . . . 93
Ratings . . . . . . . . . . . . . . . . . 93
Certain Legal Matters. . . . . . . . . . . 93
Additional Information . . . . . . . . . . 93
Glossary . . . . . . . . . . . . . . . . . 95
Index to Financial Statement . . . . . . . F-1
</TABLE>
__________________
THROUGH AND INCLUDING
[______,] 1997 (THE 25TH DAY AFTER
THE COMMENCEMENT OF THE OFFERING),
ALL DEALERS EFFECTING TRANSACTIONS
IN THE REGISTERED SECURITIES,
WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND
WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
1,100,000 SHARES
D&N CAPITAL
CORPORATION
[____%] NON-CUMULATIVE
PREFERRED STOCK, SERIES A
__________
PROSPECTUS
__________
RONEY & CO.
<PAGE> 189
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Registration Fee . . . . . . . . . . . . . . . . . . . $ 10,000
Rating Agency Fee . . . . . . . . . . . . . . . . . . . 35,000
Printing and Out of Pocket Expenses . . . . . . . . . . 70,000
Legal Fees and Expenses . . . . . . . . . . . . . . . . 150,000
Accounting Fees and Expenses . . . . . . . . . . . . . 50,000
Blue Sky Fees and Expenses . . . . . . . . . . . . . . 10,000
--------
Total . . . . . . . . . . . . . . . . . . . . $325,000
========
ITEM 31. SALES TO SPECIAL PARTIES.
See response to Item 32 below.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES
In connection with the formation of D&N Capital Corporation (the "Company"
or the "Registrant"), the Company issued 1000 shares of Common Stock, par value
$1.00 per share, to D&N Bank (the "Bank"). Prior to the consummation of the
Offering, the Company will amend its Certificate of Incorporation to change the
par value of its Common Stock to $300.00 per share. Simultaneously with the
consummation of the Offering, the Company will issue an aggregate of __________
shares of Common Stock to the Bank. The description of these transactions in
the Prospectus under the heading "Certain Transactions Constituting The
Formation" is incorporated herein by reference. These shares of Common Stock
will be issued in reliance upon the exemption from registration under Section
4(2) of the Securities Act of 1933 (the "Securities Act").
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to the Delaware General Corporation Law ("DGCL"), a corporation
may indemnify any person in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than a derivative action by or in the right of such
corporation) who is or was a director, officer, employee or agent of such
corporation, or serving at the request of such corporation in such capacity for
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred in connection with such action,
suit or proceeding, if such person acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of such
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful.
II-1
<PAGE> 190
The DGCL also permits indemnification by a corporation under similar
circumstances for expenses (including attorneys' fees) actually and reasonably
incurred by such persons in connection with the defense or settlement of a
derivative action, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to such corporation unless the Court of Chancery or the court in
which such action or suit was brought shall determine upon application that
such person is fairly and reasonably entitled to indemnity for such expenses
which such court shall deem proper.
The DGCL provides that the indemnification described above shall not
be deemed exclusive of other indemnification that may be granted by a
corporation pursuant to its By-laws, disinterested directors' vote,
stockholders' vote, agreement or otherwise. The DGCL also provides corporations
with the power to purchase and maintain insurance on behalf of any person who
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request of the corporation in a similar capacity for another
corporation, partnership, joint venture, trust or other enterprise against any
liability asserted against him or her in any such capacity, or arising out of
his or her status as such, whether or not the corporation would have the power
to indemnify him or her against such liability as described above.
The Amended and Restated Certificate of Incorporation of the
Registrant provides that, to the fullest extent that the DGCL as from time to
time in effect permits the limitation or elimination of the liability of
directors, no director of the Registrant shall be personally liable to the
Registrant or its stockholders for monetary damages for breach of fiduciary
duty as a director.
The Amended and Restated Certificate of Incorporation empowers the
Registrant to indemnify any director, officer, employee or agent of the
Registrant or any other person who is serving at the Registrant's request in
any such capacity with another corporation, partnership, joint venture, trust
or other enterprise (including, without limitation, an employee benefit plan)
to the fullest extent permitted under the DGCL as from time to time in effect,
and any such indemnification may continue as to any person who has ceased to be
a director, officer, employee or agent and may inure to the benefit of the
heirs, executors and administrators of such a person.
The Amended and Restated Certificate of Incorporation also empowers
the Registrant by action of its Board of Directors, notwithstanding any
interest of the directors in the action, to purchase and maintain insurance in
such amounts as the Board of Directors deems appropriate to protect any
director, officer, employee or agent of the Registrant or any other person who
is serving at the Registrant's request in any such capacity with another
corporation, partnership, joint venture, trust or other enterprise (including,
without limitation, an employee benefit plan) against any liability asserted
against such individual or incurred by such individual in any such capacity
arising out of such individual's status as such (including, without limitation,
expenses, judgments, fines (including any excise taxes assessed on a person
with respect to any employee benefit plan) and amounts paid in settlement) to
the fullest extent permitted under the DGCL as from time to time in effect,
whether or not the Registrant would have the power or be required to indemnify
any such individual under the terms of any agreement or by-law or the DGCL.
In addition, the Registrant's By-laws require indemnification to the
fullest extent permitted under applicable law, as from time to time in effect.
The By-laws provide a clear and unconditional
II-2
<PAGE> 191
right to indemnification for expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by any
person in connection with any threatened, pending or completed investigation,
claim, action, suit or proceeding, whether civil, administrative or
investigative (including, to the extent permitted by law, any derivative
action) by reason of the fact that such person is or was serving as a director,
officer, employee or agent of the Registrant or, at the request of the
Registrant, of another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, an employee benefit plan). The
By-laws specify that the right to indemnification so provided is a contract
right, set forth certain procedural and evidentiary standards applicable to the
enforcement of a claim under the By-laws, entitle the persons to be indemnified
to be reimbursed for the expenses of prosecuting any such claim against the
Registrant and entitle them to have all expenses incurred in advance of the
final disposition of a proceeding paid by the Registrant. Such provisions,
however, are intended to be in furtherance and not in limitation of the general
right to indemnification provided in the By-laws, which right of
indemnification and of advancement of expenses is not exclusive.
The Registrant's By-laws also provide that the Registrant may enter
into contracts with any director, officer, employee or agent of the Registrant
in furtherance of the indemnification provisions in the By-laws, as well as
create a trust fund, grant a security interest or use other means (including,
without limitation, a letter of credit) to ensure payment of amounts
indemnified.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 35. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements
See F-1 of the Prospectus for an index to financial statements included as
part of the Prospectus.
II-3
<PAGE> 192
(b) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ---------------------------------------------------------------------
<S> <C>
1* Form of Underwriting Agreement between the Company, the Bank and the
Underwriters
3(a)(i) Certificate of Incorporation of the Company
3(a)(ii) Form of Certificate of Designation establishing the Series A
Preferred Shares
3(a)(iii) Form of Restated Certificate of Incorporation
3(b) Bylaws of the Company
4 Specimen of certificate representing Series A Preferred Shares
5 Opinion of Silver, Freedman & Taff, L.L.P., counsel to the Company,
relating to Series A Preferred Shares
8 Opinion of Coopers & Lybrand L.L.P., tax adviser to the Company,
relating to certain tax matters
10(a) Form of Residential Mortgage Loan Purchase and Warranties Agreement
between the Company and the Bank
10(b) Form of Commercial Mortgage Loan Purchase and Warranties Agreement
between the Company and the Bank
10(c) Form of Residential Mortgage Loan Servicing Agreement between the
Company and the Bank
10(d) Form of Commercial Mortgage Loan Servicing Agreement between the
Company and the Bank
10(e) Form of Advisory Agreement between the Company and the Bank
23(a) Consent of Coopers & Lybrand L.L.P.
23(b) Consent of Tax Advisor
23(c) Consent of Silver, Freedman & Taff, L.L.P. (included in Exhibit 5)
23(d) Consent of Honigman Miller Schwartz and Cohn
24 Powers of Attorney
</TABLE>
- ---------------
* To be filed by amendment
II-4
<PAGE> 193
ITEM 36. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the
Underwriters, at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling persons
of the Registrant pursuant to the provisions described under Item 33 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer, or controlling person of the Registrant in the successful defense of
any action, suit or proceeding), is asserted by such director, officer, or
controlling person in connection with the securities registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
For the purpose of determining any liability under the Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE> 194
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-11 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Hancock, Michigan, on the 28th day of April, 1997.
D&N CAPITAL CORPORATION
By: /s/ Peter L. Lemmer
-------------------
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
/s/ Kenneth R. Janson /s/ Peter L. Lemmer
- ---------------------------------- -------------------------------
Kenneth R. Janson Peter L. Lemmer
President, Director Secretary
(Principal Executive Officer)
April 28, 1997 April 28, 1997
- ---------------------------------- -------------------------------
Date Date
/s/ Daniel D. Greenlee /s/ Richard E. West
- ---------------------------------- -------------------------------
Daniel D. Greenlee Richard E. West
Treasurer Director
April 28, 1997 April 28, 1997
- ---------------------------------- -------------------------------
Date Date
<PAGE> 195
/s/George J. Butvilas
- ---------------------------------- -------------------------------
George J. Butvilas William McGarry
Director Director
April 28, 1997
- ---------------------------------- -------------------------------
Date Date
- ----------------------------------
James Bogan
Director
- ----------------------------------
Date
<PAGE> 196
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ---------------------------------------------------------------------
<S> <C>
1* Form of Underwriting Agreement between the Company, the Bank and the
Underwriters
3(a)(i) Certificate of Incorporation of the Company
3(a)(ii) Form of Certificate of Designation establishing the Series A
Preferred Shares
3(a)(iii) Form of Restated Certificate of Incorporation
3(b) Bylaws of the Company
4 Specimen of certificate representing Series A Preferred Shares
5 Opinion of Silver, Freedman & Taff, L.L.P., counsel to the Company,
relating to Series A Preferred Shares
8 Opinion of Coopers & Lybrand L.L.P., tax adviser to the Company,
relating to certain tax matters
10(a) Form of Residential Mortgage Loan Purchase and Warranties Agreement
between the Company and the Bank
10(b) Form of Commercial Mortgage Loan Purchase and Warranties Agreement
between the Company and the Bank
10(c) Form of Residential Mortgage Loan Servicing Agreement between the
Company and the Bank
10(d) Form of Commercial Mortgage Loan Servicing Agreement between the
Company and the Bank
10(e) Form of Advisory Agreement between the Company and the Bank
23(a) Consent of Coopers & Lybrand L.L.P.
23(b) Consent of Tax Advisor
23(c) Consent of Silver, Freedman & Taff, L.L.P. (included in Exhibit 5)
23(d) Consent of Honigman Miller Schwartz and Cohn
24 Powers of Attorney
</TABLE>
- ---------------
* To be filed by amendment
<PAGE> 1
EXHIBIT 3(a)(i)
CERTIFICATE OF INCORPORATION
OF
D&N CAPITAL CORPORATION
1. The name of the corporation is:
D&N Capital Corporation
2. The address of its registered office in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, in the city of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
3. The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of Delaware.
4. The total number of shares of stock which the corporation shall have
authority to issue is One Thousand (1,000) and the par value of each of such
shares be One Dollar ($1.00) amounting in the aggregate to One Thousand
Dollars ($1,000.00).
5. The name and mailing address of the incorporator is
James S. Fleischer, P.C.
Silver, Freedman & Taff, L.L.P.
100 New York Avenue, N.W.
Washington, D.C. 20005
6. The Board of Directors is authorized to make, alter or repeal the By-Laws of
the corporation. Election of directors need not be by written ballot.
7. No director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived
an improper personal benefit.
<PAGE> 2
THE UNDERSIGNED, being the incorporator hereinbefore named, for the purpose
of forming a corporation pursuant to the General Corporation Law of Delaware,
does make this certificate, hereby declaring and certifying that this is my
act and deed and the facts herein stated are true, and accordingly have
hereunto set my hand this 18th day of March, 1997.
/s/ James S. Fleischer
---------------------------
James S. Fleischer, P.C.
Incorporator
<PAGE> 1
EXHIBIT 3(a)(ii)
CERTIFICATE OF DESIGNATION
OF
% NONCUMULATIVE EXCHANGEABLE
PREFERRED STOCK, SERIES A
OF
D&N CAPITAL CORPORATION
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
D&N CAPITAL CORPORATION, a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), HEREBY CERTIFIES that
the following resolution was duly adopted by the Board of Directors of the
Corporation on [____________], 1997, pursuant to authority conferred upon the
Board of Directors by the provisions of the Restated Certificate of
Incorporation of the Corporation which authorizes the issuance of up to
2,500,000 shares of preferred stock, $25.00 par value per share (the "Preferred
Stock"):
RESOLVED that the issue of [1,210,000] shares of [___]% Noncumulative
Exchangeable Preferred Stock, Series A, $25.00 par value, of the
Corporation is hereby authorized and the designation, preferences,
relative, participating, optional and other special rights, and
qualifications, or restrictions of all 1,210,000 shares of this
Series, in addition to those set forth in the Restated Certificate of
Incorporation of the Corporation are hereby fixed as follows:
1. Designation. The designation of this Series shall be [___]%
Noncumulative Exchangeable Preferred Stock, Series A (hereinafter referred to
as this "Series"), and the number of shares constituting this Series shall be
[1,210,000]. Shares of this Series shall have a liquidation preference of
$25.00 per share. The number of authorized shares of this Series may be reduced
by further resolution duly adopted by the Board of Directors of the Corporation
or a duly authorized committee thereof and by the filing of a certificate
pursuant to the provisions of the General Corporation Law of the State of
Delaware stating that such reduction has been so authorized, but the number of
authorized shares of this Series shall not be increased.
2. Dividends.
(a) For each quarterly dividend period (a "Dividend Period")
dividends payable on each share of this Series shall be
payable at a rate of [___]% per annum of the liquidation
preference per share divided by four. Each Dividend Period
shall commence on the January 1, April 1, July 1 and October 1
following the last day of the preceding Dividend Period and
shall end on and include the day next
<PAGE> 2
preceding the first day of the next Dividend Period.
Dividends are noncumulative and shall be payable, when, as,
and if, declared by the Board of Directors or by a duly
authorized committee thereof, on March 31, June 30, September
30 and December 31 of each year, commencing on [JUNE 30,
1997]. Each such dividend shall be paid to the holders of
record of shares of this Series as they appear on the stock
register of the Corporation on such record date, not exceeding
45 days preceding the payment date thereof, as shall be fixed
by the Board of Directors of the Corporation or by a duly
authorized committee thereof.
(b) Dividends payable on this Series for any Dividend Period less
than a full Dividend Period, shall be computed on the basis of
a 360-day year consisting of twelve 30-day months and the
actual number of days elapsed in the period.
(c) Dividends shall be noncumulative. If the Board of Directors of
the Corporation fails to declare a dividend on the Preferred
Stock for a Dividend Period, then holders of the Preferred
Stock will have no right to receive a dividend for that
Dividend Period, and the Corporation will have no obligation
to pay a dividend for that Dividend Period, whether or not
dividends are declared and paid for any future Dividend Period
with respect to either the Preferred Stock or the common
stock, par value $300.00 per share, of the Corporation (the
"Common Stock").
(d) If full dividends on the Preferred Stock for any Dividend
Period shall not have been declared and paid, or declared and
a sum sufficient for the payment thereof shall not have been
set apart for such payments, no dividends shall be declared or
paid or set aside for payment and no other distribution shall
be declared or made or set aside for payment upon the Common
Stock or any other capital stock of the Corporation ranking
junior to or on a parity with the Preferred Stock as to
dividends or amounts upon liquidation, nor shall any Common
Stock or any other capital stock of the Corporation ranking
junior to or on a parity with the Preferred Stock as to
dividends or amounts upon liquidation be redeemed, purchased
or otherwise acquired for any consideration (or any monies to
be paid to or made available for a sinking fund for the
redemption of any such stock) by the Corporation (except by
conversion into or exchange for other capital stock of the
Corporation ranking junior to the Preferred Stock as to
dividends and amounts upon liquidation), until such time as
dividends on all outstanding Preferred Stock have been (i)
declared and paid or declared and a sum sufficient for the
payment thereof has been set apart for payment for three
consecutive dividend periods and (ii) declared and paid or
declared and a sum sufficient for the payment thereof has been
set apart for payment for the fourth consecutive Dividend
Period. Notwithstanding the above, nothing in this
subparagraph shall prevent the Corporation from treating an
amount consented to by the holder of the Common Stock under
the provisions of section 565 of the Internal Revenue Code of
1986, as amended (the "Code"), as a dividend for purposes of
the dividends paid deduction under section 561 of the Code.
2
<PAGE> 3
(e) When dividends are not paid in full (or a sum sufficient for
such full payment is not set apart) upon the Preferred Stock
and the shares of any other series of capital stock ranking on
a parity as to dividends with the Preferred Stock, all
dividends declared upon the Preferred Stock and any other
series of capital stock ranking on a parity as to dividends
with the Preferred Stock shall be declared pro rata so that
the amount of dividends declared per share on the Preferred
Stock and such other series of capital stock shall in all
cases bear to each other the same ratio that full dividends,
for the then-current Dividend Period, per share on the
Preferred Stock (which shall not include any accumulation in
respect of unpaid dividends for prior Dividend Periods) and
full dividends, including required or permitted accumulations,
if any, on such other series of capital stock bear to each
other.
(f) Holders of the Preferred Stock shall not be entitled to any
dividend, whether payable in cash, property or stock, in
excess of full dividends, as herein provided, on the Preferred
Stock. No interest, or sum of money in lieu of interest, shall
be payable in respect of any dividend payment or payments on
the Preferred Stock which may be in arrears.
3. Redemption.
(a) The shares of this Series are not redeemable prior to
[________], 2002, except upon the occurrence of a Tax Event
(as defined in paragraph (b) below). The Corporation, at its
option, may redeem shares of this Series, as a whole or in
part, at any time or from time to time, on or after [_______],
2002, at a redemption price of $25.00 per share, plus the
accrued and unpaid dividends for the most recent quarter
thereon to the date fixed for redemption.
(b) The Corporation will have the right, at any time upon the
occurrence of a Tax Event and with the prior written approval
of the OTS, to redeem the shares of this Series, in whole, but
not in part, at a redemption price of $25.00 per share, plus
the accrued and unpaid dividends for the most recent quarter
to the date fixed for redemption. "Tax Event" means the
receipt by the Corporation of an opinion of a nationally
recognized law or accounting firm experienced in such matters
to the effect that, as a result of (i) any amendment to,
clarification of, or change (including any announced
prospective change) in, the laws or treaties (or any
regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein affecting
taxation, (ii) any judicial decision, official administrative
pronouncement, published or private ruling, regulatory
procedure, notice or announcement (including any notice or
announcement of intent to adopt such procedures or
regulations) ("Administrative Action") or (iii) any amendment
to, clarification of, or change in the official position or
the interpretation of such Administrative Action or any
interpretation or pronouncement that provides for a position
with respect to such Administrative Action that differs from
the theretofore generally accepted position, in each case, by
any legislative body, court, governmental authority or
regulatory body, irrespective of the manner in which
3
<PAGE> 4
such amendment, clarification or change is made known, which
amendment, clarification, or change is effective or such
pronouncement or decision is announced on or after the date of
issuance of the shares of this Series, there is more than an
insubstantial risk that (a) dividends paid or to be paid by
the Corporation with respect to the Common Stock and Preferred
Stock of the Corporation are not, or will not be, fully
deductible by the Corporation for United States federal income
tax purposes or (b) the Corporation is, or will be, subject to
more than a de minimis amount of other taxes, duties or other
governmental charges.
(c) In the event that fewer than all the outstanding shares of
this Series are to be redeemed, the number of shares to be
redeemed shall be determined by the Board of Directors of the
Corporation or a duly authorized committee thereof and the
shares to be redeemed shall be determined by lot or pro rata
as may be determined by the Board of Directors of the
Corporation or such duly authorized committee thereof or by
any other method as may be determined by the Board of
Directors of the Corporation or such duly authorized committee
thereof in its sole discretion to be equitable, provided that
such method satisfies any applicable requirements of the
Nasdaq System on which this Series is listed.
(d) In the event the Corporation shall redeem shares of this
Series, notice of such redemption shall be given by first
class mail, postage prepaid, mailed not less than 30 or more
than 60 days prior to the redemption date, to each holder of
record of the shares to be redeemed, at such holder's address
as the same appears on the stock register of the Corporation.
Each such notice shall state: (i) the redemption date; (ii)
the number of shares of this Series to be redeemed and, if
fewer than all the shares held by such holder are to be
redeemed, the number of such shares to be redeemed from such
holder; (iii) the redemption price; (iv) the place or places
where certificates for such shares are to be surrendered for
payment of the redemption price; and (v) that quarterly
dividends on the shares to be redeemed will cease to accrue on
the redemption date.
(e) Notice having been mailed as aforesaid, from and after the
redemption date (unless default shall be made by the
Corporation in providing money for the payment of the
redemption price) quarterly dividends on the shares of this
Series so called for redemption shall cease to accrue, and
said shares shall no longer be deemed to be outstanding, and
all rights of the holders thereof as stockholders of the
Corporation (except the right to receive from the Corporation
the redemption price) shall cease. Upon surrender in
accordance with said notice of the certificates for any shares
so redeemed (properly endorsed or assigned for transfer, if
the Board of Directors of the Corporation or a duly authorized
committee thereof shall so require and the notice shall so
state), such shares shall be redeemed by the Corporation at
the redemption price aforesaid. In case fewer than all the
shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares
without cost to the holder thereof.
4
<PAGE> 5
(f) Any shares of this Series which shall at any time have been
redeemed shall, after such redemption, have the status of
authorized but unissued shares of Preferred Stock, without
designation as to series until such shares are once more
designated as part of a particular series by the Board of
Directors of the Corporation or a duly authorized committee
thereof.
(g) Notwithstanding the foregoing provisions of this Section 3,
unless full dividends on the Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof has been set apart for payment
for the then-current Dividend Period, no shares of this Series
shall be redeemed unless all outstanding shares of this Series
are simultaneously redeemed, and the Corporation shall not
purchase or otherwise acquire any shares of this Series;
provided, however, that the foregoing shall not prevent the
purchase or acquisition of shares of this Series pursuant to a
purchase or exchange offer made on the same terms to holders of
all outstanding shares of this Series.
4. Automatic Exchange.
(a) Subject to the terms and conditions of this Section 4, each
share of Preferred Stock will be exchanged automatically (the
"Automatic Exchange") for one share of [___]% Noncumulative
Preferred Stock, Series A, $25.00 par value per share (a "Bank
Preferred Share"), of D&N Bank (the "Bank"). The issuance of the
Bank Preferred Shares has been duly authorized by the board of
directors of the Bank. Prior to or contemporaneously with the
filing of this Certificate of Designation with the Delaware
Division of Corporations, the Bank shall file with the OTS a
Certificate of Designation establishing the Bank Preferred
Shares. The preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends,
qualifications, and terms and conditions of the Bank Preferred
Shares shall be substantially identical to the preferences,
conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, and terms and
conditions of the Preferred Stock established by this
Certificate of Designation.
(b) The Automatic Exchange will occur only if the appropriate
regulatory agency directs in writing (a "Directive") an exchange
of the Preferred Stock for Bank Preferred Shares because (i) the
Bank becomes "undercapitalized" under prompt corrective action
regulations, (ii) the Bank is placed into conservatorship or
receivership or (iii) the appropriate regulatory agency, in its
sole discretion, anticipates the Bank's becoming
"undercapitalized" in the near term (the "Exchange Event").
(c) Upon the Exchange Event, each holder of the Preferred Stock
shall be unconditionally obligated to surrender to the Bank the
certificates representing each share of the Preferred Stock of
such holder, and the Bank shall be unconditionally obligated to
issue to such holder in exchange for each share of Preferred
Stock a certificate representing one Bank Preferred Share.
5
<PAGE> 6
(d) The Automatic Exchange shall occur as of 8:00 a.m. Eastern
Time on the date for such exchange set forth in the Directive,
or, if such date is not set forth in the Directive, as of 8:00
a.m. on the earliest possible date such exchange could occur
consistent with the Directive (the "Time of Exchange"), as
evidenced by the issuance by the Bank of a press release. As of
the Time of Exchange, all of the Preferred Stock required to be
exchanged will be deemed canceled without any further action by
the Corporation, all rights of the holders of the Preferred Stock
as stockholders of the Corporation shall cease, and such persons
shall thereupon and thereafter be deemed to be and shall be for
all purposes the holders of Bank Preferred Shares. Notice of the
occurrence of the Exchange Event shall be given by first-class
mail, postage prepaid, mailed within 30 days of such event, to
each holder of record of the Preferred Stock, at such holder's
address as the same appears on the stock register of the
Corporation. Each such notice shall indicate the place or places
where certificates for the Preferred Stock are to be surrendered
by the holders thereof, and the Bank shall deliver to each such
holder certificates for Bank Preferred Shares upon surrender of
certificates for the Preferred Stock. Until such replacement
stock certificates are delivered (or in the event such
replacement certificates are not delivered), certificates
previously representing the Preferred Stock shall be deemed for
all purposes to represent Bank Preferred Shares.
(e) Any Preferred Stock purchased or redeemed by the Corporation
in accordance with Section 3 hereof prior to the Time of Exchange
shall not be deemed outstanding and shall not be subject to the
Automatic Exchange. In the event of the Automatic Exchange, any
accrued and unpaid dividends for the most recent quarter on the
Preferred Stock as of the Time of Exchange would be deemed to
be accrued and unpaid dividends on the Bank Preferred Shares.
5. Conversion. The holders of shares of this Series shall not
have any rights to convert such shares into shares of any other class or series
of capital stock of the Corporation.
6. Liquidation Rights.
(a) Upon the voluntary or involuntary dissolution, liquidation or
winding up of the Corporation, the holders of the shares of this
Series shall be entitled to be paid or have funds set aside for
such payment out of the assets of the Corporation available for
distribution to its stockholders, before any payment or
distribution shall be made on the Common Stock or on any other
class of stock ranking junior to this Series upon liquidation,
the amount of $25.00 per share, plus accrued and unpaid
dividends for the most recent quarter thereon.
(b) After the payment to the holders of the shares of this Series
of the full preferential amounts provided for in this Section 6,
the holders of this Series as such shall have no right or claim
to any of the remaining assets of the Corporation.
6
<PAGE> 7
(c) If, upon any voluntary or involuntary dissolution,
liquidation, or winding up of the Corporation, the amounts
payable with respect to the stated value of the shares of this
Series and any other shares of stock of the Corporation
ranking as to any such distribution on a parity with the
shares of this Series are not paid in full, the holders of the
shares of this Series and of such other shares will share
ratably in any such distribution of assets of the Corporation
in proportion to the full respective liquidating distributions
to which they are entitled.
(d) Neither the sale of all or substantially all the
property or business of the Corporation, nor the
merger or consolidation of the Corporation into or
with any other corporation or the merger or
consolidation of any other corporation into or with
the Corporation, shall be deemed to be a dissolution,
liquidation or winding up, voluntary or involuntary,
for the purposes of this Section 6.
(e) Upon the dissolution, liquidation or winding up of the
Corporation, the holders of shares of this Series then
outstanding shall be entitled to be paid out of the assets of
the Corporation available for distribution to its stockholders
all amounts to which such holders are entitled pursuant to
paragraph (a) of this Section 6 before any payment shall be
made to the holder of any class of capital stock of the
Corporation ranking junior to this Series upon liquidation.
7. Ranking. For purposes of this resolution, any stock of any
class or classes of the Corporation shall be deemed to rank:
(a) prior to the shares of this Series, either as to dividends or
upon liquidation, if the holders of such class or classes
shall be entitled to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of
the Corporation, as the case may be, in preference or priority
to the holders of shares of this Series;
(b) on a parity with shares of this Series, either as to dividends
or upon liquidation, whether or not the dividend rates,
dividend payment dates or redemption or liquidation prices per
share or sinking fund provisions, if any, be different from
those of this Series, if the holders of such stock shall be
entitled to the receipt of dividends or of amounts
distributable upon dissolution, liquidation or winding up of
the Corporation, as the case may be, without preference or
priority, one over the other, as between the holders of such
stock and the holders of shares of this Series; and
(c) junior to shares of this Series, either as to dividends or
upon liquidation, if such class shall be Common Stock or if
the holders of shares of this Series shall be entitled to
receipt of dividends or of amounts distributable upon
dissolution, liquidation or winding up of the Corporation, as
the case may be, in preference or priority to the holders of
shares of such class or classes.
7
<PAGE> 8
8. Voting Rights. The shares of this Series shall not have any
voting powers either general or special, except that:
(a) If at the time of any annual meeting of the Corporation's
stockholders for the election of directors there is a default
in preference dividends on the Preferred Stock, the number of
directors constituting the Board of Directors of the
Corporation shall be increased by two (if not already
increased by two due to a default in preference dividends),
and the holders of the Preferred Stock of all series (whether
or not the holders of such series of Preferred Stock would be
entitled to vote for the election of directors if such default
in preference dividends did not exist), shall have the right
at such meeting, voting together as a single class without
regard to series, to the exclusion of the holders of Common
Stock, to elect two additional directors of the Corporation to
fill such newly created directorships. Each director elected
by the holders of shares of the Preferred Stock (a "Preferred
Director") shall continue to serve as such director until the
later of: (i) the full term for which he shall have been
elected or (ii) the payment of four consecutive quarterly
dividends on the Preferred Stock. So long as a default in any
preference dividends on the Preferred Stock shall exist, any
vacancy in the office of a Preferred Director may be filled by
an instrument in writing signed by the remaining Preferred
Director and filed with the Corporation. Each director
appointed as aforesaid by the remaining Preferred Director
shall be deemed, for all purposes hereof, to be a Preferred
Director. Whenever the term of office of the Preferred
Directors shall end and a default in preference dividends
shall no longer exist, the number of directors constituting
the Board of Directors shall be reduced by two. For the
purposes hereof, a "default in preference dividends" on the
Preferred Stock shall be deemed to have occurred whenever the
Corporation has failed to pay or declare and set aside for
payment a quarterly dividend during any of the four preceding
quarterly dividend periods on all shares of Preferred Stock of
any series then outstanding; and
(b) Without the consent of the holders of shares entitled to cast
at least 66- 2/3% of the votes entitled to be cast by the
holders of the total number of shares of Preferred Stock then
outstanding, voting together as a single class without regard
to series, the holders of shares of this series being entitled
to cast one vote per share thereon, the Corporation may not:
(i) create any class or series of stock which shall have
preference as to dividends or distribution of assets
over any outstanding series of Preferred Stock other
than a series which shall not have any right to
object to such creation; or
(ii) alter or change the provisions of the Corporation's
Restated Certificate of Incorporation (including this
Certification of Designation) so as to adversely
affect the voting powers, preferences or special
rights of the holders of Preferred Stock; provided,
however, that if such creation or such
8
<PAGE> 9
alteration or change would adversely affect the
voting power, preferences or special rights of one or
more, but not all, series of Preferred Stock at the
time outstanding, consent of the holders of shares
entitled to cast at least 66-2/3% of the votes
entitled to be cast by the holders of all of the
shares of all such series so affected, voting
together as a single class, shall be required in lieu
of the consent of the holders of shares entitled to
cast at least 66-2/3% of the votes entitled to be
cast by the holders of the total number of shares of
Preferred Stock at the time outstanding.
9. Approval of Independent Directors.
(a) For so long as any shares of this Series are outstanding, the
Corporation may not take the following actions without first
obtaining the approval of a majority of the Independent
Directors. "Independent Director" means any director of the
Corporation who is either (i) not a current director (except a
Preferred Director), officer or employee of the Corporation,
D&N Financial Corporation, D&N Bank (the "Bank") or any
affiliate of the Bank; (ii) the owner of not more than one
percent of the outstanding common stock of D&N Financial
Corporation; or (iii) a Preferred Director. The actions which
require the prior approval of a majority of the Independent
Directors include:
(i) the issuance of a series of Preferred Stock on a
parity with the shares of this Series;
(ii) the incurrence of debt for borrowed money in
excess of 20% of the aggregate amount of net
proceeds received in connection with the issuance
of any Preferred Stock and Common Stock;
(iii) the modification of the general distribution policy
or the declaration of any distribution in respect of
Common Stock for any year if, after taking into
account any such proposed distribution, total
distributions on the shares of this Series and on the
Common Stock would exceed an amount equal to the sum
of 105% of the Corporation's "REIT taxable income"
(excluding capital gains) for such year plus net
capital gains of the Corporation for that year;
(iv) the acquisition of real estate assets other than
mortgage loans or mortgage securities
representing interests in or obligations backed
by pools of mortgage loans that (A) qualify as
real estate assets under Section 856(c)(6)(B) of
the Code, (B) are rated investment grade or
better by at least one nationally recognized
independent rating organization, (C) are not
interest-only, principal-only or high-risk
securities and (D) represent interests in or
obligations backed by pools of mortgage loans;
(v) the redemption of any shares of Common Stock;
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(vi) the termination or material modification of, or
election not to renew, the Advisory Agreement, dated
[_______], 1997, between the Corporation and the Bank
or any servicing agreement entered into in connection
with the purchase of mortgage loans, the subcontracting
of any duties under the Advisory Agreement or any
servicing agreement to persons who are not affiliates
of the Bank;
(vii) any dissolution, liquidation or termination of the
Corporation prior to [_____________], 2002;
(viii) any material amendment to or modification of any
agreements pursuant to which the Corporation purchases
its real estate mortgage assets; and
(ix) the determination to revoke the Corporation's status
as a real estate investment trust ("REIT").
(b) In assessing the benefits to the Corporation of any proposed
action requiring their consent, the Independent Directors shall
take into account the interests of holders of both the Common
Stock and the Preferred Stock, including, without limitation, the
holders of shares of this Series. In considering the interests
of the holders of the Preferred Stock, including without
limitation holders of shares of this Series, the Independent
Directors shall owe the same duties which the Independent
Directors owe to holders of Common Stock.
10. Status as a Reporting Company. For so long as any shares of this
Series are outstanding, the Corporation shall comply with the reporting
requirements of the Securities Exchange Act of 1934, as amended.
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<PAGE> 1
EXHIBIT 3(a)(iii)
FORM OF
RESTATED CERTIFICATE OF INCORPORATION
OF
D&N CAPITAL CORPORATION
UNDER SECTION 245
OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
1. NAME
The name of the Corporation is D&N CAPITAL CORPORATION.
2. REGISTERED OFFICE AND AGENT
The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801. The name of its registered agent at such address is The
Corporation Trust Company.
3. PURPOSE
The nature of the business or purpose to be conducted or promoted is
to engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware. The Corporation
shall possess and may exercise all powers and privileges necessary or
convenient to effect the foregoing purpose.
4. CAPITAL STOCK
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is TWO MILLION SEVEN HUNDRED AND
FIFTY THOUSAND, of which TWO MILLION FIVE HUNDRED THOUSAND shares shall be
shares of preferred stock of the par value of $25.00 per share (hereinafter
called "Preferred Stock") and TWO HUNDRED AND FIFTY THOUSAND shares shall be
shares of common stock of the par value of $300.00 per share (hereinafter
called "Common Stock").
Any amendment to this Certificate of Incorporation which shall
increase or decrease the authorized capital stock of the Corporation may be
adopted by the affirmative vote of the holders
<PAGE> 2
of capital stock representing not less than a majority of the voting power
represented by the outstanding shares of capital stock of the Corporation
entitled to vote.
4.1 Designations, Powers, Preferences, Qualifications and Limitations.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions thereof, of the Preferred Stock
shall be as follows:
The Board of Directors is expressly authorized at any time,
and from time to time, to provide for the issuance of shares
of Preferred Stock in one or more class or series, with such
voting powers, full or limited but not to exceed one vote per
share, or without voting powers and with such designations,
preferences and relative, participating, optional or other
special rights, and qualifications, or restrictions thereof,
as shall be stated and expressed in the resolution or
resolutions providing for the issue thereof adopted by the
Board of Directors, and as are not stated and expressed in
this Certificate of Incorporation, or any amendment thereto,
including (but without limiting the generality of the
foregoing) the following:
(a) the designation of such class or series;
(b) the dividend rate or rates of such class or series
and/or the methods of determining dividends, the
conditions and dates upon which such dividends shall
be payable, the preference or relation which such
dividends shall bear to the dividends payable on any
other class or classes or on any other series of any
class or classes of capital stock, and whether such
dividends shall be cumulative or non-cumulative;
(c) whether the shares of such class or series shall be
subject to redemption by the Corporation, and, if
made subject to such redemption, the times, prices
and other terms and conditions of such redemption;
(d) the terms and amount of any sinking fund provided for
the purchase or redemption of the shares of such
class or series;
(e) whether or not the shares of such class or series
shall be convertible into or exchangeable for shares
of any other class or classes or of any other series
of any class or classes of capital stock of the
Corporation or affiliate of the Corporation, and, if
provision be made for conversion or exchange, the
times, prices, rates, adjustments and other terms and
conditions of such conversion or exchange;
(f) the extent, if any, to which the holders of the
shares of such class or series shall be entitled to
vote as a class or otherwise with respect to the
election of the directors or otherwise; provided,
however, that in no event shall any
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<PAGE> 3
holder of any class or series of Preferred Stock be
entitled to more than one vote for each share of such
Preferred Stock held by it;
(g) the restrictions, if any, on the issue or reissue of
any additional Preferred Stock;
(h) the liquidation preference of such class or series
and other rights of the holders of the shares of such
class or series upon the dissolution of, or upon the
distribution of assets of, the Corporation;
(i) whether or not (a) warrants for such class or series
or (b) depositary shares evidenced by depositary
receipts, each representing a fraction (as determined
by the Board of Directors) of a share of such class
or series, shares of which class or series will be
issued and deposited with a depositary, shall be
issued, in each case, in lieu of offering full shares
of such class of series; and
(j) whether or not warrants for Preferred Stock,
depositary shares or Common Stock shall be issued,
whether alone or in connection with any other class
or series, and the terms and conditions of any such
warrants.
4.2 Voting Power/Limits Thereto.
Except as otherwise required by law and except for such voting powers
with respect to the election of directors or other matters as may be stated in
the resolutions of the Board of Directors, or duly authorized committee
thereof, creating any class or series of Preferred Stock, the holders of any
such class or series shall have no voting power whatsoever.
5. BY-LAWS
The Board of Directors is authorized to make, alter, amend or repeal
the by-laws of the Corporation. The books of the Corporation (subject to the
provisions of the laws of the State of Delaware) may be kept outside of the
State of Delaware at such places as from time to time may be designated by the
Board of Directors. Election of directors need not be by written ballot.
6. LIABILITY OF DIRECTORS
6.1 Liability.
To the fullest extent that the General Corporation Law of the State of
Delaware as it exists on the date hereof or as it may hereafter be amended
permits the limitation or elimination of the liability of directors, no
director of the Corporation shall be personally liable to the Corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director.
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<PAGE> 4
6.2 Indemnification.
The Corporation shall have the power to indemnify any director,
officer, employee or agent of the Corporation or any other person who is
serving at the request of the Corporation in any such capacity with another
corporation, partnership, joint venture, trust or other enterprise (including,
without limitation, any employee benefit plan) to the fullest extent permitted
by the General Corporation Law of the State of Delaware as it exists on the
date hereof or as it may hereafter be amended, and any such indemnification may
continue as to any person who has ceased to be a director, officer, employee or
agent and may inure to the benefit of the heirs, executors and administrators
of such a person.
6.3 Insurance.
By action of its Board of Directors, notwithstanding any interest of
the directors in such action, the Corporation may purchase and maintain
insurance, in such amounts as the Board of Directors deems appropriate, to
protect any director, officer, employee or agent of the Corporation or any
other person who is serving at the request of the Corporation in any such
capacity with another corporation, partnership, joint venture, trust or other
enterprise (including, without limitation, any employee benefit plan) against
any liability asserted against such person or incurred by such person in any
such capacity or arising out of such person's status as such (including,
without limitation, expenses, judgments, fines and amounts paid in settlement)
to the fullest extent permitted by the General Corporation Law of the State of
Delaware as it exists on the date hereof or as it may hereafter be amended, and
whether or not the Corporation would have the power or would be required to
indemnify any such person under the terms of any agreement or by-law or the
General Corporation Law of the State of Delaware. For purposes of this
paragraph (3), "fines" shall include any excise taxes assessed on a person with
respect to any employee benefit plan.
7. RESTRICTION OF TRANSFER,
ACQUISITION AND REDEMPTION OF SHARES
7.1 Definitions.
The following terms shall have the following meanings for purposes of
this Certificate of Incorporation:
"Acquire" shall mean the acquisition of Beneficial Ownership of shares
of Preferred Stock by any means, including, without limitation, the exercise of
any rights under any option, warrant, convertible security, pledge or other
security interest or similar right to acquire shares, but shall not include the
acquisition of any such rights unless, as a result, the acquirer would be
considered a Beneficial Owner. The terms "Acquires" and "Acquisition" shall
have correlative meanings.
"Beneficial Ownership" means ownership of shares of any class or
series of Common Stock or Preferred Stock by a Person who would be treated as
an owner of such shares under Section
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<PAGE> 5
542(a)(2) of the Code either directly or constructively through the application
of Section 544 of the Code as modified by Section 856(h)(1)(B) of the Code. The
terms "Beneficial Owner," "Beneficially Own" and "Own Beneficially" shall have
correlative meanings.
"Beneficiary" means, with respect to the Trust, one or more
organizations named by the Corporation as beneficiary or beneficiaries of the
Trust in accordance with Section 7.12(a). Each such Beneficiary shall be an
organization described in Section 501(c)(3) of the Code, that is not an
"individual" within the meaning of Section 542 of the Code, contributions to
which must be eligible for deduction under each of Sections 170(b)(1)(A), 2055
and 2522 of the Code.
"Board of Directors" means the Board of Directors of the
Corporation.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, or any successor statute thereto. Reference to any provision of the
Code shall mean such provision as in effect from time to time, as the same may
be amended, and any successor thereto, as interpreted by any applicable
regulations or other administrative pronouncements as in effect from time to
time.
"Excess Shares" has the meaning set forth in Section 7.3.
"Individual" shall mean a natural person or any entity considered an
individual for purposes of Section 542(a)(2) of the Code.
"Initial Public Offering" means the sale of shares of Preferred Stock
to the public pursuant to the Corporation's first effective registration
statement for such Preferred Stock filed under the Securities Act of 1933, as
amended.
"Market Price", with respect to any class or series of Preferred
Stock, on any date means the Closing Price on the Trading Day immediately
preceding such date of such class or series of Preferred Stock. The "Closing
Price", with respect to any class or series of Preferred Stock, on any date
shall mean the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on
the NYSE or, if such class or series of Preferred Stock is not then listed or
admitted to trading on the NYSE, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the principal
national securities exchange on which such class or series of Preferred Stock
is listed or admitted to trading or, if such class or series of Preferred Stock
is not listed or admitted to trading on any national securities exchange, the
last quoted price, or if not so quoted, the average of the high bid and low
asked prices in the over-the-counter market, as reported by the Nasdaq System
or, if such system is no longer in use, the principal other automated
quotations system that may then be in use or, if such class or series of
Preferred Stock is not quoted by any such organization, the average of the
closing bid and asked prices as furnished by a professional market maker making
a market in such class or series of Preferred Stock selected by the Board of
Directors of the Corporation, or, if there is no such market maker or such
closing prices otherwise are not available, the fair market value of the
affected series of
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<PAGE> 6
Preferred Stock as of such day, as determined by the Board of Directors, in its
discretion. "Trading Day" means a day on which the principal national
securities exchange on which the relevant class or series of Preferred Stock is
listed or admitted to trading is open for the transaction of business or, if
the relevant class or series of Preferred Stock is not listed or admitted to
trading on any national securities exchange, shall mean any day other than a
Saturday, a Sunday or a day on which banking institutions in the State of
Michigan are authorized or obligated by law or executive order to close.
"Non-Transfer Event" means any event other than a purported Transfer
that would cause (i) any Person to Own Beneficially shares of Preferred Stock
in excess of the Ownership Limit, (ii) the Corporation to become "closely held"
within the meaning of Section 856(h) of the Code, and/or (iii) the Corporation
to otherwise fail to qualify as a REIT (other than as a result of a violation
of the "100-shareholder" requirement of Section 856(a)(5) of the Code), in each
case including, but not limited to, the granting of any option or entering into
any agreement for the sale, transfer or other disposition of shares of
Preferred Stock or the sale, transfer, assignment or other disposition of any
securities or rights convertible into or exchangeable for shares of Preferred
Stock.
"Ownership Limit" means, for any Person, the Beneficial Ownership of
nine and nine-tenths percent (9.9%), in number of shares or value, of the
outstanding shares of any class or series of Preferred Stock of the
Corporation. The value of the outstanding shares of any class or series of
Preferred Stock of the Corporation shall be determined by the Board of
Directors in good faith, which determination shall be conclusive for all
purposes hereof.
"Permitted Transferee" means any Person designated as a Permitted
Transferee in accordance with the provisions of Section 7.12(e) hereof.
"Person" means (a) an individual, corporation, partnership, estate,
trust (including a trust qualified under Section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in Section 642(c) of the Code, association, private
foundation within the meaning of Section 509(a) of the Code, joint stock
company, limited liability company or other entity and (b) also includes a
group as that term is used for purposes of Section 13(d)(3) of the Securities
Exchange Act of 1934, as amended; but does not include an underwriter which
participated in a public offering of Preferred Stock for a period of sixty (60)
days following the purchase by such underwriter of such Preferred Stock
therein, provided that the foregoing exclusion shall apply only if the
ownership of such Preferred Stock by an underwriter or underwriters
participating in a public offering would not cause the Corporation to fail to
qualify as a REIT by reason of being "closely held" within the meaning of
Section 856(a) of the Code or otherwise cause the Corporation to fail to
qualify as a REIT.
"Prohibited Owner" means, with respect to any purported Transfer or
Non-Transfer Event, any Person who, except for the provisions of Section 7.3,
would Beneficially Own shares of Preferred Stock.
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<PAGE> 7
"REIT" means a Real Estate Investment Trust defined in Sections 856
through 860 of the Code.
"Restriction Termination Date" means the first day after the date of
the Initial Public Offering on which the Board of Directors determines that it
is no longer in the best interests of the Corporation to attempt to, or
continue to, qualify as a REIT.
"Transfer" means any sale, transfer, gift, hypothecation, assignment,
devise or other disposition of a direct or indirect interest in any shares of
Common Stock or Preferred Stock or the right to vote or receive dividends on
such Common Stock or Preferred Stock (including (i) the granting of any option
(including, but not limited to, an option to acquire an option or any series of
such options) or entering into any agreement for the sale, transfer or other
disposition of Common Stock or Preferred Stock or the right to vote or receive
dividends on such Common Stock or Preferred Stock or (ii) the sale, transfer,
assignment or other disposition of any securities or rights convertible into or
exchangeable for Common Stock or Preferred Stock or the exercise of such
rights), whether voluntary or involuntary, whether of record or beneficially,
and whether by operation of law or otherwise (including, but not limited to,
any transfer of an interest in other entities which results in a change in the
Beneficial Ownership of shares of Common Stock or Preferred Stock). The terms
"Transfers," "Transferred" and "Transferable" shall have correlative meanings.
"Trust" means the trust created pursuant to Section 7.12.
"Trustee" means any Person or entity unaffiliated with both the
Corporation and any Prohibited Owner who is designated by the Corporation to
act as trustee of the Trust, and any successor trustee appointed by the
Corporation.
7.2 Restriction on Ownership and Transfers.
(a) Except as provided in Section 7.9, from and after the
date of the Initial Public Offering and prior to the
Restriction Termination Date, no Person shall
Beneficially Own shares of any class or series of
Preferred Stock in excess of the Ownership Limit.
(b) Except as provided in Section 7.9, and subject to the
provisions of Section 7.13, from and after the date
of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer or other
event that, if effective, would result in any Person
Beneficially Owning shares of any class or series of
Preferred Stock in excess of the Ownership Limit
shall be void ab initio as to the Transfer of such
shares of Preferred Stock which would be otherwise
Beneficially Owned by such Person in excess of the
Ownership Limit, and the intended transferee shall
acquire no rights in such shares of Preferred Stock.
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<PAGE> 8
(c) Subject to the provisions of Section 7.13, from and
after the date of the Initial Public Offering and
prior to the Restriction Termination Date, any
Transfer that, if effective, would result in the
outstanding Common Stock and Preferred Stock being
Beneficially Owned by less than 100 Persons
(determined without reference to any rules of
attribution) shall be void ab initio, and the
intended transferee shall acquire no rights in such
shares of Common Stock or Preferred Stock.
(d) Notwithstanding any other provision herein, subject
to the provisions of Section 7.13, from and after the
date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer that, if
effective, would result in the Corporation being
"closely held" within the meaning of Section 856(h)
of the Code shall be void ab initio as to the
Transfer of that number of shares of Common Stock or
Preferred Stock, as the case may be, that would cause
the Corporation to be "closely held" within the
meaning of Section 856(h) of the Code; and the
intended transferee shall acquire no rights in such
shares of Common Stock or Preferred Stock, as the
case may be.
(e) Notwithstanding any other provision herein, subject
to the provisions of Section 7.13, from and after the
date of the Initial Public Offering and prior to the
Restriction Termination Date, any Transfer that, if
effective, would cause the Corporation to fail to
qualify as a REIT shall be void ab initio as to the
Transfer of that number of shares of Common Stock or
Preferred Stock, as the case may be, in excess of the
number that could have been Transferred without such
result; and the intended transferee shall acquire no
rights in such shares of Common Stock or Preferred
Stock, as the case may be.
(f) A Transfer of a share of Common Stock or Preferred
Stock which is null and void under paragraphs (b),
(c), (d) or (e) of this Section 7.2 shall not
adversely affect the validity of the Transfer of any
other share of Common Stock or Preferred Stock in the
same or any other related transaction.
7.3 Transfer in Trust.
(a) If, notwithstanding the other provisions contained in
this Article 7, at any time from and after the date
of the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event such that any Person
would Own Beneficially shares of any class or series
of Preferred Stock in excess of the Ownership Limit,
then (i) except as otherwise provided in Section 7.9,
the Prohibited Owner shall acquire no right or
interest (or, in the case of a Non-Transfer Event,
shall cease to own any right or interest) in such
number of shares of such class or series of Preferred
Stock that would cause such Beneficial Owner
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<PAGE> 9
to Beneficially Own shares of such class or series of
Preferred Stock in excess of the Ownership Limit and
(ii) such number of shares of such class or series of
Preferred Stock in excess of the Ownership Limit
(rounded up to the nearest whole share) shall be
designated as Excess Shares and, in accordance with
Section 7.12, be transferred automatically and by
operation of law to the Trust for the benefit of the
Beneficiary. Such transfer to a Trust and the
designation of the shares as Excess Shares shall be
effective as of the close of business on the business
day prior to the date of the purported Transfer or
Non-Transfer Event, as the case may be.
(b) If, notwithstanding the other provisions contained in
this Article 7, at any time from and after the date
of the Initial Public Offering and prior to the
Restriction Termination Date, there is a purported
Transfer or Non-Transfer Event that, if effective,
would cause the Corporation to become "closely held"
within the meaning of Section 856(h) of the Code or
to otherwise fail to qualify as a REIT (other than as
a result of a violation of the 100-shareholder
requirement of Section 856(a)(5)), then (i) except as
otherwise provided in Section 7.9, the Prohibited
Owner shall acquire no right or interest (or, in the
case of a Non-Transfer Event, shall cease to own any
right or interest) in such number of shares of
Preferred Stock, the ownership of which by such
purported transferee or record holder would cause the
Corporation to be "closely held" within the meaning
of Section 856(h) of the Code or to otherwise fail to
qualify as a REIT (other than as a result of a
violation of the 100- shareholder requirement of
Section 856(a)(5)) and (ii) such number of shares of
Preferred Stock (rounded up to the nearest whole
share) shall be designated as Excess Shares and, in
accordance with the provisions of Section 7.12, be
transferred automatically and by operation of law to
the Trust for the benefit of the Beneficiary. Such
transfer to a Trust and the designation of shares as
Excess Shares shall be effective as of the close of
business on the business day prior to the date of the
Transfer or Non-Transfer Event, as the case may be.
7.4 Remedies for Breach
If the Board of Directors or a committee thereof shall at any time
determine in good faith that a Non-Transfer Event has occurred, a Transfer has
taken place in violation of Section 7.2 or that a Person intends to acquire or
has attempted to acquire or may acquire Beneficial Ownership of any shares of
Common Stock or Preferred Stock in violation of Section 7.2 (whether or not
such violation is intended), the Board of Directors shall be empowered to take
any action it deems advisable to refuse to give effect to or to prevent such
Transfer or Non-Transfer Event, including, but not limited to, refusing to give
effect to such Transfer or Non-Transfer Event on the books of the Corporation
or instituting proceedings to enjoin or rescind such Transfer or acquisition.
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7.5 Notice of Restricted Transfer.
Any Person who acquires or attempts to acquire shares of Common Stock
or Preferred Stock in violation of Section 7.2, or any Person who owned shares
of Preferred Stock that were transferred to a Trust pursuant to the provisions
of Section 7.3, shall immediately give written notice to the Corporation of
such event and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such
Transfer or Non-Transfer Event, as the case may be, on the Corporation's status
as a REIT. Failure to give such notice shall not in any way limit the rights
and remedies of the Board of Directors provided herein.
7.6 Owners Required to Provide Information.
From and after the date of the Initial Public Offering and prior to
the Restriction Termination Date:
(a) Every Beneficial Owner of more than 1% (or such lower
percentage as required in the applicable regulations
adopted under the Code) of any class or series of
Preferred Stock of the Corporation outstanding shall,
within 30 days after June 30 and December 31 of each
year, give written notice to the Corporation stating
the name and address of such Beneficial Owner, the
number of shares of such class or series of Preferred
Stock Beneficially Owned by such Beneficial Owner, a
full description of how shares are held and a
statement identifying the actual or constructive
owners of such shares. Each such Beneficial Owner
shall, upon demand by the Corporation, disclose to
the Corporation in writing such additional
information with respect to its Beneficial Ownership
of such class or series of Preferred Stock as the
Corporation, in its sole discretion, deems
appropriate or necessary, (i) to comply with the
provisions of the Code regarding the qualification of
the Corporation as a REIT and (ii) to ensure
compliance with the Ownership Limit.
(b) At the request of the Corporation, any Person who is
a Beneficial Owner of Common Stock or Preferred Stock
and any Person (including the shareholder of record)
who is holding Common Stock or Preferred Stock for a
Beneficial Owner, and any proposed transferee of
shares, shall provide (i) such information as the
Corporation, in its sole discretion, may request from
time to time in order (A) to determine the
Corporation's status as a REIT, (B) to ensure
compliance with the requirements of any taxing
authority or other governmental agency or (C) to
ensure compliance with the Ownership Limit and (ii) a
statement or affidavit to the Corporation setting
forth the number of shares of each class or series of
Common Stock or Preferred Stock Beneficially Owned by
such shareholder or proposed transferee and any
related Persons specified, which statement or
affidavit shall be in the form prescribed by the
Corporation for that purpose.
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7.7 Remedies Not Limited.
Nothing contained in this Article 7 shall limit the authority of the
Board of Directors to take such other action as it deems necessary or advisable
(subject to the provisions of Section 7.13) to protect the Corporation and the
interests of its shareholders in the preservation of the Corporation's status
as a REIT, and to insure compliance with the Ownership Limit.
7.8 Ambiguity.
In the case of an ambiguity in the application of any of the
provisions of Article 7, including any definition contained in Section 7.1, the
Board of Directors shall have the power to determine the application of such
provisions with respect to any situation based on its reasonable belief,
understanding or knowledge of the circumstances.
7.9 Exceptions.
(a) The Board of Directors, upon receipt of a ruling from
the Internal Revenue Service or an opinion of tax
counsel satisfactory to it, may waive the application
of the Ownership Limit, in whole or in part, to any
Person, if such Person is not an individual for
purpose of Section 542(a) of the Code and is a
corporation, partnership, estate or trust; provided,
however, in no event may the Board of Directors grant
any such exception if it would, in the Board of
Director's judgment, jeopardize the Corporation's
status as a REIT. In connection with any such
exemption, the Board of Directors may require such
representations and undertakings from such Person and
may impose such other conditions as the Board of
Directors deems necessary, in its sole discretion to
determine the effect, if any, of the proposed
Transfer on the Corporation's status as a REIT.
(b) For a period of 90 days following the acquisition of
Preferred Stock by an underwriter that (i) is a
corporation or a partnership and (ii) participates in
an offering of the Preferred Stock, such underwriter
shall not be subject to the Ownership Limit with
respect to the Preferred Stock purchased by it as a
part of such offering.
7.10 Legend.
Each certificate for Preferred Stock shall bear the following legend:
"The shares of Preferred Stock represented by this certificate
are subject to restrictions on transfer for the purpose of the
Corporation's maintenance of its status as a Real Estate Investment
Trust under the Internal Revenue Code of 1986, as amended. No Person
may (1) Beneficially Own shares of any class or series of Preferred
Stock in excess of the Ownership Limit, except as set forth in the
Corporation's Restated Certificate of
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Incorporation, as the same may be amended from time to time (the
"Certificate of Incorporation"), or (2) Beneficially Own shares of
Preferred Stock that would result in the Corporation being "closely
held" under 856(h) of the Code or otherwise to fail as a REIT. Any
Person who attempts to Own Beneficially shares of Preferred Stock in
excess of the applicable limitation must immediately notify the
Corporation in writing. No Person may transfer shares of Preferred
Stock if such transfer would result in the outstanding Common Stock
and Preferred Stock being Beneficially Owned by less than 100 Persons
(determined without reference to any rules of attribution). If the
restrictions on transfer are violated, the shares of Preferred Stock
represented hereby will be transferred automatically and by operation
of law to a Trust and shall be designated Excess Shares. All
capitalized terms in this legend have the meanings ascribed to such
terms in the Certificate of Incorporation, a copy of which, including
the restrictions on transfer, will be sent without charge to each
stockholder who so requests."
7.11 Severability.
If any provision of this Article 7 or any application of any such
provision is determined to be void, invalid or unenforceable by any Federal or
state court having jurisdiction over the issues, the validity and
enforceability of the remaining provisions of this Restated Certificate of
Incorporation (including without limitation this Article 7) shall not be
affected and other applications of such provision shall be affected only to the
extent necessary to comply with the determination of such court.
7.12 Excess Shares.
(a) Ownership in Trust. Upon any purported
Transfer, Non-Transfer Event, Acquisition,
change in the capital structure of the
Corporation or purported change in Beneficial
Ownership or event or transaction that
results in shares of Preferred Stock being
designated Excess Shares pursuant to Section
7.3, such Excess Shares shall be transferred
to a Trust for the exclusive benefit of the
Beneficiary to whom an interest in such
Excess Shares may later be transferred
pursuant to Section 7.12(e). The Corporation
shall name a Beneficiary that is an
organization described in Section 501(c)(3)
of the Code, that is not an "individual"
within the meaning of Section 542 of the
Code, if one does not already exist, within
five (5) days after the discovery of any
Transfer to the Trust. Excess Shares so held
in trust shall remain issued and outstanding
stock of the Corporation and shall be
entitled to the same rights and privileges on
identical terms and conditions as all other
issued and outstanding shares of the same
class and series. When transferred to the
Permitted Transferee in accordance with the
provisions of Section 7.12(e), such Excess
Shares shall cease to be designated as Excess
Shares.
(b) Dividend Rights. Excess Shares shall not be
entitled to any dividends or distributions
(except as provided in Paragraph (c) of this
Section 7.12).
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<PAGE> 13
Any dividend or distribution paid prior to the
discovery by the Corporation that the shares of
Preferred Stock have been exchanged for Excess Shares
shall be repaid by the original transferee to the
Corporation and by the Corporation to the trustee,
and any dividend or distribution declared but unpaid
at the time of such discovery shall be void ab initio
with respect to such Excess Shares.
(c) Rights Upon Liquidation. Except as provided below,
in the event of any voluntary or involuntary
liquidation, dissolution or winding up, or any other
distribution of the assets, of the Corporation, each
holder of Excess Shares resulting from the exchange
of Preferred Stock of any specified series shall only
be entitled to receive, ratably with each other
holder of Excess Shares resulting from the exchange
of shares of Preferred Stock of such series and each
holder of shares of Preferred Stock of such series,
the price paid by the original transferee for the
Excess Shares or, if no value was given, the price
per share equal to the closing market price on the
date of the purported transfer. The trustee of the
trust shall promptly sell the shares to any person
whose ownership is not prohibited, whereupon the
interest of the trust shall terminate. Proceeds of
the sale shall be paid to the original transferee up
to its purchase price (or, if the original transferee
did not purchase the shares, the value on its date of
acquisition) and any remaining proceeds shall be paid
to a charity to be named by the Corporation.
(d) Voting Rights. The holders of Excess Shares shall
not be entitled to vote on any matters. Any vote of
the shares while the shares were held by the original
transferee prior to the Corporation's discovery
thereof shall be void ab initio and the original
transferee shall be deemed to have given its proxy to
the trustee.
(e) Designation of Permitted Transferee. The Corporation
shall have the exclusive and absolute right to
designate a Permitted Transferee of any and all
Excess Shares. As soon as reasonably practicable, in
an orderly fashion so as not to materially adversely
affect the Market Price of the Excess Shares, the
Corporation shall designate any Person as Permitted
Transferee; provided, however, that (i) the Permitted
Transferee so designated purchases for valuable
consideration (whether in a public or private sale)
the Excess Shares and (ii) the Permitted Transferee
so designated may acquire such Excess Shares without
such acquisition resulting in a transfer to a Trust
and the redesignation of such shares of Preferred
Stock so acquired as Excess Shares under Section 7.3.
Upon the designation by the Corporation of a
Permitted Transferee in accordance with the
provisions of this paragraph, the Trustee of a Trust
shall (i) cause to be transferred to the Permitted
Transferee that number of Excess Shares acquired by
the Permitted Transferee; (ii) cause to be recorded
on the books of the
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<PAGE> 14
Corporation that the Permitted Transferee is the
holder of record of such number of shares of
Preferred Stock; and (iii) distribute to the
Beneficiary any and all amounts held with respect to
the Excess Shares after making that payment to the
Prohibited Owner pursuant to Section 7.12(f).
(f) Compensation to Record Holder of Shares that Become
Excess Shares. Any Prohibited Owner shall be
entitled (following discovery of the Excess Shares
and subsequent designation of the Permitted
Transferee in accordance with Section 7.12(e)) to
receive from the Trustee the lesser of (i) in the
case of (a) a purported Transfer in which the
Prohibited Owner gave value for shares of Preferred
Stock and which Transfer resulted in the transfer of
the shares to the Trust, the price per share, if any,
such Prohibited Owner paid for such shares, or in the
case of (b) a Non-Transfer Event or Transfer in which
the Prohibited Owner did not give value for such
shares (e.g., if the shares were received through a
gift or devise) and which Non-Transfer Event or
Transfer, as the case may be, resulted in the
transfer of shares to the Trust, the price per share
equal to the Market Price on the date of such Non-
Transfer Event or Transfer, and (ii) the price per
share received by the Trustee of the Trust from the
sale or other disposition of such Excess Shares in
accordance with Section 7.12(e). Any amounts
received by the Trustee in respect of such Excess
Shares in excess of such amounts to be paid to the
Prohibited Owner pursuant to this Section 7.12(f)
shall be distributed to the Beneficiary in accordance
with the provisions of Section 7.12(e). Each
Beneficiary and Prohibited Owner waives any and all
claims that they may have against the Trustee and the
Corporation arising out of the disposition of Excess
Shares, except for claims arising out of the gross
negligence or willful misconduct of, or any failure
to make payments in accordance with this Section 7.12
by, such Trustee or the Corporation.
(g) Purchase Right in Excess Shares. Excess Shares shall
be deemed to have been offered for sale to the
Corporation, or its designee, at a price per share
equal to the lesser of (i) the price per share in the
transaction that created such Excess Shares (or, in
the case of a devise or gift, the Market Price on the
date of such devise or gift) and (ii) the Market
Price on the date the Corporation, or its designee,
accepts such offer. The Corporation shall have the
right to accept such offer for a period of ninety
days after the later of (i) the date of the Transfer
which resulted in such Excess Shares and (ii) the
date the Board of Directors determines in good faith
that a Transfer resulting in Excess Shares has
occurred.
7.13 Settlement.
Notwithstanding any provision contained herein to the contrary,
nothing in this Certificate of Incorporation shall preclude the settlement of
any transaction with respect to any class or series of Preferred Stock entered
into through facilities of the Nasdaq System.
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<PAGE> 15
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Restated Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation, which
restates, integrates and amends the provisions of the Corporation's Certificate
of Incorporation, originally filed on March 18, 1997 in the office of the
Secretary of State of Delaware, having been duly adopted by the Board of
Directors and the Stockholders of the Corporation in accordance with the
provisions of Sections 242 and 245 of the General Corporation Law of Delaware,
has been executed this ____ day of ____________, 1997.
D&N CAPITAL CORPORATION
By:_____________________________________
Name:
Title:
[CORPORATE SEAL]
Attest: ____________________________
Name:
Title:
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<PAGE> 1
EXHIBIT 3(b)
D&N CAPITAL CORPORATION
* * * * *
BY-LAWS
* * * * *
ARTICLE I
OFFICES
SECTION 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
SECTION 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the board of directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 1. All meetings of the stockholders for the election of directors
shall be held in the City of Wilmington, State of Delaware, or at such place as
may be fixed from time to time by the board of directors and stated in the
notice of the meeting. Meetings of stockholders for any other purpose may be
held at such time and place within or without the State of Delaware as shall be
stated in the notice of the meeting or in a duly executed waiver of notice
thereof.
SECTION 2. Annual meetings of stockholders, commencing with the year 1998,
shall be held on the last business day of March if not a legal holiday, and if a
legal holiday, then on the next business day following, at 11:00 A.M., or at
such other date and time as shall be designated from time to time by the board
of directors and stated in the notice of the meetings, at which they shall elect
by a plurality vote a board of directors, and transact such other business as
may properly be brought before the meeting.
SECTION 3. Written notice of the annual meeting stating the place, date
and hour of the meeting shall be given to each stockholder entitled to vote at
such meeting not less than one nor more than thirty days before the date of the
meeting.
SECTION 4. The officer who has charge of the stock ledger of the
corporation shall prepare and make, at least ten days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
<PAGE> 2
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at
least ten days prior to the meeting, either at a place within the city where
the meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
SECTION 5. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise prescribed by statute or by the certificate of
incorporation, may be called by the president and shall be called by the
president or the secretary at the request in writing of a majority of the board
of directors, or at the request in writing of stockholders owning a majority in
amount of the entire capital stock of the corporation issued and outstanding and
entitled to vote. Such request shall state the purpose or purposes of the
proposed meeting.
SECTION 6. Written notice of a special meeting stating the place, date and
hour of the meeting and the purpose or purposes for which the meeting is called,
shall be given not less than one nor more than thirty days before the date of
the meeting, to each stockholder entitled to vote at such meeting.
SECTION 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice.
SECTION 8. The holders of fifty percent of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the stockholders for the
transaction of business except as otherwise provided by statute or by the
certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
SECTION 9. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any questions brought before such meeting,
unless the question is one upon which by express provision of the statutes or of
the certificate of incorporation, a different vote is required, in which case
such express provisions shall govern and control the decision of such question.
SECTION 10. Unless otherwise provided in the certificate of incorporation,
each stockholder shall at every meeting of the stockholders be entitled to one
vote in person or by proxy for each share of the capital stock having voting
power held by such stockholder, but no proxy shall be voted on after three years
from its date, unless the proxy provides for a longer period.
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<PAGE> 3
SECTION 11. Unless otherwise provided in the certificate of incorporation,
any action required to be taken at any annual or special meeting of stockholders
of the corporation, or any action which may be taken at any annual or special
meeting of such stockholders, may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
ARTICLE III
DIRECTORS
SECTION 1. The number of directors which shall constitute the whole board
shall be not less than one nor more than ten. The first board shall consist of
five (5) directors. Thereafter, within the limits above specified, the number of
directors shall be determined by resolution of the board of directors or by the
stockholders at the annual meeting. The directors shall be elected at the annual
meeting of the stockholders, except as provided in Section 2 of this Article,
and each director elected shall hold office until his successor is elected and
qualified. Directors need not be stockholders.
SECTION 2. Vacancies and newly created directorships resulting from any
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by the sole
remaining director, and the directors so chosen shall hold office until the next
annual election or until their successors are duly elected and shall qualify,
unless sooner displaced. If there are no directors in office, than an election
of directors may be held in the manner provided by statute. If, at the time of
filling any vacancy or any newly created directorship, the directors then in
office shall constitute less than a majority of the whole board (as constituted
immediately prior to any such increase), the Court of Chancery may, upon
application of any stockholder or stockholders holding at least ten percent of
the total number of the shares at the time outstanding having the right to vote
for such directors, summarily order an election to be held to fill any such
vacancies or newly created directorships, or to replace the directors chosen by
the directors then in office.
SECTION 3. The business of the corporation shall be managed by or under
the direction of its board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the certificate of incorporation or by these by-laws directed or required to
be exercised or done by the stockholders.
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<PAGE> 4
MEETINGS OF THE BOARD OF DIRECTORS
SECTION 4. The board of directors of the corporation may hold meetings,
both regular and special, either within or without the State of Delaware.
SECTION 5. The first meeting of each newly elected board of directors
shall be held at such time and place as shall be fixed by the vote of the
stockholders at the annual meeting and no notice of such meeting shall be
necessary to the newly elected directors in order legally to constitute the
meeting, provided a quorum shall be present. In the event of the failure of the
stockholders to fix the time or place of such first meeting of the newly elected
board of directors, or in the event such meeting is not held at the time and
place so fixed by the stockholders, the meeting may be held at such time and
place as shall be specified in a notice given as hereinafter provided for
special meetings of the board of directors, or as shall be specified in a
written waiver signed by all of the directors.
SECTION 6. Regular meetings of the board of directors may be held without
notice at such time and at such place as shall from time to time be determined
by the board.
SECTION 7. Special meetings of the board may be called by the president on
two day's notice to each director, either personally or by mail or by facsimile;
special meetings shall be called by the president or secretary in like manner
and on like notice on the written request of two directors unless the board
consists of only one director; in which case special meetings shall be called by
the president or secretary in like manner and on like notice on the written
request of the sole director.
SECTION 8. At all meetings of the board, a majority of the directors shall
constitute a quorum for the transaction of business and the act of a majority of
the directors present at any meeting at which there is a quorum shall be the act
of the board of directors, except as may be otherwise specifically provided by
statute or by the certificate of incorporation. If a quorum shall not be
represented at any meeting of the board of directors, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
SECTION 9. Unless otherwise restricted by the certificate of incorporation
or these by-laws, any action required or permitted to be taken at any meeting of
the board of directors or any committee thereof may be taken without a meeting,
if all members of the board or committee, as the case may be, consent thereto in
writing and the writing or writings are filed with the minutes of proceedings of
the board or committee.
SECTION 10. Unless otherwise restricted by the certificate of
incorporation or these by-laws, members of the board of directors, or any
committee designated by the board of directors, may participate in a meeting of
the board of directors, or any committee, by means of conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
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<PAGE> 5
COMMITTEES OF DIRECTORS
SECTION 11. The board of directors may, by resolution passed by a majority
of the whole board, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The board may designate one
or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member.
Any such committee, to the extent provided in the resolution of the board
of directors, shall have and may exercise all the powers and authority of the
board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to amending the certificate of incorporation, adopting an
agreement of merger or consolidation, recommending to the stockholders the sale,
lease or exchange of all or substantially all of the corporation's property and
assets, recommending to the stockholders a dissolution of the corporation or a
revocation of a dissolution, or amending the by-laws of the corporation; and,
unless the resolution or the certificate of incorporation expressly so provide,
no such committee shall have the power or authority to declare a dividend; or to
authorize the issuance of stock. Such committee or committees shall have such
name or names as may be determined from time to time by resolution adopted by
the board of directors.
SECTION 12. Each committee shall keep regular minutes of its meetings and
report the same to the board of directors when required.
COMPENSATION OF DIRECTORS
SECTION 13. Unless otherwise restricted by the certificate of
incorporation or these by-laws, the board of directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, for attendance at each meeting of the board of directors and may be paid
a fixed sum for attendance at each meeting of the board of directors or a stated
salary as director. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor. Members
of special or standing committees may be allowed like compensation for attending
committee meetings.
REMOVAL OF DIRECTORS
SECTION 14. Unless otherwise restricted by the certificate of
incorporation or by law, any director or the entire board of directors may be
removed, with or without cause, by the holders of a majority of shares entitled
to vote at an election of directors.
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<PAGE> 6
ARTICLE IV
NOTICES
SECTION 1. Whenever, under the provisions of the statutes or of the
certificate of incorporation or of these by-laws, notice is required to be given
to any director or stockholder, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
director or stockholder, at his address as it appears on the records of the
corporation, with postage thereon prepaid, and such notice shall be deemed to be
given at the time when the same shall be deposited in the United States mail.
Notice to directors may also be given by facsimile.
SECTION 2. Whenever any notice is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE V
OFFICERS
SECTION 1. The officers of the corporation shall be chosen by the board of
directors and shall be a president, a treasurer and a secretary. The board of
directors may also choose a Chairman, one or more vice-presidents, one or more
assistant secretaries, and one or more assistant treasurers. Any number of
offices may be held by the same person, unless the certificate of incorporation
or these by-laws otherwise provide.
SECTION 2. The board of directors at its first meeting after each annual
meeting of stockholders shall choose a president, a treasurer and a secretary.
SECTION 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
SECTION 4. The salaries of all officers and agents of the corporation
shall be fixed by the board of directors.
SECTION 5. The officers of the corporation shall hold office until their
successors are chosen and qualified. Any officer elected or appointed by the
board of directors may be removed at any time by the affirmative vote of a
majority of the board of directors. Any vacancy occurring in any office of the
corporation shall be filled by the board of directors.
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<PAGE> 7
THE CHAIRMAN
SECTION 6. The chairman of the board of directors, if one is elected,
shall participate in the formulation of policy and strategic planning of the
corporation and shall preside at all meetings of the stockholders and the board
of directors.
THE PRESIDENT
SECTION 7. The president shall have general and active management of the
business of the corporation and shall see that all orders and resolutions of the
board of directors are carried into effect.
SECTION 8. He shall execute bonds, mortgages and other contracts requiring
a seal, under the seal of the corporation, except where required or permitted by
law to be otherwise signed and executed and except where the signing and
execution thereof shall be expressly delegated by the board of directors to some
other officer or agent of the corporation.
THE VICE-PRESIDENTS
SECTION 9. The executive vice president, if any, or, if there shall be
more than one, the executive vice presidents in the order determined by the
board of directors, shall, in the absence or disability of the president,
perform the duties and exercise the powers of the president and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe. The senior vice president, if any, or, if there shall be
more than one, the senior vice presidents in the order determined by the board
of directors, shall, in the absence or disability of the president and all
executive vice presidents, perform the duties and exercise the powers of the
president and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe. The vice president, if any,
or if there shall be more than one, the vice presidents in the order determined
by the board of directors, shall, in the absence or disability of the president
and all executive vice presidents and senior vice presidents, perform the duties
and exercise the powers of the president and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
THE SECRETARY AND ASSISTANT SECRETARIES
SECTION 10. The secretary shall attend all meetings of the board of
directors and all meetings of the stockholders and record all the proceedings of
the meetings of the corporation and of the board of directors in a book to be
kept for that purpose and shall perform like duties for the standing committees
when required. He shall give, or cause to be given, notice of all meetings of
the stockholders and special meetings of the board of directors, and shall
perform such other
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<PAGE> 8
duties as may be prescribed by the board of directors or president, under whose
supervision he shall be. He shall have custody of the corporate seal of the
corporation and he, or an assistant secretary, shall have authority to affix
the same to any instrument requiring it and when so affixed, it may be attested
by his signature or by the signature of such assistant secretary. The board of
directors may give general authority to any other officer to affix the seal of
the corporation and to attest the affixing by his signature.
SECTION 11. The assistant secretary, or, if there be more than one, the
assistant secretaries in the order determined by the board of directors, or, if
there be no such determination, then in the order of their election, shall, in
the absence of the secretary of in the event of his inability or refusal to act,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
SECTION 12. The treasurer shall have the custody of the corporate funds
and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the corporation and shall deposit all moneys
and other valuable effects in the name and to the credit of the corporation in
such depositories as may be designated by the board of directors.
SECTION 13. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of directors, at
its regular meetings, or when the board of directors so requires, an account of
all his transactions as treasurer and of the financial condition of the
corporation.
SECTION 14. If required by the board of directors, he shall give the
corporation a bond (which shall be renewed every six years) in such sum and with
such surety or sureties as shall be satisfactory to the board of directors for
the faithful performance of the duties of his office and for the restoration to
the corporation, in the case of his death, resignation, retirement or removal
from office, of all books, papers, vouchers, money and other property of
whatever kind in his possession or under his control belonging to the
corporation.
SECTION 15. The assistant treasurer, or, if there shall be more than one,
the assistant treasurers in the order determined by the board of directors, or,
if there be no such determination, then in the order of their election, shall,
in the absence of the treasurer or in the event of his inability or refusal to
act, perform the duties and exercise the powers of the treasurer and shall
perform such other duties and have such other powers as the board of directors
may from time to time prescribe.
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<PAGE> 9
ARTICLE VI
CERTIFICATE OF STOCK
SECTION 1. Every holder of stock in the corporation shall be entitled to
have a certificate, signed by, or in the name of the corporation by, the
chairman of the board of directors, or the president or a vice president, or the
treasurer or an assistant treasurer, or the secretary or an assistant secretary
of the corporation, certifying the number of shares owned by him in the
corporation.
Certificates may be issued for partly paid shares and in such case upon the
face or back of the certificates issued to represent any such partly paid
shares, the total amount of the consideration to be paid therefor, and the
amount paid thereon shall be specified.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences or rights, or both.
SECTION 2. Any of or all the signatures on the certificate may be
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
LOST CERTIFICATES
SECTION 3. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the board of directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
9
<PAGE> 10
or give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed, or both.
TRANSFER OF STOCK
SECTION 4. Upon surrender to the corporation or the transfer agent of the
corporation of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the persons entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
SECTION 5. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than sixty nor less than ten days before the date of
such meeting, nor more than sixty days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting: provided,
however, that the board of directors may fix a new record date for the adjourned
meeting.
REGISTERED STOCKHOLDERS
SECTION 6. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owners, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
10
<PAGE> 11
ARTICLE VII
GENERAL PROVISIONS
DIVIDENDS
SECTION 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the certificate of incorporation, if any, may be declared by
the board of directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock
subject to the provisions of the certificate of incorporation.
SECTION 2. Before payment of any dividend, there may be set aside out of
any funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserves in the
manner in which it was created.
CHECKS
SECTION 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers or such other person or persons as
the board of directors may from time to time designate.
FISCAL YEAR
SECTION 4. The fiscal year of the corporation shall be fixed by resolution
of the board of directors.
SEAL
SECTION 5. The corporate seal shall have inscribed thereon the name of the
corporation, and the words, "Corporate Seal, Delaware." The seal may be used by
causing it or a facsimile thereof to be impressed or affixed or reproduced or
otherwise.
INDEMNIFICATION
SECTION 6. The corporation shall indemnify its officers, directors,
employees and agents to the extent permitted by the General Corporation Law of
Delaware.
11
<PAGE> 12
ARTICLE VIII
AMENDMENTS
SECTION 1. These by-laws may be altered, amended or repealed or new
by-laws may be adopted by the stockholders or by the board of directors, when
such power is conferred upon the board of directors by the certificate of
incorporation at any regular meeting of the stockholders or of the board of
directors or at any special meeting of the stockholders or of the board of
directors, if notice of such alteration, amendment, repeal or adoption of new
by-laws be contained in the notice of such special meeting. If the power to
adopt, amend or repeal by-laws is conferred upon the board of directors by the
certificate of incorporation, it shall not divest or limit the power of the
stockholders to adopt, amend or repeal by-laws.
12
<PAGE> 1
EXHIBIT 4
NUMBER SHARES
______ ________
CUSIP
D&N CAPITAL CORPORATION
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE
FULLY PAID AND NON-ASSESSABLE
[ ]% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK, SERIES A
THIS IS TO CERTIFY THAT: IS THE OWNER OF THE ABOVE
STATED NUMBER OF SHARES OF [ ]% NONCUMULATIVE EXCHANGEABLE PREFERRED STOCK,
SERIES A, PAR VALUE OF $25.00 PER SHARE, OF D&N CAPITAL CORPORATION, (THE
"CORPORATION"). THE SHARES REPRESENTED BY THIS CERTIFICATE ARE TRANSFERABLE
ONLY ON THE STOCK TRANSFER BOOKS OF THE CORPORATION BY THE HOLDER OF RECORD
HEREOF IN PERSON, OR BY HIS DULY AUTHORIZED ATTORNEY OR LEGAL REPRESENTATIVE,
UPON THE SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED. THIS CERTIFICATE IS
NOT VALID UNTIL COUNTERSIGNED AND REGISTERED BY THE CORPORATION'S TRANSFER
AGENT AND REGISTRAR. THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT AND IS NOT
FEDERALLY INSURED OR GUARANTEED.
THE INTEREST IN SAID CORPORATION REPRESENTED BY THIS
CERTIFICATE MAY NOT BE RETIRED OR WITHDRAWN EXCEPT AS
PROVIDED IN THE RESTATED CERTIFICATE OF INCORPORATION AND
BYLAWS OF THIS CORPORATION.
IN WITNESS WHEREOF, D&N CAPITAL CORPORATION, HAS
CAUSED THIS CERTIFICATE TO BE EXECUTED BY THE FACSIMILE
SIGNATURES OF ITS DULY AUTHORIZED OFFICERS AND HAS CAUSED
A FACSIMILE OF ITS CORPORATE SEAL TO BE HEREUNTO AFFIXED.
____________________________ [SEAL] __________________________________
PETER L. LEMMER, KENNETH R. JANSON, PRESIDENT AND
SECRETARY CHIEF EXECUTIVE OFFICER
COUNTERSIGNED: ILLINOIS STOCK TRANSFER COMPANY, INC.
TRANSFER AGENT AND REGISTRAR
BY: __________________________
AUTHORIZED SIGNATURE
<PAGE> 2
The securities represented by this Certificate (the "Preferred Stock") are
issued subject to all the provisions of the Certificate of Incorporation,
Restated Certificate of Incorporation and Bylaws of D&N Capital Corporation, a
Delaware Corporation (the "Corporation") as from time to time amended or
supplemented (copies of which are on file at the principal executive offices of
the Corporation) to all of which the holder, by acceptance hereof, assents.
The Corporation's Restated Certificate of Incorporation contains certain
limitations on the ownership of the Preferred Stock. The Preferred Stock may
be automatically exchanged, without the consent of the owner thereof, for
identical shares of preferred stock of D&N Bank, (the "Bank") in the event a
conservator or receiver is appointed for the Board, the Bank fails to meet its
capital requirements or applicable Bank regulatory authorities believe such
failure is likely in the near future.
The shares of Preferred Stock represented by this certificate are subject to
restrictions on transfer for the purpose of the Corporation's maintenance of
its status as a Real Estate Investment Trust under the Internal Revenue Code of
1986, as amended. No Person may (1) Beneficially Own shares of any class or
series of preferred stock in excess of the Ownership Limit, except as set forth
in the Corporation's Restated Certificate of Incorporation, as the same may be
amended from time to time (the "Certificate of Incorporation"), or (2)
Beneficially Own shares of Preferred Stock that would result in the Corporation
being "closely held" under Section 856(h) of the Code or otherwise to fail as a
REIT. Any Person who attempts to Own Beneficially shares of Preferred Stock in
excess of the applicable limitation must immediately notify the Corporation in
writing. No Person may transfer shares of Preferred Stock if such transfer
would result in the outstanding Common Stock and Preferred Stock's being
Beneficially Owned by fewer than 100 Persons (determined without reference to
any rules of attribution). If the restrictions on transfer are violated, the
shares of Preferred Stock represented hereby will be transferred automatically
and by operation of law to a Trust and shall be designated Excess Shares. All
capitalized terms in this legend have the meanings ascribed to such terms in
the Certificate of Incorporation, a copy of which, including the restrictions
on transfer, will be sent without charge to each stockholder who so requests.
The Preferred Stock will not be redeemable prior to ____________, 2002, except
upon the occurrence of a Tax Event (as defined in the Certificate of
Designation for the Preferred Stock). On or after such date, the Preferred
Stock will be redeemable at the option of the Corporation at $25.00 per share,
plus the quarterly accrued and unpaid dividends to the redemption date.
The Corporation will furnish to any stockholder, upon request and without
charge, a full statement of the powers, designations, preferences and special
rights of each authorized class of stock or series thereof and the
qualifications, limitations or restrictions of any such preferences and/or
rights, to the extent that the same have been fixed, and of the authority of
the Board of Directors to designate the same with respect to other series.
Such request may be made to the Secretary of the Corporation or its Transfer
Agent.
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT ____ Custodian ________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of Under Uniform Gifts to Minors Act
survivorship and not as tenants
in common ---------
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received, hereby sell, assign and transfer unto
- -----------------------------------------------------------------------
</TABLE>
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- -------------------------------------------------------------------------
shares
- -------------------------------------------------------------------------
of preferred stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ----------------------------------------------------------------------- Attorney
to transfer the said shares on the books of the within named Corporation with
full power of substitution in the premises.
Dated ________________________
__________________________________
(Signature)
NOTICE: THE SIGNATURE TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON
THE FACE OF THE CERTIFICATE
IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
<PAGE> 1
EXHIBIT 5
[SFT LETTERHEAD]
April 28, 1997
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Re: D&N Capital Corporation - Public Offering of [1,210,000] Shares
of its [ ]% Noncumulative Exchangeable Preferred Stock, Series A
(Liquidation Preference $25.00 per share)
Ladies and Gentlemen:
We are acting as special counsel for D&N Capital Corporation, a Delaware
corporation (the "Company"), in connection with the proposed public offering of
an aggregate of [1,210,000] shares (including 110,000 shares subject to the
Underwriters' over-allotment option) of the [ ]% Noncumulative Exchangeable
Preferred Stock, Series A (Liquidation Preference $25.00 per share) of the
Company (the "Shares"). In connection with the proposed offering, the Company
has filed Registration Statement No. 333-[_____] on Form S-11 (the
"Registration Statement"), with the Securities and Exchange Commission for the
purpose of registering the Shares under the Securities Act of 1933, as amended.
As special counsel to the Company, we are familiar with the corporate
proceedings taken by the Company in connection with the authorization and sale
of the Shares and with the provisions of the proposed Underwriting Agreement
between the Company and Roney & Co., as Lead Underwriter, in accordance with
which the sales of the Shares are to be made, in the form filed as an exhibit
to the Registration Statement (the "Underwriting Agreement").
We have examined originals, or copies certified to our satisfaction, of
such corporate records of the Company, agreements and other instruments,
certificates of public officials, certificates of officers and representatives
of the Company and other documents as we have deemed it necessary to require as
a basis for the opinions hereinafter expressed. In such examination we have
assumed (i) the genuineness of all signatures, the authenticity of all
documents submitted to us as originals, the conformity with the originals of
all documents submitted to us as copies and the authenticity of the originals
of such latter documents and (ii) the filing with the Office of the Secretary
of State of the State of Delaware, prior to the issuance of the Shares, of the
Amended and Restated Certificate of Incorporation of the Company and the
Certificate of Designation establishing the Shares, each in the form filed as
an exhibit to the Registration Statement. As to various questions of fact
material to such opinions we have, when
<PAGE> 2
D&N Capital Corporation
April 28, 1997
Page 2
relevant facts were not independently established, relied upon certifications
by officers of the Company and other appropriate persons and statements
contained in the Registration Statement.
Based upon the foregoing, and having regard to legal considerations which
we deem relevant, we are of the opinion that the Shares have been duly
authorized and, when certificates representing the Shares shall have been
executed by proper officers of the Company, authenticated by the transfer agent
and registrar for the Shares, delivered to persons entitled thereto pursuant to
the Underwriting Agreement in accordance with the terms thereof and paid for at
the price specified therein, the Shares will have been legally and validly
issued, fully paid and nonassessable.
We hereby consent to the use of our name under the heading "Certain Legal
Matters" in the Prospectus constituting a part of the Registration Statement
and to the filing of this opinion as Exhibit 5 to the Registration Statement.
Very truly yours,
SILVER, FREEDMAN & TAFF, L.L.P.
<PAGE> 1
EXHIBIT 8
[COOPERS & LYBRAND LETTERHEAD]
March 31, 1997
D&N Bank
400 Quincy St.
Hancock, Michigan 49930
To D&N Bank:
In accordance with your request, we provide this opinion on the ability of D&N
Capital Corporation (the "Company") to qualify as a real estate investment
trust ("REIT") for federal income tax purposes.
The facts as we understand them as provided in the Offering Memorandum dated
February 27, 1997 are as follows:
The Company is a new corporation formed for the purpose of acquiring, holding,
and managing real estate mortgage assets. The Company has been formed by D&N
Bank, a federally chartered and insured savings bank (the "Bank"), in order to
raise capital for regulatory purposes. D&N Bank is a wholly owned subsidiary
of D&N Financial Corporation. D&N Financial Corporation's stock is widely
held.
The Company is to be financed through the issuance of preferred and common
securities. The Company will issue 1,000,000 shares of noncumulative
exchangeable preferred stock with a par value of $25 per share. Dividends on
the preferred shares are not cumulative, and if declared, are payable quarterly
in arrears. The preferred shares are not redeemable prior to the anniversary
date of the stocks issuance in 2002 except on the occurrence of a Tax Event.
In general, the Tax Event is triggered by the Company receiving a opinion of
law that (a) the dividends paid or to be paid by the Company are not, or will
not be fully deductible by the Company for United States federal income tax
purposes, or (b) the Company is, or will be, subject to more than a de minimis
amount of other taxes, duties or other governmental charges. After the Tax
Event is triggered or after 2002, the preferred shares may be redeemed at the
option of D&N Capital for cash at a redemption price of $25.00 per share. In
addition to the Tax Event, the preferred securities are subject to an Automatic
Exchange provision if a decline occurs in the performance and capital levels of
the Bank or placement of the Bank into conservatorship or receivership. The
Automatic Exchange provision would require holders of the Company preferred to
exchange such stock for Bank preferred stock.
<PAGE> 2
D&N Bank/Page 2
Simultaneously with the offering of the Company's preferred securities, the
Bank will purchase shares of common Stock for $25 million. The Company will
use the aggregate proceeds of $50 million from the offering of the preferred
stock and the Bank's acquisition of common stock to purchase a portfolio of
mortgage loans from the Bank. The Bank will purchase additional shares of
common stock for a price equal to the aggregate amount of underwriting
discounts and expenses incurred by the Company in connection with its offering
and formation. An estimate of the underwriting discounts, offering expenses,
and formation expenses was not provided. The comparative value of the
Company's preferred stock to the common stock is expected to remain constant
subsequent to the initial offering.
Pursuant to the Offering Memorandum, it is understood that the Company
contemplates ownership of property consisting of mortgage assets and mortgage
backed securities. The mortgage assets of the Company will be comprised of
approximately 90% of residential mortgage loans and approximately 10% of
commercial mortgage loans. The Company expects that subsequent to the initial
acquisition of mortgage assets that it will acquire additional assets in
similar form and terms to the original purchase. The Company may dispose of
any mortgage assets at anytime for any reason. However, the Company has not
indicated an intent to securitize its mortgage assets or otherwise participate
in the "trade or business" of selling mortgage assets. The Company may also
acquire mortgage backed securities representing interests in or obligations
backed by pools of mortgage loans. It is not currently anticipated that the
Company will hold a significant amount of mortgage backed securities.
The Company's day-to-day activities will be managed by the Bank through a
service agreement. In administering the Company's mortgage assets, the Bank
has been given a high degree of autonomy. The Company's Board of Directors has
established certain policies for the Bank including a prohibition against the
purchase of (1) a commercial mortgage loan constituting more than five percent
of the total book value of the mortgage assets of the Company, and (2) certain
loans in default.
With respect to the income expected to be realized on an annual basis, the
Company anticipates that greater than 75 percent of its gross income will be
generated from interest on mortgage assets. In addition, the Company expects
that at least 95% of its annual income will be derived from interests in
mortgage assets, dividends, interest, or gain or loss from the sale or other
disposition of capital assets. The Company further anticipates that less than
30% of its gross income will arise from the sale or other disposition of real
estate assets (including interests in mortgage assets) held for less than four
years and mortgage backed securities. The Company will not receive income from
servicing loans.
The Company expects to pay dividends on its outstanding capital stock equal to
approximately 100% of its REIT taxable income (excluding capital gains). In
the event the Company has insufficient cash flow to meet the 95% distribution
requirement, as provided in the Internal Revenue Code, it may find it necessary
to arrange borrowings or to pay dividends in the form of taxable stock
dividends.
<PAGE> 3
D&N Bank/Page 3
DISCUSSION:
The requirements for qualifying as a REIT for federal income tax purposes are
four-fold. First, the entity must meet certain organizational requirements.
Second, the entity must satisfy four interacting asset tests under IRC Section
856(c)(5). Third, the entity must satisfy three separate income tests each
year it operates under IRC Sections 856(c)(2), (3) and (4). Finally, the
entity must meet certain distribution requirements under IRC 857(a)(1).
I. ORGANIZATIONAL REQUIREMENTS:
In order for an entity to qualify as a REIT, IRC Section 856(a) and the
corresponding Regulations provide that an entity must:
(1) be managed by one or more trustees or directors;
(2) have transferable shares or certificates relating to beneficial
ownership;
(3) be taxable as a domestic corporation if not for the provisions of
Sections 856-859;
(4) not be an IRC Section 582(c)(2) financial institution or an insurance
company;
(5) be owned by 100 or more persons;
(6) not be closely held;
(7) elect to be taxed as a REIT; and
(8) be organized as a corporation, trust, or association.
IRC Code Section 856(b) provides that the conditions described in items (1) to
(4) must be met during the entire taxable year whereas condition (5) must exist
during at least 335 days of a taxable year, or during a proportionate part of a
taxable year of less than 12 months. Condition (6) must be met by during the
last half of the taxable year. Conditions (7) and (8) are organizational
requirements for the entity. Each of the above listed factors is discussed in
detail below:
1. Management: In order to qualify as a REIT, the Company must be managed by
one or more trustees or directors. Reg. Sec. 1.856-1(d)(1) defines a trustee
[director] as a person who holds legal title to the property of the REIT. The
Regulations explain that the trustee [director] will be considered to hold
legal title to the property, for purposes of the requirement, when the title is
held in the trust's [corporation's] name. In the present case, the Company
(i.e. the "REIT") will hold title to the mortgage assets.
<PAGE> 4
D&N Bank/Page 4
The Regulations further provide that the trustee [director] must have rights
and powers that would meet the requirements of centralized management under IRC
Section 301.7701-2. An organization has centralized management if any person
(or group of any persons which does not include all members) has continuing
exclusive authority to make the decisions necessary to conduct the business.
Reg. Sec. 301.7701-2(c)(1). In other words, the directors must not be required
to obtain shareholder ratification for their day-to-day business decisions.
Reg. Sec. 301.7701-2(c).
In the present case, the Bank administers the day-to-day activities of the
Company through a service agreement. The Bank will be responsible for (i)
monitoring the credit quality of mortgage assets held by the Company, and (ii)
advising the Company with respect to the acquisition, management, financing and
disposition of the Company's mortgage assets. The Bank is allowed to
subcontract its obligations to one or more of its affiliates. In Rev. Rul.
72-254, the Commissioner held that a trustee's delegation of duties within
certain perimeters to an advisory company was not a violation of the
centralized management requirement. In Rev. Rul. 72-254 the trustees of a REIT
entered into an agreement with an advisory company to manage the trust with
respect to investments and administer the day-to-day operation of the trust,
subject to the supervision of the trust. The advisory company was authorized
to make investments on behalf of the trust up to a specific amount, subject to
the policies and guidelines set forth in the declaration of trust. In the
instant case, the Offering Memorandum provides that the Bank has been given a
high degree of autonomy in managing the Company's mortgage assets. The Bank's
management authority is only restricted to the purchase of (1) a commercial
mortgage loan constituting more than five percent of the total book value of
the mortgage assets of the Company, and (2) certain loans in default.
2. Transferable Shares: In order to qualify as a REIT the Company's
beneficial ownership must be transferable. The preferred stock will be listed
on the NASDAQ System and therefore will be fully transferable. The Company's
common stock held by the Bank is not intended to be listed on the exchange.
The Company's Certificate of Incorporation does contain specific restrictions
on the number of shares an individual stockholder may own. This restriction
was established in order to prevent the termination of REIT status. PLR
9627017; PLR 9621032; PLR 8921067. In these Private Letter Rulings, an excess
share provision within the governing instrument of a REIT, which is designed to
prevent the violation of the closely held prohibition, does not result in the
shares being deemed nontransferable. IRC Section 6110(j)(3) provides that
PLR's may not be cited as precedent. However, PLR holdings may provide insight
on how the IRS may rule in a similar instance.
3. Corporate Status: The Company must be taxable as a corporation
notwithstanding the REIT provisions. This determination is made under the
provisions and Regulations of Sections 7701(a)(3) and (4). Treasury Regulation
301.7701-3(c)(v)(B) provides that, "an eligible entity that files an election
under section 856(c)(1) to be treated as a real estate investment trust is
treated as having made an election under this section to be classified as an
association." Therefore, for purposes of the recently finalized
"check-the-box" regulations, an entity is deemed to be taxable as a corporation
upon the election to be treated as a REIT.
<PAGE> 5
D&N Bank/Page 5
Previous regulations promulgated under IRC Sec. 7701(a)(3)( and (4) set forth
the following characteristics to distinguish a corporate entity from other
organizations including (i) associates, (ii) an objective to carry on a
business and divide the gains, (iii) continuity of life, (iv) centralized
management, (v) liability for corporate debts limited to corporate property,
and (vi) free transferability of interests. The Company has many of the
corporate characteristics. First, as noted above, the Company has both
centralized management and free transferability of shares. Second, the
Offering Memorandum provides that "the Company's principle business objective
is to acquire, hold and manage mortgage assets that will generate net income
for distribution to stockholders. Clearly, the intent of the Company is to
generate profits and distribute such gains to its shareholders. Third, an
organization has continuity of life if the death, insanity, bankruptcy,
retirement, resignation, or expulsion of any member will not result in the
termination of such organization. Reg. Sec. 301.7701-2(b)(1). In the present
case, no provisions within the Offering Memorandum suggest that the actions or
fate of any one shareholder or group of shareholders would result in the
termination of the Company. Finally, the Offering Memorandum does not contain
any provisions that require the shareholder's to assume the debt obligations of
the Company.
4. Financial Institution/Insurance Company: The Company must not be a
financial institution or an insurance company in order to qualify as a REIT.
IRC Section 582(c) defines a financial institution to be (i) any bank, mutual
savings bank, cooperative bank, domestic building and loan, and other savings
institutions chartered under Federal or State law (ii) any small business
investment company, and (iii) any business development corporation. IRC
Section 581 defines a bank as a business in which a substantial part of its
transactions include receiving deposits and making loans and discounts. In
accordance with the Offering Memorandum, the Company is only expected to
maintain a portfolio of mortgage assets. The Company is not expected to
receive deposits, make loans, or to discount debt obligations.
IRC Reg. Sec. 1.801-3(a) defines an insurance company as an entity engaged in
the business of issuing insurance contracts and annuity contracts. The
Offering Memorandum does not provide that the Company is contemplating entering
into any other activity outside of holding mortgage assets.
5. One Hundred Shareholders: The Company must have 100 shareholders for 335
days of a 12 month taxable year or a proportionally smaller number of days for
a shorter year in order to qualify as a REIT. The days are not required to be
consecutive. Reg. Sec. 1.856-1(c). In addition, IRC Section 856(h)(2) waives
the 100 shareholder requirement in the first year an entity elects to be
treated as a REIT. In the present case, the Company is offering its preferred
securities on the NASDAQ market. Based on this type of offering, the Offering
Memorandum provides that the Company will have more than 100 preferred stock
shareholders. The Company should be able to rely on the fact that it meets the
100 shareholder test through ownership of the preferred stock (i.e. the sole
common stock holder is the Bank). In PLR 8342016, Company A formed a
subsidiary corporation, Company B, intending to qualify it as a REIT. Company
A retained 100 percent of Company B's common stock and sold one share of
Company B's preferred stock to each of its 125 employees. Company B was held
to meet the 100 shareholder
<PAGE> 6
D&N Bank/Page 6
test. The facts in PLR 8342016 parallel the present case. At hand, the
Company will have one common stockholder and over 100 preferred stockholders.
Under certain circumstances, the Company's preferred stock could be converted
into Bank preferred stock. The conditions which would result in the conversion
of the Company's preferred stock are not expected to arise. However, such an
event could result in the termination of the Company's REIT status. This
opinion does not address this issue as the Company is expected to have more
than 100 shareholders as of the offering date.
6. Closely Held Provision: The Company will not qualify as a REIT if more
than 50% of the value of its outstanding stock is owned, directly or
indirectly, by or for not more than 5 individuals during the last half of the
year. The Offering Memorandum provides that at no time will five or fewer
shareholders who are individuals, private foundations, pension trusts or other
relevant entities in aggregate own more than 50% of the value of the stock in
either the Company or the Bank. In addition, the Offering Memorandum provides
that no holder of preferred stock is permitted to own (including attributed
shares) more than 9.9% of any issued and outstanding class or series of
preferred stock. In this manner, no more than 9.9% of the preferred stock
could be held by one individual; thus, by definition the 50% test should be
met.
The Company's common stock is held 100% by the Bank. However, for purposes of
applying the 50% test, each shareholder of D&N Financial Corporation counts as
a beneficial owner of the Company. IRC Section 544(a)(1). D&N Financial
Corporation is widely held.
The Offering Memorandum provides that the comparative value of the Company's
preferred stock to the common stock is expected to remain constant subsequent
to the initial offering. Under these circumstances, the relative value of the
common stock to the preferred stock should not affect the Company's compliance
with the closely held provision.
IRC Reg. Sec. 1.857-8 provides that a REIT is required to keep records that
will disclose the actual ownership of its outstanding stock. Specifically,
under Reg. Secs. 1.857-8(b) and (c) the REIT must demand written statements
from the shareholders disclosing the actual ownership of the stock. These
statements shall be demanded from shareholders of record based on the number of
shareholders within the REIT as follows:
(a) 2,000 Plus Shareholders: Each record holder of five percent or more
of its stock.
(b) Less than 2,000 but more than 200 Shareholders: Each record holder of
one percent or more of its stock.
(c) 200 or less Shareholders: Each record holder of one-half of one
percent or more of its stock.
<PAGE> 7
D&N Bank/Page 7
The written statements must be demanded within 30 days after the close of the
REIT's taxable year. Reg. Sec. 1.857-8(e). A REIT that fails to comply with
the demand statement requirements shall be taxed as an ordinary corporation.
Reg. Sec. 1.857-8(e).
7. Elect REIT Status: The Company must elect to be treated as a REIT. IRC
Section 859 provides that in order for the Company to elect REIT status it must
adopt a calendar year accounting period. The election to be treated as a REIT
is made by computing taxable income as a real estate investment trust in its
return for the first taxable year for which it desires the election to apply.
It is presumed that the Company will adopt a calendar year period and elect to
be taxed as a REIT.
8. Organized as a Corporation: Reg. Sec. 1.856-1(a) provides in part that the
term REIT means a corporation that meets certain requirements. In the instant
case, the Company was formed as a corporation in the State of Delaware.
II. ASSET TESTS:
The Company must satisfy certain asset tests in order to maintain its
qualification as a REIT. Pursuant to IRC Section 856(c)(5), an entity is not
considered to be a REIT unless at the close of each quarter of the taxable year
the following tests are satisfied:
(A) at least 75 percent of the value of its total assets is
represented by real estate assets, cash and cash items (including
receivables), and Government securities; and
(B) not more than 25 percent of the value of its total assets is
represented by securities (other than those included under
subparagraph (A)).
In addition, IRC Section 856(c)(5)(B) imposes the following two
sub-requirements in order to satisfy the 25 percent test:
(1) not more than 5 percent of the value of the total assets of
the trust may consist of securities of any one issuer, other than
the securities included under the 75% test; and
(2) not more than 10 percent of the outstanding voting securities
of any one issuer may be held, other than those securities
included under the 75 percent test.
A REIT must satisfy each of the four asset tests noted above at the end of each
quarter of the REIT's taxable year. IRC Section 856(c)(5)(B). Failure to
satisfy any one of the four asset tests may result in disqualification of REIT
status. However, certain mitigation provisions within the Internal Revenue
Code (Code) may prevent the disqualification of the REIT if a violation of one
of the asset tests occurs. Under Rev. Rul. 72-83, the mitigation provisions
can only be applied once the tests have actually been met for at least one
quarter. The mitigation tests are not
<PAGE> 8
D&N Bank/Page 8
provided herein in that the purpose of this letter is only to address whether
or not the Company initially qualifies as a REIT.
Pursuant to the Offering Memorandum, the Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests,
and to take the necessary action within 30 days after the close of any quarter
as may be required to cure any noncompliance with the asset tests.
1. 75 Percent Asset Test: IRC Section 856(c)(5)(A) requires that at least 75
percent of the value of the total assets of the trust must be represented by
one or more of either (1) real estate assets, (2) Government securities, and
(3) cash and cash items (including receivables). For purposes of applying the
75 percent "asset" test, IRC Section 856(c)(6)(B) defines the term "real estate
assets" as follows:
The term "real estate assets" means real property (including
interests in real property and interests in mortgages on real
property) and shares (or transferable certificates of beneficial
interest) in other real estate investment trusts which meet the
requirements of this part.
Several rulings make clear that the nature of the underlying asset secured by a
mortgage will determine whether a mortgage is secured by qualified "real estate
assets." In Rev. Rul. 70-544, 1970-2 C.B. 6, a federally insured mortgage pool
that was subsequently sold at a discount was considered to be a "real estate
asset." In Rev. Rul. 77-349, 1977-2 C.B. 2, the IRS considered whether a
mortgage pooling arrangement where "straight pass-through" mortgage
certificates in a "pool" of residential mortgage loans were sold to building
and loan associations, individuals and REITs qualified as "real estate assets."
The REIT's interest was secured by private mortgage insurance. The IRS ruled
that a REIT that owns mortgage certificates is considered as owning "real
estate assets" within IRC Section 856(c)(5)(A). As such, it is clear that the
nature of the underlying asset of a mortgage is determinative of whether such
mortgage is included for purposes of determining the trust's compliance with
the 75 percent asset test.
If a REIT asset constitutes an interest in a mortgage on both real and personal
property, an apportionment is necessary because only the value of the portion
of a mortgage secured by real property is included for purposes of the 75
percent asset test. IRC Sec. 856(c)(6)(B); Reg. Sec. 1.856-3(b), (c) and (d).
Although not specifically defined, IRC Section 856(c)(5)(A) also indicates that
cash, cash items, and Government securities are also considered for purposes of
determining a REIT's compliance with the 75 percent asset test.
In addition to the items identified above, IRC Section 856(c)(6)(B) states that
the term "real estate assets" shall also include property attributable to
"temporary investment of new capital." Section 856(c)(6)(B) provides in
pertinent part:
<PAGE> 9
D&N Bank/Page 9
any property (not otherwise a real estate asset) attributable to
the temporary investment of new capital, but only if such property
is stock or a debt instrument, and only for the one-year period
beginning on the date the REIT receives such capital.
As stated above, the Company contemplates ownership of property consisting
solely of mortgage assets and mortgage backed securities. The Offering
Memorandum indicates that the Company's business objective is to acquire, hold
and manage "mortgage loans" secured by first mortgages or deeds of trust on
single family residential or commercial real estate properties. Further, the
Offering Memorandum provides that from time to time the Company will acquire
mortgage securities that qualify as "real estate assets" under IRC Section
856(c)(6)(B). Such mortgage securities will consist of interests in or
obligations backed by pools of mortgage loans.
2. 25-, 5- and 10 Percent Asset Tests: For purposes of applying the 25
percent asset test, the Regulations indicate that not more than 25 percent of
the value of the total assets of the trust may be represented by securities
other than those described in section 856(c)(5)(A) as defined above. Thus, the
25 percent limitation is necessarily satisfied by virtue of compliance with the
75 percent asset requirement. However, the Reg. Sec. 1.856-2(d)(2) indicates
that the trust must meet the 5 and 10 percent tests provided under IRC Section
856(c)(5)(B).
Pursuant to IRC Section 856(c)(5)(B), a trust may not own "securities" of any
one issuer in an amount greater in value than 5 percent of the value of the
total assets of the trust and not more than 10 percent of the outstanding
voting securities of such issuer. Reg. Sec. 1.856-3(e) provides that the term
"securities" does not include "interests in real property" or "real estate
assets" such as interests in mortgages on real property.
The Offering Memorandum indicates that the Company may acquire from time to
time solely securities which qualify as "real estate assets" under IRC Section
856(c)(6)(B). As indicated above, securities consisting of mortgages or
interests in mortgages are specifically excluded from the term "securities" for
purposes of the 5- and 10- percent asset tests.
With regard to "securities" included within the 5- and 10- percent limitations,
the Offering Memorandum specifically restricts ownership by the Company of
securities of any one issuer which are either (a) in an amount greater than 5
percent in value of the trust's asset; and (b) equal to or greater than 10
percent of the outstanding voting securities of the issuer.
3. Determination of "Value" for Purposes of Asset Tests: The various asset
tests are based on the value of the REIT's total assets as of the close of each
quarter. A revaluation of assets is not required at the end of any particular
quarter unless during that period the REIT acquired assets which do not meet
the 75% test (e.g. non-"real estate assets" as defined under IRC Sec.
856(c)(5)(A) above). IRC 856(c)(5). As such, the mere fluctuation in the
market value of the REIT's assets does not, in itself, require the REIT to
revalue the assets for purposes of determining the REIT's compliance with the
asset tests. Reg. Sec. 1.856-2(d)(3).
<PAGE> 10
D&N Bank/Page 10
For purposes of valuing the REIT's assets, securities (other than REIT shares)
for which market quotations are readily available must be valued at market
value. Reg. Sec. 1.1856-3(a). With respect to other securities and assets,
Reg. Sec. 1.856-3(a) provides that the trustees of the REIT are permitted to
determine the fair market value. The regulations require that such
determination by the trustee be made in good faith. Id.
Pursuant to the Offering Memorandum, the Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests,
and to take the necessary action within 30 days after the close of any quarter
as may be required to cure any noncompliance with the asset tests.
III. INCOME TESTS:
To qualify as a REIT, the corporation must meet three separate "income" tests
each year under IRC Section 856(c). The three requirements of this test, all
of which must be satisfied, are:
(1) At least 75% of gross income (other than income from
prohibited transactions) must be derived from the following
sources:
(a) rents from real property;
(b) interest on obligations secured by mortgages on real
property or on interests in mortgages on real property;
(c) gain from the sale or other disposition of real property
(including interests in real property and interests in
mortgages on real property other than property held primarily
for sale to customers in the ordinary course of a trade or
business;
(d) dividends or other distributions on, and gain (other than
gain from prohibited transactions) from the sale or other
disposition of, transferable shares (or certificates of
beneficial interest) in other qualifying REITs;
(e) abatements and refunds of taxes on real property;
(f) income and gain from foreclosure property;
(g) amounts (other than amounts determined by the income or
profits of another person) received as consideration for
entering into commitments to make mortgage loans or to purchase
or lease real property (including interests in real property
and interests in mortgages on real property);
(h) gain received from the sale or other disposition of a real
estate asset which is not a prohibited transaction solely by
reason of section 857(b)(6);
<PAGE> 11
D&N Bank/Page 11
(i) and qualified temporary investment income;
(2) At least 95 percent of gross income (excluding gross income
from prohibited transactions) must be derived from the following
sources:
(a) sources that satisfy the 75 percent income test;
(b) dividends;
(c) interest; and
(d) capital gains on the sale or other disposition of stocks
or securities;
(3) Less than 30% of gross income must be derived from the sale
or other dispositions of the following:
(a) any stock or securities held for less than one year;
(b) property in a transaction which is a prohibited
transaction; and
(c) real property (including interests in real property and
interests in mortgages on real property) held for less than
four years other than involuntarily converted property or
foreclosure property.
A REIT must satisfy the income tests on an annual basis. IRC Sec. 856(c). All
of the income tests are based on gross income. However, the 75- and 95-
percent income tests apply to gross income other than gross income from
prohibited transactions (discussed below). IRC Sec. 856(c)(2) and (c)(3). The
30 percent income limitation applies to gross income including income from
prohibited transactions. IRC Sec. 856(c)(4).
If a REIT fails to satisfy either the 75- or 95- percent income tests in any
year, and such failure is due to "reasonable cause" and not willful neglect,
the REIT will not lose its status as such, but instead the REIT will be subject
to 100% tax on its taxable income attributable to the amount by which it failed
to comply with such tests. IRC Secs. 856(c)(7) and 857(b)(5). If a REIT
violates either or both 75- or 95- percent income tests other than for
reasonable cause, or if it violates the 30 percent rule under any
circumstances, the REIT will be disqualified and taxable as a regular
corporation for the taxable year and the four succeeding years. IRC Sec.
856(g)(1), (3), and (4).
1. 75- and 95 Percent Income Tests
a. Qualified Sources of Income :
(1) Interest : Interest is qualified income for purposes of both the 75- and
95- percent income test. IRC Sec. 856(c)(2)(B). For interest to qualify as
"interest on obligations secured by mortgages on real property or on interests
in real property" for purposes of the 75 percent test,
<PAGE> 12
D&N Bank/Page 12
the obligation must be secured by real property having a fair market value at
the time of acquisition at least equal to the principal amount of the loan.
Reg. Sec. 1.856-5(c). The term "interest" includes only an amount that
constitutes compensation for the use or forbearance of money. Reg. Sec.
1.856-5(a); Rev. Rul. 76-413, 1976-2 C.B. 213. For purposes of both the 75-
and 95- percent income tests, income that a REIT derives from mortgages it
originates and holds as investments is "interest on obligations secured by
mortgages" within the meaning of IRC Sec. 856(c)(3)(B). Rev. Rul. 65-67.
1965-1 C.B. 269. In the present case, the Company's primary source of income
is from interest on its mortgage assets. No projections or facts were made
available that provided the specific amount of income that the Company would
recognize from the mortgage assets.
(2) Interest From Hypothecation Loans : Interest received on a hypothecation
loan is qualifying interest for purposes of the 75 percent income test as long
as the security for such loan consists of a first mortgage which is secured by
real property. Rev. Rul. 80-280, 1980-2 C.B. 207. In the present case, the
Offering Memorandum indicates that the Company's business objective is to
acquire, hold and manage "mortgage loans" which are secured by first mortgages
or deeds of trust on single family residential or commercial real estate
properties.
(3) Loans Purchased at Market Discount : Income from loans secured by
mortgages on real property purchased for an amount less than the face amount of
the loan ("market discount") qualify for purposes of the 75- and 95- percent
income tests. The difference between the face amount and the purchase price of
the loan is treated as a gain from the "disposition" of interests in mortgages
on real property as provided in IRC Secs. 1276 through 1278. As such, income
related to the disposition of mortgage assets will be qualified income for
purposes of the 75- and 95- percent income tests provided that the mortgage
assets are not property held in the ordinary course of the taxpayer's trade or
business and such notes are secured by real property. PLR 7412260550A; PLR
8202005; GCM 32491. In the present case, the Company is expected to purchase
$50 million of mortgage assets from the Bank. This acquisition of debt may
produce market discount providing that the amount paid is less than the face
value of such debt.
(4) Penalties and Prepayments on Loans : A REIT can provide for penalties on
the prepayment of all or a portion of a loan balance, loan assumption fees and
late payment charges. The IRS has ruled, in a non-REIT context, that penalties
received on prepayments of loans constitute interest. Rev. Rul 57-198, 1957-1
C.B. 94; Rev. Rul. 73-141, 1973-1 C.B. 331. The IRS has issued favorable
Private Letter Rulings to REITs in this regard. PLR 8640018; PLR 8545039. In
the instant case, the Company may receive income from prepayment penalties on
the mortgage assets it will hold.
(5) Interest on Loans Secured by Personal Property : Interest received from
loans secured by personal property is excluded for purposes of the 75 percent
income test. Reg. Sec. 1.856-5(c). Interest from mortgages secured by both
real and personal property must be apportioned for purposes of satisfying the
75- and 95 percent income tests. Id. In the case of a construction loan, the
portion of interest related to a mortgage secured by personal property must
also be apportioned. Reg. Sec. 1.856-5(c)(2).
<PAGE> 13
D&N Bank/Page 13
b. Other Income : In addition to the types of income discussed above, two
other kinds of income qualify for either the 75- or 95- percent income tests
including:
(1) Deed In Lieu of Foreclosure : If a REIT acquires property through a deed
in lieu of foreclosure and the fair market value of property exceeds the REIT's
basis in the mortgage note, the REIT realizes gain in the amount of the excess.
Rev. Rul. 80-56, 1980-1 C.B. 154. Similarly, if the REIT purchases property
at a foreclosure sale for less than its fair market value and if the REIT's
basis in its mortgage note is also less than the property's fair market value,
the REIT realizes ordinary income to the extent that the property's fair market
value exceeds the purchase price. Rev. Rul. 80-57, 1980-1 C.B. 157. In both
cases, the gain is qualified income for purposes of the 75- and 95- percent
tests.
(2) Commitment Fees : Commitment fees are qualifying income for purposes of
the 75- and 95- percent income tests. The Offering Memorandum does not
contemplate that the Company will receive commitment fees.
2. 30 Percent Income Test
IRC Section 856(c)(4) requires that a REIT satisfy a 30 percent income
limitation on an annual basis. Section 856(c)(4) requires that less than 30
percent of a REIT's gross income for the taxable year must be derived from the
sale or other dispositions of (i) any stock or securities held for less than
one year; (ii) property in a transaction which is a prohibited transaction; and
(iii) real property (including interests in real property and interests in
mortgages on real property) held for less than four years other than
involuntarily converted property or foreclosure property. The term "prohibited
transaction" is defined below.
The Offering Memorandum contemplates that the Company will own mortgage assets
and from time to time interests in mortgage backed securities. The Company has
not indicated an intent to securitize its mortgage assets or otherwise
participate in the "trade or business" of selling mortgage assets. However, in
the event of a sale or disposition of mortgage assets or mortgage backed
securities by the Company, any income derived from such sale will be considered
for purposes of determining the Company's compliance with the 30 percent income
limitation.
3. Prohibited Transactions: A "prohibited transaction" is any sale of dealer
property that is not foreclosure property. IRC Sec. 857(b)(6); See also, IRC
Sec. 1221(1). Transactions which constitute "prohibited transactions" do not
necessarily terminate REIT status. However, "prohibited transactions" are
taken into consideration for purposes of determining whether the Company
satisfies the 30 percent income limitation.
(a) Sale or Disposition in the Ordinary Course of Taxpayer's Trade or
Business: Real estate loans that are originated or acquired by a REIT for the
purpose of being packaged for sale may constitute "prohibited transactions" for
purposes of determining the Company's compliance with the 30 percent income
test. In Rev. Rul. 74-554, 1974-2 C.B. 199, a REIT that sold several mortgages
to two unrelated mortgage brokers in two separate transactions within one
taxable
<PAGE> 14
D&N Bank/Page 14
year as part of a single plan to reduce the REIT's long term investments was
deemed to have held the mortgages primarily for sale to customers in the
ordinary course of its trade or business.
(b) Sale of Mortgage in an Isolated Transaction: In Rev. Rul. 76-356, 1976-2
C.B. 213, a REIT that sold mortgage loans in a single, isolated transaction to
balance its loan portfolio was deemed not to have held the mortgages primarily
for sale to customers in the ordinary course of its business. Accordingly,
such sales qualified for the 75 percent income test. Id.
(c) Sale of Mortgage to Protect Investment: In Rev. Rul. 76-327, 1976-2 C.B.
212, a REIT, which financed construction of a townhouse development,
subsequently made mortgage loans to purchasers after the developer could not
arrange financing and then sold the mortgage loans to investors at no profit or
premium in order to protect its investment. The Service ruled that the REIT in
this instance was not a dealer.
(d) Foreclosure Property : "Foreclosure property" is property that a REIT
acquires through foreclosure or an action similar to foreclosure, such as deed
in lieu of foreclosure. When a REIT earns income from involuntarily acquired
foreclosure property, it runs the risk of receiving "trade or business" income
that could cause it to fail the income tests and possibly forfeit its REIT
status. However, the REIT may make an election that allows for a grace period
following the acquisition of property by foreclosure that provides time to
convert potentially disqualifying income into qualifying income without
consequence to REIT status. IRC Sec. 856(e)(5). During this grace period,
income from foreclosure property is taxed at the REIT level at the maximum
corporate income tax rate. IRC Sec. 857(b)(4).
Although Company's business strategy may not intend for the trust to engage in
rental real estate activities, it may nevertheless become the lessor of real
property upon a mortgage default. Due to the limitations imposed under the
Code on the activities of a REIT in connection with rental real estate,
ownership of real estate upon foreclosure may create nonqualifying income
issues.
(e) Safe Harbor Provisions: IRC Section 857(b)(6)(C) identifies certain safe
harbor provisions which permits a REIT to avoid entering into prohibited
transactions. Pursuant to these safe harbor rules, a sale of property which is
a "real estate asset" (including interests in mortgages secured by real
property as defined above), does not constitute a "prohibited transaction" if:
(i) the trust has held the property for not less than four years;
(ii) aggregate expenditures made by the trust, or any partner of
the trust during the four years prior to the date of sale which
are included in the basis of the property do not exceed 30 percent
of the net selling price of the property;
(iii) (I) during the taxable year the trust does not make more
than 7 sales of property (other than foreclosure property) or (II)
the aggregate adjusted bases of all such property does not exceed
10 percent of the aggregate bases of all of the assets of the
trust as of the beginning of the year;
<PAGE> 15
D&N Bank/Page 15
(iv) in the case of property, which consists of land or
improvements, not acquired through foreclosure (or deed in lieu of
foreclosure) or lease termination, the trust has held the property
for not less than four years for production of rental income, and
(v) if the requirement of clause (iii) (I) is not satisfied,
substantially all of the marketing and development expenditures
with respect to the property were made through an independent
contractor . . . from whom the trust itself does not derive or
receive any income.
Sales or dispositions of "real estate assets" which do not satisfy the safe
harbor provisions may be considered for purposes of determining the Company's
compliance with the 30 percent income limitation.
IV. DISTRIBUTION REQUIREMENTS
In order to qualify as a REIT, the Company must satisfy certain distribution
requirements set forth in IRC Sec. 857(a)(1). Pursuant to Section 857(a)(1),
the REIT must distribute an amount equal to the following:
(A) The sum of:
(i) 95% of the REIT's tax income computed without regard to
distributions and excluding net capital gain, and
(ii) 95% of the excess of net income from foreclosure property
over the tax on such income, minus
(B) any excess "noncash income" as determined under IRC Sec.
857(e).
As a general rule, only dividends actually paid during a taxable year are taken
into account for purposes of satisfying the distribution requirements. IRC
Sec. 858(a) provides certain statutory exceptions which treat dividends paid in
one year as paid in the prior year for purposes of the distribution
requirements and for purposes of calculating REITTI.
For purposes of the distribution requirements, the term "real estate investment
trust taxable income" (REITTI") is defined as taxable income computed according
to the normal corporate rules with specific adjustments as set forth in IRC
Sec. 857(b)(2)(A) through (F).
The Offering Memorandum contemplates a plan to distribute an aggregate amount
of dividends with respect to the Company's outstanding shares of capital stock
equal to 100 percent of the Company's REITTI excluding capital gains.
<PAGE> 16
D&N Bank/Page 16
CONCLUSION
The Company should qualify as a REIT under the organizational provisions of
IRC Section 856(a). This conclusion is based upon the Company:
Organizational Requirements:
(1) retaining centralized management through its board of directors
by maintaining sufficient control over the Bank as its advisor;
(2) maintaining the free transferability of the preferred stock
and common stock;
(3) continuing to be taxable as a corporation notwithstanding the
REIT provisions pursuant to the check-the box entity classification
regulations and the fact that the Company possesses a majority of
the corporate characteristics as defined under former
Reg. Sec. 301.7701-2(a)(2) including (i) the objective of carrying on
a trade or business, (ii) continuity of life, (iii) centralized
management, (iv) liability for corporate debts limited to corporate
property, and (v) free transferability of interest;
(4) not being deemed a financial institution as long as it does
not receive deposits, make loans, or discount debt obligations
nor should the Company be deemed an insurance company as long as it
does not issue insurance or annuity contracts;
(5) continuing to have more than 100 preferred shareholders
through its public offering and the IRS will remain consistent
with its holding in PLR 8342016 that each class of stock need not
have 100 shareholders;
(6) insuring that it will never allow more than 50% of the value
of its outstanding stock to be owned, directly or indirectly,
by or for not more than 5 individuals during the last half of the
year.
(7) elects to be treated as a REIT; and
(8) was organized as a corporation.
Asset Test:
The Company should qualify as a REIT under the asset test of IRC Section
856(c)(5). This conclusion is based upon the Company:
<PAGE> 17
D&N Bank/Page 17
(1) maintaining an asset base which includes at least 75% of
property which consists of solely of mortgage assets, mortgage
backed securities or other property which qualifies as "real estate
assets" for purpose of IRC Sec. 856(c)(5)(A) or (c)(6)(B); and
(2) not owning "securities" of any one issuer in an amount greater
in value than 5 percent of the value of the total assets of the
trust and not more than 10 percent of the outstanding voting
securities of such issuer.
Income Test:
The income test under IRC Section 856(c) should be met by the Company as long
as it:
(1) continues to derive at least 75 percent of its gross income
(excluding income from prohibited transactions) from mortgage
assets and mortgage backed securities;
(2) continues to derive at least 95 percent of its gross income
(excluding income from prohibited transactions) from sources
that satisfy the 75 percent income test; dividends; interest; and
capital gains on the sale or other disposition of stocks or
securities;
(3) continues to realize less than 30 percent of its gross income
from the sale or other dispositions of (i) any stock or
securities held for less than one year; (ii) property in a
transaction which is a prohibited transaction; and (iii) real
property (including interests in real property and interests in
mortgages on real property) held for less than four years other than
involuntarily converted property or foreclosure property.
Distribution Test
The distribution test under IRC Section 857(a)(1) should be met by the Company
as long as it:
(1) distributes an aggregate amount of dividends with respect to the
Company's outstanding shares of capital stock equal to (i) 95
percent of the Company's REITTI excluding capital gains, (ii) 95
percent of the excess income from foreclosure property over the tax
imposed on such income, minus (iii) any excess noncash income.
The conclusions in this letter are based upon a review of the facts as of
February 27, 1997 and upon pertinent statutory, legislative and other relevant
tax authority as of such date. To confirm these conclusions with respect to
the actual transaction it will be necessary to review the final transaction
documents, other factual data as may be relevant and the tax authority as of
the date
<PAGE> 18
D&N Bank/Page 18
of implementation. It must be emphasized that all tax authority is subject to
modification at any time by legislation, judicial and/or administrative action.
Any such change in law could be applied retroactively. Further, it is
possible that the Internal Revenue Service may disagree with these conclusions
and argue toward a different, more adverse result.
Very truly yours,
Coopers & Lybrand, LLP
BAK
<PAGE> 1
EXHIBIT 10(a)
================================================================================
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
D&N CAPITAL CORPORATION
PURCHASER
D&N BANK
SELLER
DATED AS OF [__________], 1997
CONVENTIONAL RESIDENTIAL MORTGAGE LOANS
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. AGREEMENT TO PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
[SECTION 3. RESERVED.] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 4. PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 5. EXAMINATION OF MORTGAGE FILES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Subsection 6.01. Conveyance of Mortgage Loans; Possession of Servicing Files . . . . . . . . . . 11
Subsection 6.02. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Subsection 6.03. Delivery of Mortgage Loan Documents . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 7. SERVICING OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLER; REMEDIES FOR BREACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Subsection 8.01. Representations and Warranties Regarding the Seller . . . . . . . . . . . . . . 13
Subsection 8.02. Representations and Warranties Regarding Individual Mortgage Loans . . . . . . . 15
Subsection 8.03. Remedies for Breach of Representations and Warranties . . . . . . . . . . . . . 27
SECTION 9. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 10. CLOSING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 11. COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 14. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 15. SEVERABILITY CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 16. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
</TABLE>
ii
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 17. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 18. INTENTION OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
SECTION 20. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 21. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
SECTION 23. REPRODUCTION OF DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 24. FURTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
EXHIBITS
EXHIBIT A CONTENTS OF EACH MORTGAGE FILE
EXHIBIT B FORM OF SERVICING AGREEMENT
EXHIBIT C FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
EXHIBIT D FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
EXHIBIT E FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT F FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT G FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT H MORTGAGE LOAN SCHEDULE
EXHIBIT I THE UNDERWRITING GUIDELINES OF D&N BANK
</TABLE>
iii
<PAGE> 4
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
This MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of [__________,] 1997, by and between D&N Capital
Corporation, a Delaware corporation, having an office at 400 Quincy Street,
Hancock, Michigan 49930 (the "Purchaser") and D&N Bank, a federally chartered
savings bank, having an office at 400 Quincy Street, Hancock, Michigan 49930
(the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the
Purchaser desires to purchase from the Seller, certain conventional residential
first mortgage loans (the "Mortgage Loans") on a servicing retained basis as
described herein, and which shall be delivered as whole loans on the Closing
Date, as defined below;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a residential dwelling
located in the jurisdiction indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of
the conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements
set forth herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Purchaser and the Seller
agree as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement the following capitalized terms shall
have the respective meanings set forth below. Other capitalized terms used in
this Agreement and not defined herein shall have the respective meanings set
forth in the Servicing Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage
Loan in the jurisdiction where the related Mortgaged Property is located.
"Act" means The National Housing Act, as amended from time to time.
"Adjustable Rate Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement the interest rate of which adjusts
periodically.
"Affiliate" means, with respect to any specified Person, any other
Person controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct
<PAGE> 5
the management and policies of such Person, directly or indirectly, whether
through the ownership of voting securities, by contract or otherwise and the
terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreement" means this Mortgage Loan Purchase and Warranties Agreement
and all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor
thereto.
"Ancillary Income" means all late charges, assumption fees, escrow
account benefits, reinstatement fees, and similar types of fees arising from or
in connection with any Mortgage, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value set forth in an appraisal made in
connection with the origination of the related Mortgage Loan as the value of
the Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in
Section 19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered
in blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or
(ii) a day on which banking and savings and loan institutions, in the State of
Michigan are authorized or obligated by law or executive order to be closed.
"Closing Date" means [_________], 1997, or such other date as is
mutually agreed upon by the parties.
"Code" means Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of
a Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Conventional Loan" means a conventional residential first lien
mortgage loan which is a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement which contains a provision whereby the
Mortgagor is permitted to convert the Mortgage Loan to a fixed rate Mortgage
Loan in accordance with the terms of the related Mortgage Note.
2
<PAGE> 6
"Custodial Account" means the separate trust account created and
maintained pursuant to Section 2.04 of the Servicing Agreement.
"Cut-off Date" means [__________], 1997.
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Determination Date" means the earlier of two (2) Business Days prior
to the related Remittance Date or the 15th day of the month in which the
related Remittance Date occurs.
"Due Date" means the day of the month on which the Monthly Payment is
due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to Section 2.06 of the Servicing Agreement with respect to each
Mortgage Loan, as specified in the Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, the
amounts constituting taxes, assessments, water rates, sewer rents, municipal
charges, mortgage insurance premiums, fire and hazard insurance premiums,
condominium charges, and any other payments required to be escrowed by the
Mortgagor with the mortgagee pursuant to the Mortgage or any other document.
"FHA" means the Federal Housing Administration, an agency within the
United States Department of Housing and Urban Development, or any successor
thereto and including the Federal Housing Commissioner and the Secretary of
Housing and Urban Development where appropriate under the FHA Regulations.
"FHLMC" means the Federal Home Loan Mortgage Corporation, or any
successor thereto.
"FNMA" means the Federal National Mortgage Association, or any
successor thereto.
"Gross Margin" means, with respect to each Adjustable Rate Mortgage
Loan, the fixed percentage amount set forth in the related Mortgage Note which
amount is added to the Index in accordance with the terms of the related
Mortgage Note to determine on each Interest Rate Adjustment Date the Mortgage
Interest Rate for such Mortgage Loan.
"HUD" means the Department of Housing and Urban Development, or any
federal agency or official thereof which may from time to time succeed to the
functions thereof with regard to FHA mortgage insurance. The term "HUD," for
purposes of this Agreement, is also deemed to include subdivisions thereof such
as the FHA and Government National Mortgage Association.
"Index" means, with respect to each Interest Rate Adjustment Date of
any Adjustable Rate Mortgage Loan sold pursuant to this Agreement, the weekly
average yield on United States
3
<PAGE> 7
Treasury securities adjusted to a constant maturity of one year, as made
available by the Federal Reserve Board.
"Insurance Proceeds" means, with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Interest Rate Adjustment Date" means, with respect to each Adjustable
Rate Mortgage Loan, the date, specified in the related Mortgage Note and the
Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Lifetime Rate Cap" means the provision of each Mortgage Note related
to an Adjustable Rate Mortgage Loan which provides for an absolute maximum
Mortgage Interest Rate thereunder. The Mortgage Interest Rate during the terms
of each Adjustable Rate Mortgage Loan shall not at any time exceed the amount
per annum set forth on Exhibit H hereto.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or
assignment of such Mortgage Loan, trustee's sale, foreclosure sale or
otherwise, or the sale of the related Mortgaged Property if the Mortgaged
Property is acquired in satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage
Loan, the ratio (expressed as a percentage) of the original principal amount of
the Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument
securing a Mortgage Note, which creates a first lien on an unsubordinated
estate in fee simple in real property securing the Mortgage Note.
"Mortgage File" means the items pertaining to a particular Mortgage
Loan referred to in Exhibit A annexed hereto, and any additional documents
required to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of an Adjustable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
"Mortgage Interest Rate Cap" means, with respect to each Adjustable
Rate Mortgage Loan, the limit on each Mortgage Interest Rate adjustment as set
forth in the related Mortgage Note.
4
<PAGE> 8
"Mortgage Loan" means an individual Mortgage Loan which is the subject
of this Agreement, each Mortgage Loan originally sold and subject to this
Agreement being identified on the applicable Mortgage Loan Schedule, which
Mortgage Loan includes without limitation the Mortgage File, the Monthly
Payments, Principal Prepayments, Liquidation Proceeds, Condemnation Proceeds,
Insurance Proceeds, and all other rights, benefits, proceeds and obligations
arising from or in connection with such Mortgage Loan, excluding replaced or
repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan,
the following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note (or, with respect to the
Mortgage Loan listed on Schedule I to Exhibit A
hereto, a lost note affidavit, executed by an officer
of the Seller, with a copy of the original note
attached thereto) bearing all intervening
endorsements, endorsed "Pay to the order of
______________ without recourse" and signed in the
name of the Seller by an authorized officer. To the
extent that there is no room on the face of the
Mortgage Notes for endorsements, the endorsement may
be contained on an allonge, if state law so allows.
If the Mortgage Loan was acquired by the Seller in a
merger, the endorsement must be by "[Seller],
successor by merger to [name of predecessor]". If
the Mortgage Loan was acquired or originated by the
Seller while doing business under another name, the
endorsement must be by "[Seller], formerly known as
[previous name]"; and
b. The original Assignment of Mortgage for each Mortgage
Loan in form and substance acceptable for recording
endorsed "Pay to the order of _____________" and
signed in the name of the Seller. If the Mortgage
Loan was acquired by the Seller in a merger, the
Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If
the Mortgage Loan was acquired or originated by the
Seller while doing business under another name, the
Assignment of Mortgage must be by "[Seller], formerly
known as [previous name]". With respect to Co-op
Loans, the Assignment of Mortgage shall include an
assignment of Security Instruments.
c. The original of any guarantee executed in connection
with the Mortgage Note.
d. The original Mortgage, with evidence of recording
thereon. If in connection with any Mortgage Loan,
the Seller cannot deliver or cause to be delivered
the original Mortgage with evidence of recording
thereon on or prior to the Closing Date because of a
delay caused by the public recording office where
such Mortgage has been delivered for recordation, a
photocopy of such Mortgage certified by the Seller to
be true and correct
5
<PAGE> 9
will be delivered; if such Mortgage has been lost or
if such public recording office retains the original
recorded Mortgage, the Seller shall deliver or cause
to be delivered to the Purchaser, a photocopy of such
Mortgage, certified by such public recording office
to be a true and complete copy of the original
recorded Mortgage.
e. The originals of all assumption, modification,
consolidation or extension agreements, if any, with
evidence of recording thereon or certified copies of
such documents if the originals thereof are
unavailable.
f. Originals of all intervening assignments of the
Mortgage with evidence of recording thereon, if such
intervening assignment has been recorded.
g. The original mortgagee policy of title insurance or,
in the event such original title policy is
unavailable, a certified true copy of the related
policy binder or commitment for title certified to be
true and complete by the title insurance company.
h. Any security agreement, chattel mortgage or
equivalent executed in connection with the Mortgage.
i. For Mortgage Loans with original LTV's greater than
85%, evidence of a Primary Insurance Policy.
"Mortgage Loan Schedule" means the schedule of
Mortgage Loans attached hereto as Exhibit H setting
forth at least the following information with respect
to each Mortgage Loan: (1) the Seller's Mortgage Loan
identifying number; (2) the Mortgagor's name; (3) the
street address of the Mortgaged Property including
the city, state and zip code; (4) a code indicating
whether the Mortgaged Property is owner occupied,
second home or investor owned; (5) the type of
residential units constituting the Mortgaged
Property; (6) the original months to maturity; (7)
the remaining months to maturity from the Cut-off
Date, based on the original amortization schedule,
and, if different, the maturity expressed in the same
manner but based on the actual amortization schedule;
(8) the Loan-to-Value Ratio at origination; (9) the
Mortgage Interest Rate as of the Cut-off Date; (10)
the stated maturity date; (11) the amount of the
Monthly Payment as of the Cut-off Date; (12) the
original principal amount of the Mortgage Loan; (13)
the principal balance of the Mortgage Loan as of the
close of business on the Cut-off Date, after
deduction of payments of principal due on or before
the Cut-off Date whether or not collected; (14) a
code indicating the purpose of the loan (i.e.,
purchase, rate and term refinance, equity take-out
refinance); (15) a code indicating the documentation
style (i.e. full, alternative or reduced); (16) a
code indicating whether the Mortgage Loan is a
Convertible Mortgage Loan; (17) the number of times
during the 12 month period preceding the Closing Date
that any Monthly Payment has been received thirty or
more days after
6
<PAGE> 10
its Due Date; (18) the type of Mortgage Loan product,
if any; (19) the first payment Due Date; (19) the
initial Mortgage Interest Rate; (20) the amount of
the first Monthly Payment; (21) the name of any
Qualified Insurer with respect to a PMI Policy; and
(22) the Servicing Fee Rate. With respect to any
Adjustable Rate Mortgage Loan, (1) the Interest Rate
Adjustment Dates; (2) the Gross Margin; (3) the
Lifetime Rate Cap; (4) any Periodic Rate Caps; (5)
any minimum interest rate, if other than the Gross
Margin; (6) the first Rate Adjustment Date after the
Cut-off Date; and (8) the name of the applicable
Index, in each case, under the terms of the Mortgage
Note. With respect to the Mortgage Loans in the
aggregate, the Mortgage Loan Schedule shall set forth
the following information, as of the Cut-off Date:
(1) the number of Mortgage Loans; (2) the current
aggregate outstanding principal balance of the
Mortgage Loans; (3) the weighted average Mortgage
Interest Rate of the Mortgage Loans; and (4) the
weighted average maturity of the Mortgage Loans.
"Mortgage Note" means the note or other evidence of
the indebtedness of a Mortgagor secured by a
Mortgage.
"Mortgaged Property" means the real property securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Officer's Certificate" means a certificate signed by the Chairman of
the Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, as the case may be, and delivered to the
Purchaser as required by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Periodic Rate Cap" means the provision of each Mortgage Note related
to each Adjustable Rate Mortgage Loan which provides for an absolute maximum
amount by which the Mortgage Interest Rate therein may increase or decrease on
an Interest Rate Adjustment Date above or below the Mortgage Interest Rate
previously in effect. The Periodic Rate Cap for each Adjustable Rate Mortgage
Loan is the rate set forth on Exhibit H hereto.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"PMI Policy" or "Primary Insurance Policy" means a policy of primary
mortgage guaranty insurance issued by a Qualified Insurer.
7
<PAGE> 11
"Prime Rate" means the prime rate announced to be in effect from time
to time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of
principal on a Mortgage Loan which is received in advance of its scheduled Due
Date, including any prepayment penalty or premium thereon and which is not
accompanied by an amount of interest representing scheduled interest due on any
date or dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price paid on the Closing Date by the
Purchaser to the Seller in exchange for the Mortgage Loans purchased on the
Closing Date as set forth in Section 4 of this Agreement.
"Purchaser" means D&N Capital Corporation or its successor in interest
or assigns or any successor to the Purchaser under this Agreement as herein
provided.
"Qualified Appraiser" means an appraiser who had no interest, direct
or indirect in the Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the approval or disapproval
of the Mortgage Loan, and such appraiser and the appraisal made by such
appraiser both satisfy the requirements of Title XI of the Federal Institutions
Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, approved as an insurer
by FNMA and FHLMC with respect to primary mortgage insurance and, in addition,
in the two highest rating categories by Best's with respect to hazard and flood
insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to
be substituted by the Seller for a Deleted Mortgage Loan which must, on the
date of such substitution, (i) have an outstanding principal balance, after
deduction of all scheduled payments due in the month of substitution (or in the
case of a substitution of more than one mortgage loan for a Deleted Mortgage
Loan, an aggregate principal balance), not in excess of the outstanding
principal balance of the Deleted Mortgage Loan (the amount of any shortfall
will be deposited in the Custodial Account by the Seller in the month of
substitution); (ii) have a Mortgage Interest Rate not less than and not more
than 1.00% greater than the Mortgage Interest Rate of the Deleted Mortgage
Loan; (iii) have a remaining term to maturity not greater than and not more
than one year less than that of the Deleted Mortgage Loan (iv) be of the same
type as the Deleted Mortgage Loan (i.e., Mortgage Loan with the same Mortgage
Interest Rate Caps or fixed rate); and (v) comply with each representation and
warranty (respecting individual Mortgage Loans) set forth in Section 8.02
hereof.
"Remittance Date" means the date specified in the Servicing Agreement
(with respect to each Mortgage Loan, as specified therein).
8
<PAGE> 12
"Repurchase Price" means, with respect to any Mortgage Loan, a price
equal to (i) the unpaid principal balance of such Mortgage Loan plus (ii)
interest on such unpaid principal balance of such Mortgage Loan at the Mortgage
Interest Rate from the last date through which interest has been paid and
distributed to the Purchaser to the date of repurchase, less amounts received
or advanced, if any, by the Seller in respect of such repurchased Mortgage
Loan.
"RESPA" means Real Estate Settlement Procedures Act, as amended from
time to time.
"Seller" means D&N Bank, its successors in interest and assigns.
"Servicing Agreement" means the agreement, attached as Exhibit B
hereto, to be entered into by the Purchaser and the Seller, as servicer,
providing for the Seller to service the Mortgage Loans as specified by the
Servicing Agreement.
"Servicing Fee" means, with respect to each Mortgage Loan, subject to
the Servicing Agreement, the amount of the annual fee the Purchaser shall pay
to the Seller, which shall for a period of one full month be equal to
one-twelfth of the product of (a) the Servicing Fee Rate and (b) the
outstanding principal balance of such Mortgage Loan. Such fee shall be payable
monthly, and shall be pro rated for any portion of a month during which the
Mortgage Loan is serviced by the Seller under the Servicing Agreement. The
obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by this Agreement) of such Monthly Payment collected by the Seller,
or as otherwise provided under this Agreement. In addition to the Servicing
Fee, the Seller shall be entitled to retain Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the
rate specified in the Mortgage Loan Schedule with respect to such Mortgage
Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Servicing Agreement consisting of originals of all
documents in the Mortgage File which are not delivered to the Purchaser or its
designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, (i) the
principal balance of the Mortgage Loan at the Cut-off Date after giving effect
to payments of principal due on or before such date, whether or not received,
minus (ii) all amounts previously received by the Purchaser with respect to the
related Mortgage Loan representing payments or recoveries of principal or
advances in lieu thereof.
SECTION 2. AGREEMENT TO PURCHASE.
The Seller agrees to sell and the Purchaser agrees to purchase
Mortgage Loans having an aggregate principal balance on the Cut-off Date in an
amount equal to $[__________], or in such
9
<PAGE> 13
other amount as agreed by the Purchaser and the Seller as evidenced by the
actual aggregate principal balance of the Mortgage Loans accepted by the
Purchaser on the Closing Date.
[SECTION 3. RESERVED.]
SECTION 4. PURCHASE PRICE.
The Purchase Price for the Mortgage Loans listed on the Mortgage Loan
Schedule shall be $[__________,] or in such other amount as agreed by the
Purchaser and the Seller as evidenced by the actual aggregate principal balance
of the Mortgage Loans accepted by the Purchaser on the Closing Date. The
initial principal amount of the Mortgage Loans shall be the aggregate principal
balance of the Mortgage Loans, so computed as of the Cut-off Date, after
application of scheduled payments of principal due on or before the Cut-off
Date whether or not collected.
In addition to the Purchase Price as described above, the Purchaser
shall pay to the Seller, at closing, accrued interest on the initial principal
amount of the related Mortgage Loans at the weighted average Mortgage Interest
Rate of those Mortgage Loans, minus any amounts attributable to Servicing Fees
as provided in the Servicing Agreement from the Cut-off Date through the day
prior to the Closing Date, inclusive.
The Purchase Price plus accrued interest as set forth in the preceding
paragraph shall be paid on the Closing Date by wire transfer of immediately
available funds.
The Purchaser shall be entitled to (l) all scheduled principal due
after the Cut-off Date, (2) all other recoveries of principal collected on or
after the Cut-off Date (provided, however, that all scheduled payments of
principal due on or before the Cut-off Date and collected after the Cut-off
Date shall belong to the Seller), and (3) all payments of interest on the
Mortgage Loans net of applicable Servicing Fees collected on or after the
Cut-off Date (minus that portion of any such payment which is allocable to the
period prior to the Cut-off Date). The outstanding principal balance of each
Mortgage Loan as of the Cut-off Date is determined after application of
payments of principal due on or before the Cut-off Date whether or not
collected, together with any unscheduled principal prepayments collected prior
to the Cut-off Date; provided, however, that payments of scheduled principal
and interest prepaid for a Due Date beyond the Cut-off Date shall not be
applied to the principal balance as of the Cut-off Date. Such prepaid amounts
shall be the property of the Purchaser. Any such prepaid amounts shall be
deposited into the Custodial Account, which account is established for the
benefit of the Purchaser for subsequent remittance to the Purchaser.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof, the Seller has (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File, including a copy of
the Assignment of Mortgage, pertaining to each Mortgage Loan, or (b) made the
related Mortgage File available to the Purchaser for examination at the
Seller's offices or such other location as shall otherwise be agreed upon by
the Purchaser and the
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Seller. The fact that the Purchaser or its designee has conducted or has
failed to conduct any partial or complete examination of the Mortgage Files
shall not affect the Purchaser's (or any of its successor's) rights to demand
repurchase, substitution or other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.01. CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF
SERVICING FILES.
The Seller hereby agrees to sell, transfer, assign, set over and
convey to the Purchaser on the Closing Date, without recourse, but subject to
the terms of this Agreement, all right, title and interest of the Seller in and
to the Mortgage Loans and the Mortgage Files and all rights and obligations
arising under the documents contained therein. The Servicing File shall be
retained by the Seller in accordance with the terms of the Servicing Agreement
and, as provided therein, shall be appropriately identified in the Seller's
computer system and/or books and records, as appropriate, to clearly reflect
the sale of the related Mortgage Loan to the Purchaser.
SUBSECTION 6.02. BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the Closing Date shall be in
the name of the Seller. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all funds received by
the Seller after the Cut-off Date on or in connection with a Mortgage Loan
shall be vested in the Purchaser or one or more of its designees; provided,
however, that all funds received on or in connection with a Mortgage Loan shall
be received and held by the Seller in trust for the benefit of the Purchaser or
its designee, as the case may be, as the owner of the Mortgage Loans pursuant
to the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's
balance sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.03. DELIVERY OF MORTGAGE LOAN DOCUMENTS.
The Seller shall deliver and release to the Purchaser or its designee
on the Closing Date the Mortgage Loan Documents with respect to each Mortgage
Loan set forth on the Mortgage Loan Schedule.
The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with this Agreement
within two (2) weeks of their execution, provided, however, that the Seller
shall provide the Purchaser or its designee with a certified true copy of any
such document submitted for recordation within two (2) weeks of its execution,
and shall promptly provide the original of any document submitted for
recordation or a copy of such document certified by the appropriate public
recording office to be a true and complete copy of the original within ninety
(90) days of its submission for recordation.
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In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the Closing Date (other
than with respect to the Assignments of Mortgage which shall be delivered to
the Purchaser or its designee in blank, and in the event that the Seller does
not cure such failure within 30 days of discovery or receipt of written
notification of such failure from the Purchaser, the related Mortgage Loan
shall, upon the request of the Purchaser, be repurchased by the Seller at the
price and in the manner specified in Subsection 8.03. The foregoing repurchase
obligation shall not apply in the event that the Seller cannot deliver, or
cause to be delivered, such original or copy of any document submitted for
recordation to the appropriate public recording office within the specified
period due to a delay caused by the recording office in the applicable
jurisdiction; provided that the Seller shall instead deliver, or cause to be
delivered, a recording receipt of such recording office or, if such recording
receipt is not available, an officer's certificate of a servicing officer of
the Seller, confirming that such documents have been accepted for recording;
provided that, upon request of the Purchaser and delivery by the Purchaser to
the Seller of a schedule of the related Mortgage Loans, the Seller shall
reissue and deliver to the Purchaser or its designee said officer's certificate
relating to the related Mortgage Loans.
The Seller shall pay all initial recording fees, if any, for the
Assignments of Mortgage and any other fees or costs in transferring all
original documents to the Purchaser or its designee. The Purchaser or its
designee shall be responsible for recording the Assignments of Mortgage and
shall be reimbursed by the Seller for the reasonable costs associated therewith
pursuant to the preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis.
The Purchaser shall retain the Seller as independent contract servicer
of the Mortgage Loans pursuant to and in accordance with the terms and
conditions contained in the Servicing Agreement. The Purchaser and the Seller
shall execute the Servicing Agreement on the Closing Date in the form attached
hereto as Exhibit B.
Pursuant to the Servicing Agreement, the Seller shall begin servicing
the Mortgage Loans on behalf of the Purchaser and shall be entitled to the
Servicing Fee and any Ancillary Income with respect to such Mortgage Loans from
the Closing Date until the termination of the Servicing Agreement with respect
to any of the Mortgage Loans as set forth in the Servicing Agreement. The
Seller shall conduct such servicing in accordance with the terms of the
Servicing Agreement.
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SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLER; REMEDIES FOR BREACH.
SUBSECTION 8.01. REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as
of the date hereof and as of the Closing Date:
(a) Due Organization and Authority; Enforceability. The
Seller is a federally chartered savings bank duly
organized and validly existing under the laws of the
United States and has all licenses necessary to carry
on its business as now being conducted and is
licensed, qualified and in good standing in each
state wherein it owns or leases any material
properties or where a Mortgaged Property is located,
if the laws of such state require licensing or
qualification in order to conduct business of the
type conducted by the Seller, and in any event the
Seller is in compliance with the laws of any such
state to the extent necessary to ensure the
enforceability of the related Mortgage Loan in
accordance with the terms of this Agreement; the
Seller has the full corporate power, authority and
legal right to hold, transfer and convey the Mortgage
Loans and to execute and deliver this Agreement and
to perform its obligations hereunder; the execution,
delivery and performance of this Agreement (including
all instruments of transfer to be delivered pursuant
to this Agreement) by the Seller and the consummation
of the transactions contemplated hereby have been
duly and validly authorized; this Agreement and all
agreements contemplated hereby have been duly
executed and delivered and constitute the valid,
legal, binding and enforceable obligations of the
Seller subject to bankruptcy laws and other similar
laws of general application affecting rights of
creditors and subject to the application of the rules
of equity, including those respecting the
availability of specific performance, none of which
will materially interfere with the realization of the
benefits provided thereunder, regardless of whether
such enforcement is sought in a proceeding in equity
or at law; and all requisite corporate action has
been taken by the Seller to make this Agreement and
all agreements contemplated hereby valid and binding
upon the Seller in accordance with their terms;
(b) Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in
the ordinary course of business of the Seller, and
the transfer, assignment and conveyance of the
Mortgage Notes and the Mortgages by the Seller
pursuant to this Agreement are not subject to the
bulk transfer or any similar statutory provisions in
effect in any applicable jurisdiction;
(c) No Conflicts. Neither the execution and delivery of
this Agreement, the sale of the Mortgage Loans to the
Purchaser, the consummation of the
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transactions contemplated hereby, nor the fulfillment
of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a
breach of any of the terms, conditions or provisions
of the Seller's charter or by-laws or any legal
restriction or any agreement or instrument to which
the Seller is now a party or by which it is bound, or
constitute a default or result in an acceleration
under any of the foregoing, or result in the
violation of any law, rule, regulation, order,
judgment or decree to which the Seller or its
property is subject, or result in the creation or
imposition of any lien, charge or encumbrance that
would have an adverse effect upon any of its
properties pursuant to the terms of any mortgage,
contract, deed of trust or other instrument, or
impair the ability of the Purchaser to realize on the
Mortgage Loans, impair the value of the Mortgage
Loans, or impair the ability of the Purchaser to
realize the full amount of any mortgage insurance
benefits accruing pursuant to this Agreement;
(d) Ability to Perform: Solvency. The Seller does not
believe, nor does it have any reason or cause to
believe, that it cannot perform each and every
covenant contained in this Agreement. The Seller is
solvent and the sale of the Mortgage Loans will not
cause the Seller to become insolvent. The sale of
the Mortgage Loans is not undertaken with the intent
to hinder, delay or defraud any of the Seller's
creditors;
(e) No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened
against the Seller, before any court, administrative
agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation
of any of the transactions contemplated by this
Agreement or which, either in any one instance or in
the aggregate, could result in any material adverse
change in the business, operations, financial
condition, properties or assets of the Seller, or in
any material impairment of the right or ability of
the Seller to carry on its business substantially as
now conducted, or in any material liability on the
part of the Seller, or which would draw into question
the validity of this Agreement or the Mortgage Loans
or of any action taken or to be taken in connection
with the obligations of the Seller contemplated
herein, or which would be likely to impair materially
the ability of the Seller to perform under the terms
of this Agreement;
(f) No Consent Required. No consent, approval,
authorization or order of, or registration or filing
with, or notice to any court or governmental agency
or body including HUD is required for the execution,
delivery and performance by the Seller of or
compliance by the Seller with this Agreement or the
Mortgage Loans, the delivery of a portion of the
Mortgage Files to the Purchaser or its designee or
the sale of the Mortgage Loans or the consummation of
the transactions contemplated by this
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Agreement, or if required, such approval has been
obtained prior to the Closing Date;
(g) Selection Process. The Mortgage Loans were selected
from among the outstanding one- to four-family
mortgage loans in the Seller's portfolio at the
Closing Date as to which the representations and
warranties set forth in Subsection 8.02 could be made
and such selection was not made in a manner so as to
affect adversely the interests of the Purchaser;
(h) Initial Portfolio. The aggregate characteristics of
the Mortgage Loans are as set forth under the heading
"Business and Strategy--Description of Initial
Portfolio" in the Prospectus of the Purchaser dated
[___________,] 1997;
(i) No Untrue Information. Neither this Agreement nor
any information, statement, tape, diskette, report,
form, or other document furnished or to be furnished
pursuant to this Agreement or in connection with the
transactions contemplated hereby contains or will
contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary
to make the statements contained herein or therein
not misleading; and
(j) No Brokers. The Seller has not dealt with any
broker, investment banker, agent or other person that
may be entitled to any commission or compensation in
connection with the sale of the Mortgage Loans.
SUBSECTION 8.02. REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser that, as to
each Mortgage Loan, as of the Closing Date for such Mortgage Loan:
(a) Mortgage Loans as Described. The information set
forth in the Mortgage Loan Schedule is complete, true
and correct in all material respects;
(b) Payments Current; Status. All payments required to
be made up to, but not including, the Cut-off Date
for the Mortgage Loan under the terms of the Mortgage
Note have been made and credited. No payment
required under the Mortgage Loan is delinquent nor
has any payment under the Mortgage Loan been 30 days
or more delinquent more than once within the period
falling twelve (12) months prior to the Cut-off Date.
The Mortgage Loan is not, and has not been at any
time in the preceding twelve months, (i) classified,
(ii) in nonaccrual status or (iii) renegotiated due
to the financial deterioration of the Mortgagor;
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(c) No Outstanding Charges. There are no defaults in
complying with the terms of the Mortgage, and all
taxes, governmental assessments, insurance premiums,
or water, sewer and municipal charges which
previously became due and owing have been paid, or an
escrow of funds has been established in an amount
sufficient to pay for every such item which remains
unpaid and which has been assessed but is not yet due
and payable. The Seller has not advanced funds, or
induced, solicited or knowingly received any advance
of funds by a party other than the Mortgagor,
directly or indirectly, for the payment of any amount
required under the Mortgage Loan, except for interest
accruing from the date of the Mortgage Note or date
of disbursement of the Mortgage Loan proceeds,
whichever is earlier, to the day which precedes by
one month the Due Date of the first installment of
principal and interest;
(d) Original Terms Unmodified. The terms of the Mortgage
Note and Mortgage have not been impaired, waived,
altered or modified in any respect, from the date of
origination except by a written instrument which has
been recorded, if necessary to protect the interests
of the Purchaser, and which has been delivered to the
Purchaser or its designee and the terms of which are
reflected in the Mortgage Loan Schedule, if
applicable. The substance of any such waiver,
alteration or modification has been approved by the
title insurer, if any, to the extent required by the
policy, and its terms are reflected on the Mortgage
Loan Schedule, if applicable. No Mortgagor has been
released, in whole or in part, except in connection
with an assumption agreement, which assumption
agreement is part of the Mortgage Loan File delivered
to the Purchaser or its designee and the terms of
which are reflected in the Mortgage Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to any
right of rescission, set-off, counterclaim or
defense, including without limitation the defense of
usury, nor will the operation of any of the terms of
the Mortgage Note or the Mortgage, or the exercise of
any right thereunder, render either the Mortgage Note
or the Mortgage unenforceable, in whole or in part
and no such right of rescission, set-off,
counterclaim or defense has been asserted with
respect thereto, and no Mortgagor is now or was, at
the time of origination of the related Mortgage Loan,
a debtor in any state or Federal bankruptcy or
insolvency proceeding;
(f) Hazard Insurance. Pursuant to the terms of the
Mortgage, all buildings or other improvements upon
the Mortgaged Property are insured by a generally
acceptable insurer against loss by fire, hazards of
extended coverage and such other hazards as are set
forth in Section 2.10 of the Servicing Agreement
attached hereto as Exhibit B. If required by the
Flood Disaster Protection Act of 1973, as amended,
the Mortgage Loan is covered by a flood insurance
policy meeting the requirements of the current
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guidelines of the Federal Insurance Administration
which policy conforms to FNMA and FHLMC, as well as
all additional requirements set forth in Section 2.10
of the Servicing Agreement attached hereto as Exhibit
B. All individual insurance policies contain a
standard mortgagee clause naming the Seller and its
successors and assigns as mortgagee, and all premiums
thereon have been paid. The Mortgage for each
Mortgage Loan obligates the Mortgagor thereunder to
maintain the hazard insurance policy at the
Mortgagor's cost and expense, and on the Mortgagor's
failure to do so, authorizes the holder of the
Mortgage to obtain and maintain such insurance at
such Mortgagor's cost and expense, and to seek
reimbursement therefor from the Mortgagor. Where
required by state law or regulation, the Mortgagor
has been given an opportunity to choose the carrier
of the required hazard insurance, provided the policy
is not a "master" or "blanket" hazard insurance
policy covering a condominium, or any hazard
insurance policy covering the common facilities of a
planned unit development. The hazard insurance
policy is the valid and binding obligation of the
insurer, is in full force and effect, and will be in
full force and effect and inure to the benefit of the
Purchaser upon the consummation of the transactions
contemplated by this Agreement. The Seller has not
engaged in, and has no knowledge of the Mortgagor's
having engaged in, any act or omission which would
impair the coverage of any such policy, the benefits
of the endorsement provided for herein, or the
validity and binding effect of either including,
without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of
any kind has been or will be received, retained or
realized by any attorney, firm or other person or
entity, and no such unlawful items have been
received, retained or realized by the Seller;
(g) Compliance with Applicable Laws. Any and all
requirements of any federal, state or local law
including, without limitation, usury,
truth-in-lending, real estate settlement procedures,
consumer credit protection, fair housing, equal
credit opportunity and disclosure laws applicable to
the Mortgage Loan have been complied with, the
consummation of the transactions contemplated hereby
will not involve the violation of any such laws or
regulations, and the Seller shall maintain in its
possession, available for the Purchaser's inspection,
and shall deliver to the Purchaser upon demand,
evidence of compliance with all such requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not
been satisfied, canceled, subordinated or rescinded,
in whole or in part, and the Mortgaged Property has
not been released from the lien of the Mortgage, in
whole or in part, nor has any instrument been
executed that would effect any such release,
cancellation, subordination or rescission. The
Seller has not waived the performance by the
Mortgagor of any action, if the
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Mortgagor's failure to perform such action would
cause the Mortgage Loan to be in default, nor has the
Seller waived any default resulting from any action
or inaction by the Mortgagor;
(i) Location and Type of Mortgaged Property. The
Mortgaged Property is located in the state identified
in the Mortgage Loan Schedule and consists of a
single parcel of real property with a detached single
family residence erected thereon, or a townhouse, or
a two- to four-family dwelling, or an individual
condominium unit in a condominium project, or an
individual unit in a planned unit development,
provided, however, that any condominium unit or
planned unit development shall conform with
requirements acceptable to FNMA or FHLMC regarding
such dwellings and that no residence or dwelling is a
single parcel of real property with a cooperative
housing corporation erected thereon, a mobile home or
a manufactured dwelling. As of the date of
origination, no portion of the Mortgaged Property is
used for commercial purposes, and since the date of
origination no portion of the Mortgaged Property is
used for commercial purposes;
(j) Valid First Lien. The Mortgage is a valid,
subsisting, enforceable and perfected first lien on
the Mortgaged Property, including all buildings and
improvements on the Mortgaged Property and all
installations and mechanical, electrical, plumbing,
heating and air conditioning systems located in or
annexed to such buildings, and all additions,
alterations and replacements made at any time with
respect to the foregoing. The lien of the Mortgage
is subject only to:
(1) the lien of current real property taxes and
assessments not yet due and payable;
(2) covenants, conditions and restrictions,
rights of way, easements and other matters of
the public record as of the date of recording
acceptable to prudent mortgage lending
institutions generally and specifically
referred to in the lender's title insurance
policy delivered to the originator of the
Mortgage Loan and (a) specifically referred
to or otherwise considered in the appraisal
made for the originator of the Mortgage Loan
or (b) which do not adversely affect the
Appraised Value of the Mortgaged Property set
forth in such appraisal; and
(3) other matters to which like properties are
commonly subject which do not materially
interfere with the benefits of the security
intended to be provided by the Mortgage or
the use, enjoyment, value or marketability of
the related Mortgaged Property.
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Any security agreement related to and delivered in connection with the
Mortgage Loan establishes and creates a valid, subsisting, enforceable and
perfected first lien and first priority security interest on the property
described therein and the Seller has full right to sell and assign the same to
the Purchaser. The Mortgaged Property was not, as of the date of origination
of the Mortgage Loan, subject to a mortgage, deed of trust, deed to secure debt
or other security instrument creating a lien subordinate to the lien of the
Mortgage (except any such subordinate loan which was created in connection with
the origination of the related Mortgage Loan details of which are contained in
the related Mortgage File);
(k) Validity of Mortgage Documents. The Mortgage Note
and the Mortgage and any other agreement executed and
delivered by a Mortgagor in connection with a
Mortgage Loan are genuine, and each is the legal,
valid and binding obligation of the maker thereof
enforceable in accordance with its terms. All
parties to the Mortgage Note, the Mortgage and any
other such related agreement had legal capacity to
enter into the Mortgage Loan and to execute and
deliver the Mortgage Note, the Mortgage and any such
agreement, and the Mortgage Note, the Mortgage and
any other such related agreement have been duly and
properly executed by such parties. No fraud, error,
omission, misrepresentation, negligence or similar
occurrence with respect to a Mortgage Loan has taken
place on the part of any Person, including without
limitation, the Mortgagor, any appraiser, any builder
or developer, or any other party involved in the
origination of the Mortgage Loan. The Seller has
reviewed all of the documents constituting the
Servicing File and has made such inquiries as it
deems necessary to make and confirm the accuracy of
the representations set forth herein;
(l) Full Disbursement of Proceeds. The Mortgage Loan has
been closed and the proceeds of the Mortgage Loan
have been fully disbursed and there is no requirement
for future advances thereunder, and any and all
requirements as to completion of any on-site or
off-site improvement and as to disbursements of any
escrow funds therefor have been complied with. All
costs, fees and expenses incurred in making or
closing the Mortgage Loan and the recording of the
Mortgage were paid, and the Mortgagor is not entitled
to any refund of any amounts paid or due under the
Mortgage Note or Mortgage;
(m) Ownership. The Seller is the sole owner of record
and holder of the Mortgage Loan and the indebtedness
evidenced by each Mortgage Note, except for the
assignments of mortgage which have been sent for
recording, and upon recordation the Seller will be
the owner of record of each Mortgage and the
indebtedness evidenced by each Mortgage Note, and
upon the sale of the Mortgage Loans to the Purchaser,
the Seller will retain the Mortgage Files or any part
thereof with respect thereto not delivered to the
Purchaser or its designee in trust only for the
purpose of servicing and supervising the servicing of
each Mortgage Loan. The Mortgage Loan is
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not assigned or pledged, and the Seller has good,
indefeasible and marketable title thereto, and has
full right to transfer and sell the Mortgage Loan to
the Purchaser free and clear of any encumbrance,
equity, participation interest, lien, pledge, charge,
claim or security interest, and has full right and
authority subject to no interest or participation of,
or agreement with, any other party, to sell and
assign each Mortgage Loan pursuant to this Agreement
and following the sale of each Mortgage Loan, the
Purchaser will own such Mortgage Loan free and clear
of any encumbrance, equity, participation interest,
lien, pledge, charge, claim or security interest.
The Seller intends to relinquish all rights to
possess, control and monitor the Mortgage Loan,
except indirectly for purposes of servicing the
Mortgage Loan as set forth in the Servicing
Agreement. After the Closing Date, the Seller will
have no right to modify or alter the terms of the
sale of the Mortgage Loan and the Seller will have no
obligation or right to repurchase the Mortgage Loan
or substitute another Mortgage Loan, except as
provided in this Agreement;
(n) Doing Business. All parties which have had any
interest in the Mortgage Loan, whether as mortgagee,
assignee, pledgee or otherwise, are (or, during the
period in which they held and disposed of such
interest, were) (1) in compliance with any and all
applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and
(2) either (i) organized under the laws of such
state, or (ii) qualified to do business in such
state, or (iii) a federal savings and loan
association, a savings bank or a national bank having
a principal office in such state, or (3) not doing
business in such state;
(o) LTV, PMI Policy. No Conventional Loan has an LTV
greater than 95%. The original LTV of each
Conventional Loan either was not more than 85% or the
excess over 80% is and will be insured as to payment
defaults by a PMI Policy until the LTV of such
Conventional Loan is reduced to 85%. All provisions
of such PMI Policy have been and are being complied
with, such policy is valid and remains in full force
and effect, and all premiums due thereunder have been
paid. No action, inaction, or event has occurred and
no state of facts exists that has, or will result in
the exclusion from, denial of, or defense to coverage
by the PMI Policy. Any Conventional Loan subject to
a PMI Policy obligates the Mortgagor thereunder to
maintain the PMI Policy and to pay all premiums and
charges in connection therewith. The Mortgage
Interest Rate for each Conventional Loan as set forth
on the Mortgage Loan Schedule is net of any such
insurance premium;
(p) Title Insurance. The Mortgage Loan is covered by an
ALTA lender's title insurance policy or other
generally acceptable form of policy or insurance
acceptable to FNMA or FHLMC and each such title
insurance policy is
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issued by a title insurer acceptable to FNMA or FHLMC
and qualified to do business in the jurisdiction
where the Mortgaged Property is located, insuring the
Seller, its successors and assigns, as to the first
priority lien of the Mortgage in the original
principal amount of the Mortgage Loan, subject only
to the exceptions contained in clauses (1), (2) and
(3) of paragraph (j) of this Subsection 8.02, and
against any loss by reason of the invalidity or
unenforceability of the lien resulting from the
provisions of the Mortgage providing for adjustment
to the Mortgage Interest Rate and Monthly Payment.
Where required by state law or regulation, the
Mortgagor has been given the opportunity to choose
the carrier of the required mortgage title insurance.
Additionally, such lender's title insurance policy
affirmatively insures ingress and egress, and against
encroachments by or upon the Mortgaged Property or
any interest therein. The Seller, its successor and
assigns, are the sole insurers of such lender's title
insurance policy, and such lender's title insurance
policy is valid and remains in full force and effect
and will be in force and effect upon the consummation
of the transactions contemplated by this Agreement.
No claims have been made under such lender's title
insurance policy, and no prior holder of the related
Mortgage, including the Seller, has done, by act or
omission, anything which would impair the coverage of
such lender's title insurance policy, including
without limitation, no unlawful fee, commission,
kickback or other unlawful compensation or value of
any kind has been or will be received, retained or
realized by any attorney, firm or other person or
entity, and no such unlawful items have been
received, retained or realized by the Seller;
(q) No Defaults. There is no default, breach, violation
or event which would permit acceleration existing
under the Mortgage or the Mortgage Note and no event
which, with the passage of time or with notice and
the expiration of any grace or cure period, would
constitute a default, breach, violation or event
which would permit acceleration, and neither the
Seller nor its predecessors have waived any default,
breach, violation or event which would permit
acceleration;
(r) No Mechanics' Liens. There are no mechanics' or
similar liens or claims which have been filed for
work, labor or material (and no rights are
outstanding that under law could give rise to such
liens) affecting the related Mortgaged Property which
are or may be liens prior to, or equal or coordinate
with, the lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. All
improvements which were considered in determining the
Appraised Value of the Mortgaged Property lay wholly
within the boundaries and building restriction lines
of the Mortgaged Property, and no improvements on
adjoining properties encroach upon the Mortgaged
Property. No improvement located on or
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being part of the Mortgaged Property is in violation
of any applicable zoning law or regulation;
(t) Origination; Payment Terms. The Mortgage Loan was
originated by a mortgagee approved by the Secretary
of Housing and Urban Development pursuant to Sections
203 and 211 of the Act, a savings and loan
association, a savings bank, a commercial bank,
credit union, insurance company or similar
institution which is supervised and examined by a
federal or state authority. The documents,
instruments and agreements submitted for loan
underwriting were not falsified and contain no untrue
statement of material fact or omit to state a
material fact required to be stated therein or
necessary to make the information and statements
therein not misleading. Principal payments on the
Mortgage Loan commenced no more than sixty (60) days
after funds were disbursed in connection with the
Mortgage Loan. The Mortgage Interest Rate, as well
as the Lifetime Rate Cap and the Periodic Rate Cap if
the Mortgage Loan is an Adjustable Rate Mortgage
Loan, are as set forth on Exhibit J and/or Exhibit K
hereto. The Mortgage Note is payable on the first
day of each month in equal monthly installments of
principal and interest, which installments of
interest are subject to change if the Mortgage Loan
is an Adjustable Rate Mortgage Loan due to the
adjustments to the Mortgage Interest Rate on each
Interest Rate Adjustment Date, with interest
calculated and payable in arrears, sufficient to
amortize the Mortgage Loan fully by the stated
maturity date, over an original term of not more than
thirty years from commencement of amortization.
There is no negative amortization with respect to any
Mortgage Loan. Each Convertible Mortgage Loan
contains a provision allowing the Mortgagor to
convert the Mortgage Note from an adjustable interest
rate Mortgage Note to a fixed interest rate Mortgage
Note in accordance with the terms of the Mortgage
Note or a rider to the related Mortgage Note;
(u) Customary Provisions. The Mortgage contains
customary and enforceable provisions such as to
render the rights and remedies of the holder thereof
adequate for the realization against the Mortgaged
Property of the benefits of the security provided
thereby, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and
(ii) otherwise by judicial foreclosure. Upon default
by a Mortgagor on a Mortgage Loan and foreclosure on,
or trustee's sale of, the Mortgaged Property pursuant
to the proper procedures, the holder of the Mortgage
Loan will be able to deliver good and merchantable
title to the Mortgaged Property. There is no
homestead or other exemption available to a Mortgagor
which would interfere with the right to sell the
Mortgaged Property at a trustee's sale or the right
to foreclose the Mortgage, subject to applicable
federal and state laws and judicial precedent with
respect to bankruptcy and right of redemption or
similar law. The Mortgage contains due-on-sale
provisions
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providing for the acceleration of the payment of the
unpaid principal balance of such Mortgage Loan in the
event that all or any part of the Mortgaged Property
is sold or transferred without the prior written
consent of the Mortgagee;
(v) Conformance with Agency and Underwriting Standards.
The Mortgage Loan was underwritten in accordance with
the underwriting standards of D&N Bank (a copy of
which is attached hereto as Exhibit I), or FNMA's
underwriting standards (except that the principal
balance of certain Mortgage Loans may have exceeded
the limits of FNMA), in each case in effect at the
time the Mortgage Loan was originated. The Mortgage
Note and Mortgage are on forms acceptable to FHLMC or
FNMA, except with respect to Mortgage Loans
underwritten in accordance with the underwriting
guidelines of D&N Bank, which are on forms acceptable
to the Purchaser, in the Purchaser's sole discretion,
as evidenced by the Purchaser's purchase of the
related Mortgage Loans, and, in either case, the
Seller has not made any representations to a
Mortgagor that are inconsistent with the mortgage
instruments used. All Mortgage Loans have full asset
verification;
(w) Occupancy of the Mortgaged Property. As of the
Closing Date, the Mortgaged Property is lawfully
occupied under applicable law. All inspections,
licenses and certificates required to be made or
issued with respect to all occupied portions of the
Mortgaged Property and, with respect to the use and
occupancy of the same, including but not limited to
certificates of occupancy and fire underwriting
certificates, have been made or obtained from the
appropriate authorities. Unless otherwise specified
on the description of characteristics for the
Mortgage Loans delivered pursuant to Section 10 on
the Closing Date in the Mortgage Loan Schedule
attached as Exhibit H hereto, the Mortgagor
represented at the time of origination of the
Mortgage Loan that the Mortgagor would occupy the
Mortgaged Property as the Mortgagor's primary
residence;
(x) No Additional Collateral. The Mortgage Note is not
and has not been secured by any collateral except the
lien of the corresponding Mortgage and the security
interest of any applicable security agreement or
chattel mortgage referred to in clause (j) above;
(y) Deeds of Trust. In the event the Mortgage
constitutes a deed of trust, a trustee, authorized
and duly qualified under applicable law to serve as
such, has been properly designated and currently so
serves and is named in the Mortgage, and no fees or
expenses are or will become payable by the Purchaser
to the trustee under the deed of trust, except in
connection with a trustee's sale after default by the
Mortgagor;
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(z) Acceptable Investment. There are no circumstances or
conditions with respect to the Mortgage, the
Mortgaged Property, the Mortgagor, the Mortgage File
or the Mortgagor's credit standing that can
reasonably be expected to cause the Mortgage Loan to
become delinquent, or adversely affect the value or
marketability of the Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note,
the Mortgage, the Assignment of Mortgage and any
other Mortgage Loan Documents for each Mortgage Loan
have been delivered to the Purchaser or its designee.
The Seller is in possession of a complete, true and
accurate Mortgage File in compliance with Exhibit A
hereto, except for such documents the originals of
which have been delivered to the Purchaser or its
designee;
(bb) Condominiums/Planned Unit Developments. If the
Mortgaged Property is a condominium unit or a planned
unit development, such condominium or planned unit
development project is acceptable to FNMA or FHLMC or
is located in a condominium or planned unit
development project which has received project
approval from FNMA or FHLMC;
(cc) Transfer of Mortgage Loans. The Assignment of
Mortgage with respect to each Mortgage Loan is in
recordable form and is acceptable for recording under
the laws of the jurisdiction in which the Mortgaged
Property is located;
(dd) Assumability. The Mortgage Loan Documents provide
that a related Mortgage Loan may only be assumed if
the party assuming such Mortgage Loan meets certain
credit requirements stated in the Mortgage Loan
Documents;
(ee) No Buydown Provisions; No Graduated Payments or
Contingent Interests. The Mortgage Loan does not
contain provisions pursuant to which Monthly Payments
are paid or partially paid with funds deposited in
any separate account established by the Seller, the
Mortgagor, or anyone on behalf of the Mortgagor, or
paid by any source other than the Mortgagor nor does
it contain any other similar provisions which may
constitute a "buydown" provision. The Mortgage Loan
is not a graduated payment mortgage loan and the
Mortgage Loan does not have a shared appreciation or
other contingent interest feature;
(ff) RESERVED
(gg) Mortgaged Property Undamaged; No Condemnation
Proceedings. There is no proceeding pending or
threatened for the total or partial condemnation of
the Mortgaged Property. The Mortgaged Property is
undamaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or
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other casualty so as to affect adversely the value of
the Mortgaged Property as security for the Mortgage
Loan or the use for which the premises were intended
and each Mortgaged Property is in good repair. There
have not been any condemnation proceedings with
respect to the Mortgaged Property and the Seller has
no knowledge of any such proceedings in the future;
(hh) Collection Practices; Escrow Deposits; Interest Rate
Adjustments. The origination and collection
practices used by the Seller with respect to the
Mortgage Loan have been in all respects in compliance
with Accepted Servicing Practices, applicable laws
and regulations, and have been in all respects legal
and proper. With respect to escrow deposits and
Escrow Payments, all such payments are in the
possession of, or under the control of, the Seller
and there exist no deficiencies in connection
therewith for which customary arrangements for
repayment thereof have not been made. All Escrow
Payments have been collected in full compliance with
state and federal law and the provisions of the
related Mortgage Note and Mortgage. An escrow of
funds is not prohibited by applicable law and has
been established in an amount sufficient to pay for
every item that remains unpaid and has been assessed
but is not yet due and payable. No escrow deposits
or Escrow Payments or other charges or payments due
the Seller have been capitalized under the Mortgage
or the Mortgage Note. All Mortgage Interest Rate
adjustments to the Monthly Payment, if the Mortgage
Loan is an Adjustable Rate Mortgage Loan, have been
made in strict compliance with state and federal law
and the terms of the related Mortgage and Mortgage
Note on the related Interest Rate Adjustment Date.
With respect to each Adjustable Rate Mortgage Loan,
the Mortgage Interest Rate adjusts annually as set
forth herein. If, pursuant to the terms of the
Mortgage Note, another index was selected for
determining the Mortgage Interest Rate, the same
index was used with respect to each Mortgage Note
which required a new index to be selected, and such
selection did not conflict with the terms of the
related Mortgage Note. The Seller executed and
delivered any and all notices required under
applicable law and the terms of the related Mortgage
Note and Mortgage regarding the Mortgage Interest
Rate and the Monthly Payment adjustments. Any
interest required to be paid pursuant to state,
federal and local law has been properly paid and
credited;
(ii) Other Insurance Policies. No action, inaction or
event has occurred and no state of facts exists or
has existed that has resulted or could result in the
exclusion from, denial of, or defense to coverage
under any hazard insurance policy or PMI Policy. In
connection with the placement of any such insurance,
no commission, fee, or other compensation has been or
will be received by the Seller or by any officer,
director, or employee of the Seller or any designee
of the Seller or any corporation in which the Seller
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or any officer, director, or employee had a financial
interest at the time of placement of such insurance;
[CONFIRM]
(jj) No Violation of Environmental Laws. There is no
pending action or proceeding directly involving the
Mortgaged Property in which compliance with any
environmental law, rule or regulation is an issue;
there is no violation of any environmental law, rule
or regulation with respect to the Mortgaged Property;
and nothing further remains to be done to satisfy in
full all requirements of each such law, rule or
regulation constituting a prerequisite to use and
enjoyment of said property;
(kk) Soldiers' and Sailors' Civil Relief Act. The
Mortgagor has not notified the Seller and the Seller
has no knowledge of any relief requested or allowed
to the Mortgagor under the Soldiers' and Sailors'
Civil Relief Act of 1940;
(ll) Appraisal. The Mortgage File contains an appraisal
of the related Mortgaged Property signed prior to the
approval of the Mortgage Loan application by a
Qualified Appraiser who had no interest, direct or
indirect in the Mortgaged Property or in any loan
made on the security thereof, and whose compensation
is not affected by the approval or disapproval of the
Mortgage Loan, and the appraisal and appraiser both
satisfy the requirements of FNMA or FHLMC and Title
XI of the Federal Institutions Reform, Recovery, and
Enforcement Act of 1989 and the regulations
promulgated thereunder, all as in effect on the date
the Mortgage Loan was originated;
(mm) Disclosure Materials. The Mortgagor has received all
disclosure materials required by and the Seller
complied with all applicable law with respect to the
making of the Mortgage Loans;
(nn) Construction or Rehabilitation of Mortgaged Property.
No Mortgage Loan was made in connection with the
construction or rehabilitation of a Mortgaged
Property or facilitating the trade-in or exchange of
a Mortgaged Property;
(oo) Value of Mortgaged Property. The Seller has no
knowledge of any circumstances existing that could
reasonably be expected to adversely affect the value
or the marketability of any Mortgaged Property or
Mortgage Loan;
(pp) No Defense to Insurance Coverage. No action has been
taken or failed to be taken, no event has occurred
and no state of facts exists or has existed on or
prior to the Closing Date (whether or not known to
the Seller on or prior to such date) which has
resulted or will result in an exclusion from, denial
of, or defense to coverage under any primary mortgage
insurance
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policy (including, without limitation, any
exclusions, denials or defenses which would limit or
reduce the availability of the timely payment of the
full amount of the loss otherwise due thereunder to
the insured) whether arising out of actions,
representations, errors, omissions, negligence, or
fraud of the Seller, the related Mortgagor or any
party involved in the application for such coverage,
including the appraisal, plans and specifications and
other exhibits or documents submitted therewith to
the insurer under such insurance policy, or for any
other reason under such coverage, but not including
the failure of such insurer to pay by reason of such
insurer's breach of such insurance policy or such
insurer's financial inability to pay;
(qq) Escrow Analysis. With respect to each Mortgage,
Seller has within the last twelve months (unless such
Mortgage was originated within such twelve month
period) analyzed the required Escrow Payments for
each Mortgage and adjusted the amount of such
payments so that, assuming all required payments are
timely made, any deficiency will be eliminated on or
before the first anniversary of such analysis, or any
overage will be refunded to the Mortgagor, in
accordance with RESPA and any other applicable law;
and
(rr) Prior Servicing. Each Mortgage Loan has been
serviced in all material respects in compliance with
Accepted Servicing Practices; provided that, in the
event of any breach of the representation and
warranty set forth in this Subsection (rr), the
Seller shall not be required to repurchase any such
Mortgage Loan unless such breach had, and continues
to have, a material and adverse effect on the value
of the related Mortgage Loan or the interest of the
Purchaser therein.
SUBSECTION 8.03. REMEDIES FOR BREACH OF REPRESENTATIONS AND
WARRANTIES.
It is understood and agreed that the representations and warranties
set forth in Subsections 8.01 and 8.02 shall survive the sale of the Mortgage
Loans to the Purchaser and shall inure to the benefit of the Purchaser,
notwithstanding any restrictive or qualified endorsement on any Mortgage Note
or Assignment of Mortgage or the examination or failure to examine any Mortgage
File. Upon discovery by either the Seller or the Purchaser of a breach of any
of the foregoing representations and warranties which materially and adversely
affects the value of the Mortgage Loans or the interest of the Purchaser (or
which materially and adversely affects the interests of the Purchaser in the
related Mortgage Loan in the case of a representation and warranty relating to
a particular Mortgage Loan), the party discovering such breach shall give
prompt written notice to the other.
The Seller, promptly after discovery of a breach of any representation
or warranty, shall notify the Purchaser of such breach and the details thereof.
Within sixty (60) days of the earlier of (i) notice by the Seller pursuant to
the immediately preceding sentence or (ii) notice by the
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Purchaser to the Seller of any breach of a representation or warranty with
respect to a Mortgage Loan, the Seller shall use its best efforts promptly to
cure such breach in all material respects and, if such breach cannot be cured,
the Seller shall, at the Purchaser's option and subject to Subsection 8.04,
repurchase such Mortgage Loan at the Repurchase Price, unless the Seller elects
to substitute a Qualified Substitute Mortgage Loan for such Mortgage Loan
pursuant to this Subsection. In the event that a breach shall involve any
representation or warranty set forth in Subsection 8.01, and such breach cannot
be cured within sixty (60) days of the earlier of either discovery by or notice
to the Seller of such breach, all of the Mortgage Loans shall, at the
Purchaser's option and subject to Subsection 8.04, be repurchased by the Seller
at the Repurchase Price. However, if the breach shall involve a representation
or warranty set forth in Subsection 8.02 and the Seller discovers or receives
notice of any such breach within two (2) years of the Closing Date, the Seller
may, at the Seller's option and provided that the Seller has a Qualified
Substitute Mortgage Loan, rather than repurchase the Mortgage Loan as provided
above, remove such Mortgage Loan (a "Deleted Mortgage Loan") and substitute in
its place a Qualified Substitute Mortgage Loan or Loans, provided that any such
substitution shall be effected not later than two (2) years after the Closing
Date. If the Seller has no Qualified Substitute Mortgage Loan, it shall
repurchase the deficient Mortgage Loan. Any repurchase of a Mortgage Loan or
Loans pursuant to the foregoing provisions of this Subsection 8.03 shall be
accomplished by either (a) if the Servicing Agreement is in effect, deposit in
the Custodial Account of the amount of the Repurchase Price for payment to the
Purchaser on the next scheduled Remittance Date, after deducting therefrom any
amount received in respect of such repurchased Mortgage Loan or Loans and being
held in the Custodial Account for future distribution or (b) if the Servicing
Agreement is no longer in effect, by direct remittance of the Repurchase Price
to the Purchaser or its designee in accordance with the Purchaser's
instructions.
At the time of repurchase or substitution, the Purchaser and the
Seller shall arrange for the reassignment of the Deleted Mortgage Loan to the
Seller and the delivery to the Seller of any documents held by the Purchaser or
its designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to such
Deleted Mortgage Loan shall be transferred to the Seller. In the event of a
repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the Mortgage Loan Schedule to reflect the
withdrawal of the Deleted Mortgage Loan from this Agreement, and, in the case
of substitution, identify a Qualified Substitute Mortgage Loan and amend the
Mortgage Loan Schedule to reflect the addition of such Qualified Substitute
Mortgage Loan to this Agreement. In connection with any such substitution, the
Seller shall be deemed to have made as to such Qualified Substitute Mortgage
Loan the representations and warranties set forth in this Agreement except that
all such representations and warranties set forth in this Agreement shall be
deemed made as of the date of such substitution. The Seller shall effect such
substitution by delivering to the Purchaser or its designee for such Qualified
Substitute Mortgage Loan the documents required by Subsection 6.03, with the
Mortgage Note endorsed as required by Subsection 6.03. No substitution will be
made in any calendar month after the Determination Date for such month. The
Seller shall deposit in the Custodial Account the Monthly Payment, or in the
event that the Servicing Agreement is no longer in effect remit directly to the
Purchaser or its designee in accordance with the Purchaser's instructions the
Monthly Payment less the Servicing Fee due, if
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any, on such Qualified Substitute Mortgage Loan or Loans in the month following
the date of such substitution. Monthly Payments due with respect to Qualified
Substitute Mortgage Loans in the month of substitution shall be retained by the
Seller. For the month of substitution, payments to the Purchaser shall include
the Monthly Payment due on any Deleted Mortgage Loan in the month of
substitution, and the Seller shall thereafter be entitled to retain all amounts
subsequently received by the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the
amount (if any) by which the aggregate principal balance of all Qualified
Substitute Mortgage Loans as of the date of substitution is less than the
aggregate Stated Principal Balance of all Deleted Mortgage Loans (after
application of scheduled principal payments due in the month of substitution).
The amount of such shortfall shall be distributed by the Seller directly to the
Purchaser or its designee in accordance with the Purchaser's instructions
within two (2) Business Days of such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of the Seller representations and warranties contained in this
Agreement. It is understood and agreed that the obligations of the Seller set
forth in this Subsection 8.03 to cure, substitute for or repurchase a defective
Mortgage Loan and to indemnify the Purchaser as provided in this Subsection
8.03 constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of
the breach of any representations and warranties made in Subsections 8.01 and
8.02 shall accrue as to any Mortgage Loan upon (i) discovery of such breach by
the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by
the Seller to cure such breach or repurchase such Mortgage Loan as specified
above, and (iii) demand upon the Seller by the Purchaser for compliance with
this Agreement.
SECTION 9. CLOSING.
The closing for the purchase and sale of the Mortgage Loans shall take
place on the Closing Date. At the Purchaser's option, the closing shall be
either: by telephone, confirmed by letter or wire as the parties shall agree,
or conducted in person, at such place as the parties shall agree.
The closing for the Mortgage Loans to be purchased on the Closing Date
shall be subject to each of the following conditions:
(a) all of the representations and warranties of the
Seller under this Agreement and under the Servicing
Agreement (with respect to each Mortgage Loan, as
specified therein) shall be true and correct as of
the Closing Date and no
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event shall have occurred which, with notice or the
passage of time, would constitute a default under
this Agreement or an Event of Default under the
Servicing Agreement;
(b) the Purchaser shall have received, or the Purchaser's
attorneys shall have received in escrow, all closing
documents as specified in Section 10 of this
Agreement, in such forms as are agreed upon and
acceptable to the Purchaser, duly executed by all
signatories other than the Purchaser as required
pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the
Purchaser or its designee all Mortgage Loan Documents
with respect to each Mortgage Loan; and
(d) all other terms and conditions of this Agreement
shall have been complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the
Seller on the Closing Date the Purchase Price, plus accrued interest pursuant
to Section 4 of this Agreement, by wire transfer of immediately available funds
to the account designated by the Seller.
SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on the
Closing Date shall consist of fully executed originals of the following
documents:
1. this Agreement;
2. the Servicing Agreement, dated as of the Cut-off
Date, in the form of Exhibit B hereto;
3. a Custodial Account Letter Agreement or a Custodial
Account Certification, as applicable, as required
under the Servicing Agreement;
4. an Escrow Account Letter Agreement or an Escrow
Account Certification, as applicable, as required
under the Servicing Agreement;
5. an Officer's Certificate, in the form of Exhibit C
hereto, including all attachments thereto;
6. an Opinion of Counsel of the Seller/Servicer (who may
be an employee of the Seller/Servicer), in the form
of Exhibit D hereto;
7. a Security Release Certification, in the form of
Exhibit E or Exhibit F, if applicable, hereto
executed by any person, as requested by the Purchaser,
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if any of the Mortgage Loans have at any time been
subject to any security interest, pledge or
hypothecation for the benefit of such person;
8. a certificate or other evidence of merger or change
of name, signed or stamped by the applicable
regulatory authority, if any of the Mortgage
Loans were acquired by the Seller by merger or
acquired or originated by the Seller while conducting
business under a name other than its present name, if
applicable; and
9. the underwriting guidelines of D&N Bank, to be
attached hereto as Exhibit I.
The Seller shall bear the risk of loss of the closing documents until
such time as they are received by the Purchaser or its attorneys.
SECTION 11. COSTS.
The Purchaser shall pay the legal fees and expenses of its attorneys.
All other costs and expenses incurred in connection with the transfer and
delivery of the Mortgage Loans including recording fees, fees for recording
Assignments of Mortgage, fees for title policy endorsements and continuations,
if applicable, the Seller's attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and
franchises as a federally chartered savings bank and will obtain and preserve
its qualification to do business as a foreign corporation in each jurisdiction
in which such qualification is or shall be necessary to protect the validity
and enforceability of this Agreement, or any of the Mortgage Loans and to
perform its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the
Seller, shall be the successor of the Seller hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding; provided, however,
that the successor or surviving Person shall have a tangible net worth of at
least $30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on the Closing Date of the Mortgage Loans
described on the Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement, it being specifically understood and agreed
that each Mortgage Loan is unique and identifiable on the date hereof and that
an award of money damages would be insufficient to compensate the Purchaser for
the losses and damages incurred by the Purchaser (including damages to
prospective purchasers of the Mortgage Loans) in the event of the Seller's
failure to deliver (i) each of the
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Mortgage Loans or (ii) one or more Qualified Substitute Mortgage Loans or (iii)
one or more Mortgage Loans otherwise acceptable to the Purchaser on or before
the Closing Date. The Seller hereby grants to the Purchaser a lien on and a
continuing security interest in each Mortgage Loan and each document and
instrument evidencing each such Mortgage Loan to secure the performance by the
Seller of its obligations under this Agreement, and the Seller agrees that it
shall hold such Mortgage Loans in custody for the Purchaser subject to the
Purchaser's (i) right to reject any Mortgage Loan (or Qualified Substitute
Mortgage Loan) under the terms of this Agreement and to require another
Mortgage Loan (or Qualified Substitute Mortgage Loan) to be substituted
therefor, and (ii) obligation to pay the Purchase Price plus accrued interest
as set forth in Section 4 hereof for the Mortgage Loans. All rights and
remedies of the Purchaser under this Agreement are distinct from, and
cumulative with, any other rights or remedies under this Agreement or afforded
by law or equity and all such rights and remedies may be exercised
concurrently, independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if mailed, by registered or
certified mail, return receipt requested, or, if by other means, when received
by the other party at the address as follows:
(i) if to the Seller:
D&N Bank
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
(ii) if to the Purchaser:
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement
which is prohibited or unenforceable or is held to be void or unenforceable in
any jurisdiction shall be ineffective, as to such jurisdiction, to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as
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to any Mortgage Loan shall not invalidate or render unenforceable such
provision in any other jurisdiction. To the extent permitted by applicable
law, the parties hereto waive any provision of law which prohibits or renders
void or unenforceable any provision hereof. If the invalidity of any part,
provision, representation or warranty of this Agreement shall deprive any party
of the economic benefit intended to be conferred by this Agreement, the parties
shall negotiate, in good faith, to develop a structure the economic effect of
which is nearly as possible the same as the economic effect of this Agreement
without regard to such invalidity.
SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
The Agreement shall be construed in accordance with the laws of the
State of Michigan and the obligations, rights and remedies of the parties
hereunder shall be determined-in accordance with the substantive laws of the
State of Michigan (without regard to conflicts of laws principles), except to
the extent preempted by Federal law.
SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing,
and the Seller is selling the Mortgage Loans and not a debt instrument of the
Seller or another security. Accordingly, the parties hereto each intend to
treat the transaction for Federal income tax purposes as a sale by the Seller,
and a purchase by the Purchaser, of the Mortgage Loans.
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be
enforceable by the Seller and the Purchaser and the respective permitted
successors and assigns of the Seller and the successors and assigns of the
Purchaser. This Agreement shall not be assigned, pledged or hypothecated by
the Seller to a third party without the consent of the Purchaser. This
Agreement may be assigned, pledged or hypothecated by the Purchaser without the
prior consent of the Seller. If the Purchaser assigns all or any of its rights
as Purchaser hereunder, the assignee of the Purchaser will become the
"Purchaser" hereunder to the extent of such assignment, provided that at no
time shall there be more than fifteen (15) persons having the status of
"Purchaser" hereunder. Any assignment by the Purchaser shall be accompanied by
the delivery and execution of an Assignment and Assumption Agreement (the
"Assignment and Assumption Agreement") substantially in the form attached
hereto as Exhibit G. The Servicer shall be required to remit all amounts
required to be remitted to the Purchaser hereunder to said assignee commencing
with the first Remittance Date falling after receipt of said copy of the
related Assignment and Assumption Agreement provided
33
<PAGE> 37
that the Seller receives said copy no later than three (3) Business Days
immediately prior to the first day of the month of the related Remittance Date.
SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified
unless such waiver or modification is in writing and signed by the party
against whom such waiver or modification is sought to be enforced.
SECTION 21. EXHIBITS.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings
assigned to them in this Agreement and include the
plural as well as the singular, and the use of any
gender herein shall be deemed to include the other
gender;
(b) accounting terms not otherwise defined herein have
the meanings assigned to them in accordance with
generally accepted accounting principles;
(c) references herein to "Articles," "Sections,"
"Subsections," "Paragraphs," and other subdivisions
without reference to a document are to designated
Articles, Sections, Subsections, Paragraphs and other
subdivisions of this Agreement;
(d) reference to a Subsection without further reference
to a Section is a reference to such Subsection as
contained in the same Section in which the reference
appears, and this rule shall also apply to Paragraphs
and other subdivisions;
(e) the words "herein," "hereof," "hereunder" and other
words of similar import refer to this Agreement as a
whole and not to any particular provision; and
(f) the term "include" or "including" shall mean without
limitation by reason of enumeration.
34
<PAGE> 38
SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at the closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties agree
that any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of
this Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
To the extent permitted by applicable law, each of the Assignments of
Mortgage is subject to recordation in all appropriate public offices for real
property records in all the counties or their comparable jurisdictions in which
any or all of the Mortgaged Properties are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected at the Seller's expense for a single recordation with respect to each
Assignment of Mortgage in the event recordation is either necessary under
applicable law or requested by the Purchaser at its sole option.
35
<PAGE> 39
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date and year first above written.
D&N CAPITAL CORPORATION
(the Purchaser)
By:___________________________________________
Name:_________________________________________
Title:________________________________________
D&N BANK
(the Seller)
By:___________________________________________
Name:_________________________________________
Title:________________________________________
36
<PAGE> 40
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include
each of the following items, which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan
Purchase and Warranties Agreement to which this Exhibit is attached (the
"Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage
Loan listed on Schedule I hereto, a lost note affidavit, executed by an officer
of the Seller, with a copy of the original note attached thereto) bearing all
intervening endorsements, endorsed "Pay to the order of _______, without
recourse" and signed in the name of the Seller by an authorized officer. To
the extent that there is no room on the face of the Mortgage Notes for
endorsements, the endorsement may be contained on an allonge, if state law so
allows. If the Mortgage Loan was acquired by the Seller in a merger, the
endorsement must be by "[Seller], successor by merger to [name of
predecessor]". If the Mortgage Loan was acquired or originated by the Seller
while doing business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the
Mortgage Note.
3. The original Mortgage, with evidence of recording thereon. If
in connection with any Mortgage Loan, the Seller cannot deliver or cause to be
delivered the original Mortgage with evidence of recording thereon on or prior
to the Closing Date because of a delay caused by the public recording office
where such Mortgage has been delivered for recordation, a photocopy of such
Mortgage certified by the Seller to be true and correct will be delivered; if
such Mortgage has been lost or if such public recording office retains the
original recorded Mortgage, the Seller shall deliver or cause to be delivered
to the Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original recorded
Mortgage.
4. The originals of all assumption, modification, consolidation
or extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan
endorsed "Pay to the order of ____________________" and signed in the name of
the Seller by an authorized officer. If the Mortgage Loan was acquired by the
Seller in a merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan was
acquired or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as [previous
name]".
6. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon if such intervening assignment has been recorded.
<PAGE> 41
7. The original mortgagee policy of title insurance or, in the
event such original title policy is unavailable, a certified true copy of the
related policy binder or commitment for title certified to be true and complete
by the title insurance company.
8. Any original security agreement executed in connection with
the Mortgage.
9. The original hazard insurance policy and, if required by law,
flood insurance policy, in accordance with Section 8.02(f) of the Agreement.
10. Residential loan application.
11. Mortgage Loan closing statement.
12. Verification of employment and income.
13. Verification of acceptable evidence of source and amount of
down payment.
14. Credit report on the Mortgagor.
15. Residential appraisal report.
16. Photograph of the Mortgaged Property.
17. Survey of the Mortgaged Property, if any.
18. Copy of each instrument necessary to complete identification
of any exception set forth in the exception schedule in the title policy, i.e.,
map or plat, restrictions, easements, sewer agreements, home association
declarations, etc.
19. All required disclosure statements.
20. If available, termite report, structural engineer's report,
water potability and septic certification.
21. Sales contract.
22. Tax receipts, insurance premium receipts, ledger sheets,
insurance claim files, correspondence, current and historical computerized data
files, and all other processing, underwriting and closing papers and records
which are customarily contained in a mortgage loan file and which are required
to document the Mortgage Loan or to service the Mortgage Loan.
23. For Mortgage Loans with original LTV's greater than 85%,
evidence of a Primary Insurance Policy.
A-2
<PAGE> 42
In the event that such original or copy of any document submitted
for recordation to the appropriate public recording office is not so delivered
to the Purchaser or its designee within 90 days following the Closing Date
(other than with respect to the Assignments of Mortgage which shall be
delivered to the Purchaser or its designee in blank), and in the event that the
Seller does not cure such failure within 30 days of discovery or receipt of
written notification of such failure from the Purchaser, the related Mortgage
Loan shall, upon the request of the Purchaser, be repurchased by the Seller at
the price and in the manner specified in Subsection 8.03 of the Agreement. The
foregoing repurchase obligation shall not apply in the event that the Seller
cannot deliver such original or copy of any document submitted for recordation
to the appropriate public recording office within the specified period due to a
delay caused by the recording office in the applicable jurisdiction; provided
that the Seller shall instead deliver a recording receipt of such recording
office or, if such recording receipt is not available, an officer's certificate
of a servicing officer of the Seller, confirming that all such documents have
been accepted for recording; provided that, upon request of the Purchaser and
delivery by the Purchaser to the Seller of a schedule of the related Mortgage
Loans, the Seller shall reissue and deliver to the Purchaser or its designee
said officer's certificate relating to the related Mortgage Loans.
A-3
<PAGE> 43
EXHIBIT B
<PAGE> 44
EXHIBIT C
FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected [Vice]
President of D&N Bank, a federally chartered savings bank (the "Seller") and
further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete
copy of the restated charter of the Seller which is in full
force and effect on the date hereof and which has been in
effect without amendment, waiver, rescission or modification
since [_________.]
2. Attached hereto as Exhibit 2 is a true, correct and complete
copy of the bylaws of the Seller which are in effect on the
date hereof and which have been in effect without amendment,
waiver, rescission or modification since [_________.]
3. Attached hereto as Exhibit 3 is an original certificate of due
incorporation and valid existence of the Seller issued within
ten days of the date hereof, and no event has occurred since
the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete
copy of the corporate resolutions of the Board of Directors of
the Seller authorizing the Seller to execute and deliver each
of the Mortgage Loan Purchase and Warranties Agreements, dated
as of __________, 1997, by and between D&N Capital Corporation
(the "Purchaser") and the Seller (the "Purchase Agreement"),
to endorse the mortgage notes and execute the assignments of
mortgages by original [or facsimile] signature, and to execute
and deliver each of the Servicing Agreements dated as of
______, 1997, by and between D&N Capital Corporation (the
"Purchaser") and the Seller as Servicer (the "Servicing
Agreement") and such resolutions are in effect on the date
hereof and have been in effect without amendment, waiver,
rescission or modification since [_________.]
5. Either (i) no consent, approval, authorization or order of any
court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or
compliance by the Seller with the Purchase Agreement and the
Servicing Agreement, the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase
Agreement and the Serving Agreement; or (ii) any required
consent, approval, authorization or order has been obtained by
the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement
and the Servicing Agreement conflicts or will conflict with or
results or will result in a breach of or constitutes or will
constitute a default under the charter or by-laws of the
Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is
bound or to which it is subject, or any statute or order,
rule,
<PAGE> 45
regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller
is subject or by which it is bound.
7. To the best of my knowledge, there is no action, suit,
proceeding or investigation pending or threatened against the
Seller which, in my judgment, either in any one instance or in
the aggregate, may result in any material adverse change in
the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the
right or ability of the Seller to carry on its business
substantially as now conducted or in any material liability on
the part of the Seller or which would draw into question the
validity of the Purchase Agreement and the Servicing Agreement
or the mortgage loans or of any action taken or to be taken in
connection with the transactions contemplated hereby, or which
would be likely to impair materially the ability of the Seller
to perform under the terms of the Purchase Agreement and the
Servicing Agreement.
8. Each person listed on Exhibit 5 attached hereto who, as an
officer or representative of the Seller, signed the Purchase
Agreement and any other document delivered prior to or on the
date hereof in connection with any purchase described in the
Purchase Agreement was, at the respective times of such
signing and delivery, and is now, a duly elected or appointed,
qualified and acting officer or representative of the Seller,
who holds the office set forth opposite his or her name on
Exhibit 5, and the signatures of such persons appearing on
such documents are their genuine signatures. The person who,
as an officer or representative of the Seller, signed the
Servicing Agreement and any other document delivered prior to
or on the date hereof in connection with any servicing duties
described in the Servicing Agreement was, at the respective
times of such signing and delivery, and is now, a duly elected
or appointed, qualified and acting officer or representative
of the Seller, who holds the office set forth beneath his or
her name on the Servicing Agreement and the signature of such
person appearing on such document is his or her genuine
signature.
9. The Seller is duly authorized to engage in the transactions
described and contemplated in the Purchase Agreement and
Servicing Agreement.
C-2
<PAGE> 46
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the
seal of the Seller.
Dated:____________, 1997 By:_____________________________
Name:___________________________
Title: [VICE] President
[Seal]
I, _________________________, an [ASSISTANT] [VICE PRESIDENT] of D&N
Bank, hereby certify that _____________________ is the duly elected, qualified
and acting [Vice] President of the Seller and that the signature appearing
above is [HIS] genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:______________, 1997 By:_____________________________
Name:___________________________
Title: [ASSISTANT] [VICE PRESIDENT]
C-3
<PAGE> 47
EXHIBIT 5
to Seller's/Servicer's Officer's Certificate
NAME TITLE SIGNATURE
<PAGE> 48
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
_________________, 1997
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Dear Sirs:
You have requested my opinion, as General Counsel to D&N Bank (the
"Seller"), with respect to certain matters in connection with the sale by the
Seller of the Mortgage Loans pursuant to that certain Mortgage Loan Purchase
and Warranties Agreement by and between the Seller and D&N Capital Corporation
(the "Purchaser"), dated as of __________, 1997 (the "Purchase Agreement")
which sale is in the form of whole loans, delivered pursuant to a Purchase
Agreement and serviced pursuant to an Servicing Agreement, dated as of
__________, 1997, by and between the Purchaser and the Seller as Servicer (the
"Servicing Agreement"). Capitalized terms not otherwise defined herein have
the meanings set forth in the Purchase Agreement and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement;
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon
the representations and warranties of the Seller contained in the Purchase
Agreement and the Servicing Agreement. I have assumed the authenticity of all
documents submitted to me as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
documents.
Based upon the foregoing, it is my opinion that:
1. The Seller is a federally chartered savings bank duly
organized and validly existing under the laws of the United
States and is qualified to transact business in, and is in
good standing under, the laws of Michigan.
<PAGE> 49
2. The Seller has the power to engage in the transactions
contemplated by the Purchase Agreement and the Servicing
Agreement and all requisite power, authority and legal right
to execute and deliver the Purchase Agreement and the
Servicing Agreement and to perform and observe the terms and
conditions of such agreements.
3. The Purchase Agreement and Servicing Agreement have been duly
authorized, executed and delivered by the Seller and are
legal, valid and binding agreements enforceable in accordance
with their respective terms against the Seller, subject to
bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application
of the rules of equity, including those respecting the
availability of specific performance, none of which will
materially interfere with the realization of the benefits
provided thereunder or with the Purchaser's ownership of the
Mortgage Loans.
4. The Seller has been duly authorized to allow any of its
officers to execute any and all documents by original
signature in order to complete the transactions contemplated
by the Purchase Agreement and the Servicing Agreement and by
original or facsimile signature in order to execute the
endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the
officer at the Seller executing the endorsements to the
Mortgage Notes and the Assignments of Mortgages represents the
legal and valid signature of said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any
court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or
compliance by the Seller with the Purchase Agreement and the
Servicing Agreement and the sale of the Mortgage Loans or the
consummation of the transactions contemplated by the Purchase
Agreement and the Servicing Agreement or (ii) any required
consent, approval, authorization or order has been obtained
and the Servicing Agreement by the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement
and the Servicing Agreement conflicts or will conflict with or
results or will result in a breach of or constitutes or will
constitute a default under the charter or by-laws of the
Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is
bound or to which it is subject, or violates any statute or
order, rule, regulations, writ, injunction or decree of any
court, governmental authority or regulatory body to which the
Seller is subject or by which it is bound.
7. There is no action, suit, proceeding or investigation pending
or, to the best of my knowledge, threatened against the Seller
which, in my judgment, either in any one instance or in the
aggregate, may result in any material adverse change in the
business, operations, financial condition, properties or
assets of the Seller or in any
D-2
<PAGE> 50
material impairment of the right or ability of the Seller to
carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would
draw into question the validity of the Purchase Agreement and
the Servicing Agreement or the Mortgage Loans or of any action
taken or to be taken in connection with the transactions
contemplated thereby, or which would be likely to impair
materially the ability of the Seller to perform under the
terms of the Purchase Agreement and the Servicing Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the
manner contemplated by the Purchase Agreement is sufficient to
fully transfer to the Purchaser all right, title and interest
of the Seller thereto as noteholder and mortgagee.
9. The Mortgages have been duly assigned and the Mortgage Notes
have been duly endorsed as provided in the Purchase Agreement.
The Assignments of Mortgage are in recordable form, except
for the insertion of the name of the assignee, and upon the
name of the assignee being inserted, and to the best of my
knowledge, with respect to all other states, the Assignments
of Mortgage are in recordable form, except for the insertion
of the name of the assignee, and upon the name of the assignee
being inserted, are acceptable for recording under the laws of
such other states. The endorsement of the Mortgage Notes, the
delivery to the Purchaser, or its designee, of the Assignments
of Mortgage, and the delivery of the original endorsed
Mortgage Notes to the Purchaser, or its designee, are
sufficient to permit the Purchaser to avail itself of all
protection available under applicable law against the claims
of any present or future creditors of the Seller, and are
sufficient to prevent any other sale, transfer, assignment,
pledge or hypothecation of the Mortgages and the Mortgage
Notes by the Seller from being enforceable.
This opinion is given to you for your sole benefit, and no other
person or entity is entitled to rely hereon except that the purchaser or
purchasers to which you initially and directly resell the Mortgage Loans may
rely on this opinion as if it were addressed to them as of its date.
Very truly yours,
Peter L. Lemmer
General Counsel
D-3
<PAGE> 51
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of ______(the "Association")
___________________________________________________
___________________________________________________
Attention: ___________________________________________________
___________________________________________________
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that D&N Bank, a federally chartered
savings bank (the "Bank") has committed to sell to D&N Capital Corporation
under a Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans originated or owned by the Bank. The
Bank warrants that the mortgage loans to be sold to D&N Capital Corporation are
in addition to and beyond any collateral required to secure advances made by
the Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to D&N
Capital Corporation shall not be used as additional or substitute collateral
for advances made by the Association. D&N Capital Corporation understands that
the balance of the Bank's mortgage loan portfolio may be used as collateral or
additional collateral for advances made by the Association, and confirms that
it has no interest therein.
Execution of this letter by the Association shall constitute a full
and complete release of any security interest, claim, or lien which the
Association may have against the mortgage loans to be sold to D&N Capital
Corporation.
Very truly yours,
________________________________________
By:_____________________________________
Name:___________________________________
Title:__________________________________
Date:___________________________________
Acknowledge and approved:
FEDERAL HOME LOAN BANK OF
________________________________
By:_____________________________
Name:___________________________
Title:__________________________
Date:___________________________
<PAGE> 52
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
D&N Capital Corporation from D&N Bank pursuant to that certain Mortgage Loan
Purchase and Warranties Agreement, dated as of [__________, 1997,] and
certifies that all notes, mortgages, assignments and other documents in its
possession relating to such Mortgage Loans have been delivered and released to
D&N Bank or its designees, as of the date and time of the sale of such Mortgage
Loans to D&N Capital Corporation.
Name and Address of Financial Institution
________________________________
(name)
________________________________
(Address)
By:_____________________________
II. CERTIFICATION OF RELEASE
D&N Bank hereby certifies to D&N Capital Corporation that, as of the
date and time of the sale of the above-mentioned Mortgage Loans to D&N Capital
Corporation, the security interests in the Mortgage Loans released by the
above-named financial institution comprise all security interests relating to
or affecting any and all such Mortgage Loans. The Company warrants that, as of
such time, there are and will be no other security interests affecting any or
all of such Mortgage Loans.
_________________________________
By: _____________________________
Title: __________________________
Date:____________________________
<PAGE> 53
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated [__________________,]
between D&N Bank, a federally chartered savings bank ("Assignor") and D&N
Capital Corporation, a Delaware corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of
which hereby are acknowledged, and in consideration of the mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee,
as Purchaser, all of the right, title and interest of Assignor
with respect to the mortgage loans listed on Exhibit A
attached hereto (the "Mortgage Loans"), and with respect to
such Mortgage Loans, in, to and under (a) that certain
Mortgage Loan Purchase and Warranties Agreement dated
[__________,] 1997 by and between D&N Bank (the "Seller") and
D&N Capital Corporation (the "Purchase Agreement"), and (b)
that certain Servicing Agreement dated as of [_______], by and
between the Purchaser and the Seller (the "Servicing
Agreement"; the Servicing Agreement and the Purchase Agreement
are collectively referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with,
the Assignee that:
a. the Assignor is the lawful owner of the Mortgage
Loans with the full right to transfer the Mortgage
Loans free from any and all claims and encumbrances
whatsoever;
b. the Assignor has not received notice of, and has no
knowledge of, any offsets, counterclaims or other
defenses available to the Seller with respect to the
Agreements or the Mortgage Loans;
c. the Assignor has not waived or agreed to any waiver
under, or agreed to any amendment or other
modification of, the Agreements. The Assignor has no
knowledge of, and has not received notice of, any
waivers under or amendments or other modifications
of, or assignments of rights or obligations under,
the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise
disposed of the Mortgage Loans or any interest in the
Mortgage Loans, or solicited any offer to buy or
accept a transfer, pledge or other disposition of the
Mortgage Loans, or any interest in the Mortgage Loans
or otherwise approached or negotiated with respect to
the Mortgage Loans, or any interest in the Mortgage
with any person in any manner, or made any general
solicitation by means of general advertising or in
any other manner, or taken any other action which
would
<PAGE> 54
constitute a distribution of the Mortgage Loans under the Securities Act of
1933, as amended (the "1933 Act") or which would render the disposition of the
Mortgage Loans a violation of Section 5 of the 1933 Act or require registration
pursuant thereto.
3. The Assignee warrants and represents to, and covenants with,
the Assignor and the Seller pursuant to the Agreements that:
a. the Assignee is a corporation duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all
requisite corporate power and authority to acquire,
own and purchase the Mortgage Loans;
b. the Assignee has full corporate power and authority
to execute, deliver and perform under this Assignment
and Assumption Agreement, and to consummate the
transactions set forth herein. The execution,
delivery and performance of the Assignee of this
Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated
hereby, have been duly authorized by all necessary
corporate action of the Assignee. This Assignment
and Assumption Agreement has been duly executed and
delivered by the Assignee and constitutes the valid
and legally binding obligation of the Assignee
enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material
consent, approval, order or authorization of, or
declaration, filing or registration with, any
governmental entity is required to be obtained or
made by the Assignee in connection with the
execution, delivery or performance by the Assignee of
this Assignment and Assumption Agreement, or the
consummation by it of the transactions contemplated
hereby;
d. The Assignee agrees to be bound, as Purchaser, by all
of the terms, covenants and conditions of the
Agreements, the Mortgage Loans, and from and after
the date hereof, the Assignee assumes for the benefit
of each of the Seller and the Assignor all of the
Assignor' s obligations as Purchaser thereunder,
including, without limitation, the limitation on
assignment set forth in Section 19 of the Purchase
Agreement;
e. The Assignee understands that the Mortgage Loans have
not been registered under the 1933 Act or the
securities laws of any state;
f. The purchase price being paid by the Assignee for the
Mortgage Loans is in excess of $250,000 and will be
paid by cash remittance of the full purchase price
within sixty (60) days of the sale;
G-2
<PAGE> 55
g. The Assignee is acquiring the Mortgage Loans for
investment for its own account only and not for any
other person;
h. The Assignee considers itself a sophisticated
institutional investor having such knowledge and
experience in financial and business matters that it
is capable of evaluating the merits and risks of
investment in the Mortgage Loans;
i. The Assignee has been furnished with all information
regarding the Mortgage Loans that it has requested
from the Assignor or the Seller;
j. Neither the Assignee nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise
disposed of the Mortgage Loans or any interest in the
Mortgage Loans, or solicited any offer to buy or
accept a transfer, pledge or other disposition of the
Mortgage Loans or any interest in the Mortgage Loans,
or otherwise approached or negotiated with respect to
the Mortgage Loans or any interest in the Mortgage
Loans with any person in any manner which would
constitute a distribution of the Mortgage Loans under
the 1933 Act or which would render the disposition of
the Mortgage Loans a violation of Section 5 of the
1933 Act or require registration pursuant thereto,
nor will it act, nor has it authorized or will it
authorize any person to act, in such manner with
respect to the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit
plan ("Plan") within the meaning of section 3(3) of
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") or a plan (also "Plan") within
the meaning of section 4975(e)(1) of the Internal
Revenue Code of 1986 ("Code"), and the Assignee is
not directly or indirectly purchasing the Mortgage
Loans on behalf of, investment manager of, as named
fiduciary of, as Trustee of, or with assets of, a
Plan; or (2) the Assignee's purchase of the Mortgage
Loans will not result in a prohibited transaction
under section 406 of ERISA or section 4975 of the
Code.
4. (a) The Assignee's address for purposes of all notices
and correspondence related to the Mortgage Loans and
the Agreements is: 400 Quincy Street, Hancock,
Michigan 49930.
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are to be confirmed in writing.
(b) The Assignor's address for purposes for all notices
and correspondence related to the Mortgage Loans and
this Agreement is: 400 Quincy Street, Hancock,
Michigan 49930.
G-3
<PAGE> 56
5. This Agreement shall be construed in accordance with the
substantive laws of the State of Michigan (without regard to
conflicts of laws principles) and the obligations, rights and
remedies of the parties hereunder shall be determined in
accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors
and assigns of the parties hereto. This Agreement may not be
assigned by the Assignee without the express written consent
of the Assignor. Any entity into which the Assignor or
Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or
Assignee, respectively, hereunder.
7. No term or provision of this Agreement may be waived or
modified unless such waiver or modification is in writing and
signed by the party against whom such waiver or modification
is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage
Loans and the assignment of the Agreements by the Assignor.
9. Notwithstanding the assignment of the Agreements by either the
Assignor or Assignee, this Agreement shall not be deemed
assigned by the Assignor or the Assignee unless assigned by
separate written instrument.
10. For the purpose for facilitating the execution of this
Agreement as herein provided and for other purposes, this
Agreement may be executed simultaneously in any number of
counterparts, each of which counterparts shall be deemed to be
an original, and such counterparts shall constitute and be one
and the same instrument.
G-4
<PAGE> 57
IN WITNESS WHEREOF, the parties have caused this Assignment and
Assumption Agreement to be executed by their duly authorized officers as of the
date first above written.
- ------------------------- -----------------------------
Assignor Assignee
By:______________________ By:__________________________
Its:_____________________ Its:_________________________
Taxpayer Taxpayer
Identification No._______ Identification No.________
G-5
<PAGE> 1
EXHIBIT 10(b)
================================================================================
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
D&N CAPITAL CORPORATION
PURCHASER
D&N BANK
SELLER
DATED AS OF [__________], 1997
CONVENTIONAL COMMERCIAL MORTGAGE LOANS
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
SECTION 1. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. AGREEMENT TO PURCHASE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
[SECTION 3. RESERVED.] . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 4. PURCHASE PRICE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 5. EXAMINATION OF MORTGAGE FILES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Subsection 6.01. Conveyance of Mortgage Loans; Possession of Servicing Files . . . . . . . 9
Subsection 6.02. Books and Records . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Subsection 6.03. Delivery of Mortgage Loan Documents . . . . . . . . . . . . . . . . . . . 10
SECTION 7. SERVICING OF THE MORTGAGE LOANS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLER; REMEDIES FOR BREACH . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Subsection 8.01. Representations and Warranties Regarding the Seller . . . . . . . . . . . 11
Subsection 8.02. Representations and Warranties Regarding Individual
Mortgage Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Subsection 8.03. Remedies for Breach of Representations and Warranties . . . . . . . . . . . 24
SECTION 9. CLOSING . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 10. CLOSING DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SECTION 11. COSTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . 28
SECTION 14. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 15. SEVERABILITY CLAUSE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 16. COUNTERPARTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
SECTION 17. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 18. INTENTION OF THE PARTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 20. WAIVERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 21. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
SECTION 23. REPRODUCTION OF DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 24. FURTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE . . . . . . . . . . . . . . . . . . . . . . . . 31
EXHIBITS
EXHIBIT A CONTENTS OF EACH MORTGAGE FILE
EXHIBIT B FORM OF SERVICING AGREEMENT
EXHIBIT C FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
EXHIBIT D FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
EXHIBIT E FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT F FORM OF SECURITY RELEASE CERTIFICATION
EXHIBIT G FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
EXHIBIT H MORTGAGE LOAN SCHEDULE
EXHIBIT I THE UNDERWRITING GUIDELINES OF THE SELLER
</TABLE>
iii
<PAGE> 4
MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT
This MORTGAGE LOAN PURCHASE AND WARRANTIES AGREEMENT (the
"Agreement"), dated as of [__________,] 1997, by and between D&N Capital
Corporation, a Delaware corporation, having an office at 400 Quincy Street,
Hancock, Michigan 49930 (the "Purchaser") and D&N Bank, a federally chartered
savings bank, having an office at 400 Quincy Street, Hancock, Michigan 49930
(the "Seller").
W I T N E S S E T H:
WHEREAS, the Seller desires to sell to the Purchaser, and the
Purchaser desires to purchase from the Seller, certain conventional commercial
mortgage loans (the "Mortgage Loans") on a servicing retained basis as
described herein, and which shall be delivered as whole loans on the Closing
Date, as defined below;
WHEREAS, each Mortgage Loan is secured by a mortgage, deed of trust or
other security instrument creating a first lien on a commercial property
located in the jurisdiction indicated on the Mortgage Loan Schedule; and
WHEREAS, the Purchaser and the Seller wish to prescribe the manner of
the conveyance, servicing and control of the Mortgage Loans.
NOW, THEREFORE, in consideration of the promises and mutual agreements
set forth herein, and for other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Purchaser and the Seller
agree as follows:
SECTION 1. DEFINITIONS.
For purposes of this Agreement the following capitalized terms shall
have the respective meanings set forth below. Other capitalized terms used in
this Agreement and not defined herein shall have the respective meanings set
forth in the Servicing Agreement attached as Exhibit B hereto.
"Accepted Servicing Practices" means, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage
Loan in the jurisdiction where the related Mortgaged Property is located.
"Affiliate" means, with respect to any specified Person, any other
Person controlling or controlled by or under common control with such specified
Person. For the purposes of this definition, "control" when used with respect
to any specified Person means the power to direct the management and policies
of such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
<PAGE> 5
"Agreement" means this Mortgage Loan Purchase and Warranties Agreement
and all amendments hereof and supplements hereto.
"ALTA" means The American Land Title Association or any successor
thereto.
"Ancillary Income" means all late charges, assumption fees, escrow
account benefits, reinstatement fees, and similar types of fees arising from or
in connection with any Mortgage, to the extent not otherwise payable to the
Mortgagor under applicable law or pursuant to the terms of the related Mortgage
Note.
"Appraised Value" means the value set forth in an appraisal made in
connection with the origination of the related Mortgage Loan as the value of
the Mortgaged Property.
"Assignment and Assumption Agreement" has the meaning set forth in
Section 19.
"Assignment of Mortgage" means an assignment of the Mortgage delivered
in blank, notice of transfer or equivalent instrument in recordable form,
sufficient under the laws of the jurisdiction wherein the related Mortgaged
Property is located to reflect the sale of the Mortgage to the Purchaser.
"Business Day" means any day other than (i) a Saturday or Sunday, or
(ii) a day on which banking and savings and loan institutions, in the State of
Michigan, are authorized or obligated by law or executive order to be closed.
"Closing Date" means [_________,] 1997, or such other date as is
mutually agreed upon by the parties.
"Code" means Internal Revenue Code of 1986, as amended.
"Condemnation Proceeds" means all awards or settlements in respect of
a Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Conventional Loan" means a conventional commercial mortgage loan
which is a Mortgage Loan.
"Convertible Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement which contains a provision whereby the
Mortgagor is permitted to convert the Mortgage Loan to a fixed rate Mortgage
Loan in accordance with the terms of the related Mortgage Note.
"Custodial Account" means the separate trust account created and
maintained pursuant to Section 2.04 of the Servicing Agreement.
2
<PAGE> 6
"Cut-off Date" means [__________, 1997.]
"Deleted Mortgage Loan" means a Mortgage Loan that is repurchased or
replaced with a Qualified Substitute Mortgage Loan by the Seller in accordance
with the terms of this Agreement.
"Determination Date" means the earlier of two (2) Business Days prior
to the related Remittance Date or the 15th day of the month in which the
related Remittance Date occurs.
"Due Date" means the day of the month on which the Monthly Payment is
due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Account" means the separate account created and maintained
pursuant to Section 2.06 of the Servicing Agreement with respect to each
Mortgage Loan, as specified in the Servicing Agreement.
"Escrow Payments" means, with respect to any Mortgage Loan, any
payments required to be escrowed by the Mortgagor with the mortgagee pursuant
to the Mortgage or any other document, including without limitation the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums.
"Insurance Proceeds" means, with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Interest Rate Adjustment Date" means, with respect to each Variable
Rate Mortgage Loan, the date, specified in the related Mortgage Note and the
Mortgage Loan Schedule, on which the Mortgage Interest Rate is adjusted.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or
assignment of such Mortgage Loan, trustee's sale, foreclosure sale or
otherwise, or the sale of the related Mortgaged Property if the Mortgaged
Property is acquired in satisfaction of the Mortgage Loan.
"Loan-to-Value Ratio" or "LTV" means, with respect to any Mortgage
Loan, the ratio (expressed as a percentage) of the original principal amount of
the Mortgage Loan to the lesser of (a) the Appraised Value of the Mortgaged
Property at origination and (b) if the Mortgage Loan was made to finance the
acquisition of the related Mortgaged Property, the purchase price of the
Mortgaged Property.
"Monthly Payment" means the scheduled monthly payment of principal and
interest on a Mortgage Loan.
"Mortgage" means the mortgage, deed of trust or other instrument
securing a Mortgage Note, which creates a first lien on an unsubordinated
estate in fee simple in real property securing the Mortgage Note; except that
with respect to real property located in jurisdictions in which the
3
<PAGE> 7
use of leasehold estates for commercial properties is a widely accepted
practice, the mortgage, deed of trust or other instrument securing the Mortgage
Note may secure and create a first lien upon a leasehold estate of the
Mortgagor.
"Mortgage File" means the items pertaining to a particular Mortgage
Loan referred to in Exhibit A annexed hereto, and any additional documents
required to be added to the Mortgage File pursuant to this Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
Mortgage Note, which, in the case of an Variable Rate Mortgage Loan, shall be
adjusted from time to time, with respect to each Mortgage Loan.
"Mortgage Loan" means an individual Mortgage Loan which is the subject
of this Agreement, each Mortgage Loan originally sold and subject to this
Agreement being identified on the applicable Mortgage Loan Schedule, which
Mortgage Loan includes without limitation the Mortgage File, the Monthly
Payments, Principal Prepayments, Liquidation Proceeds, Condemnation Proceeds,
Insurance Proceeds, and all other rights, benefits, proceeds and obligations
arising from or in connection with such Mortgage Loan, excluding replaced or
repurchased mortgage loans.
"Mortgage Loan Documents" means, with respect to each Mortgage Loan,
the following documents pertaining to such Mortgage Loan:
a. The original Mortgage Note bearing all intervening
endorsements, endorsed "Pay to the order of ______________
without recourse" and signed in the name of the Seller by an
authorized officer. To the extent that there is no room on the
face of the Mortgage Notes for endorsements, the endorsement
may be contained on an allonge, if state law so allows. If the
Mortgage Loan was acquired by the Seller in a merger, the
endorsement must be by "[Seller], successor by merger to [name
of predecessor]". If the Mortgage Loan was acquired or
originated by the Seller while doing business under another
name, the endorsement must be by "[Seller], formerly known as
[previous name]"; and
b. The original Assignment of Mortgage for each Mortgage Loan in
form and substance acceptable for recording endorsed "Pay to
the order of _____________" and signed in the name of the
Seller. If the Mortgage Loan was acquired by the Seller in a
merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage
Loan was acquired or originated by the Seller while doing
business under another name, the Assignment of Mortgage must
be by "[Seller], formerly known as [previous name]".
c. The original of any guarantee executed in connection with the
Mortgage Note.
4
<PAGE> 8
d. The original Mortgage, with evidence of recording thereon. If
in connection with any Mortgage Loan, the Seller cannot
deliver or cause to be delivered the original Mortgage with
evidence of recording thereon on or prior to the Closing Date
because of a delay caused by the public recording office where
such Mortgage has been delivered for recordation, a photocopy
of such Mortgage certified by the Seller to be true and
correct will be delivered; if such Mortgage has been lost or
if such public recording office retains the original recorded
Mortgage, the Seller shall deliver or cause to be delivered to
the Purchaser, a photocopy of such Mortgage, certified by such
public recording office to be a true and complete copy of the
original recorded Mortgage.
e. The originals of all assumption, modification, consolidation
or extension agreements, if any, with evidence of recording
thereon or certified copies of such documents if the originals
are unavailable.
f. Originals of all intervening Assignments of the Mortgage with
evidence of recording thereon, or if any such intervening
assignment has not been returned from the applicable recording
office, a photocopy of each such assignment certified by the
Seller to be true and correct will be delivered, or if such
assignment has been lost or if such public recording office
retains the original recorded assignments of mortgage, the
Seller shall deliver or cause to be delivered to the
Purchaser, a photocopy of such intervening assignment,
certified by such public recording office to be a true and
complete copy of the original recorded intervening assignment.
g. The original mortgagee policy of title insurance or, in the
event such original title policy is unavailable, a certified
true copy of the related policy binder or commitment for title
certified to be true and complete by the title insurance
company; provided that the original mortgagee policy of title
insurance shall be delivered promptly after receipt by the
Seller thereof but in no event later than one hundred twenty
(120) days from and after the Closing Date.
h. Any security agreement, chattel mortgage or equivalent
executed in connection with the Mortgage.
"Mortgage Loan Schedule" means the schedule of Mortgage Loans attached
hereto as Exhibit J setting forth at least the following information with
respect to each Mortgage Loan: (1) the Seller's Mortgage Loan identifying
number; (2) the Mortgagor's name; (3) the street address of the Mortgaged
Property including the state; (4) a code indicating whether the Mortgaged
Property is owner-occupied; (5) the type of commercial property constituting
the Mortgaged Property; (6) the type of Mortgage Loan (i.e., whether the
Mortgage Loan bears interest at a fixed or variable rate); (7) the original
months to maturity or the remaining months to maturity from the Cut-off Date,
in any case based on the original amortization schedule and, if different, the
maturity expressed in the same manner but based on the actual amortization
schedule; (8) the Loan-to-Value Ratio at origination; (9) the Mortgage Interest
Rate as of the Cut-off Date; (10) the
5
<PAGE> 9
stated maturity date; (11) the amount of the Monthly Payment as of the Cut-off
Date; (12) the original principal amount of the Mortgage Loan; (13) the
principal balance of the Mortgage Loan as of the close of business on the
Cut-off Date, after deduction of payments of principal due on or before the
Cut-off Date whether or not collected; (14) a code indicating the purpose of
the loan (i.e., purchase, rate and term refinance, equity take-out refinance);
(15) the Interest Rate Adjustment Date with respect to any Variable Rate
Mortgage Loan; (16) a code indicating whether the Mortgage Loan is a
Convertible Mortgage Loan; (17) the Servicing Fee Rate; (18) with respect to
any Variable Rate Mortgage Loan, the index pursuant to which the Mortgage
Interest Rate is determined and (19) the number of times during the 12 month
period preceding the Closing Date that any Monthly Payment has been received
thirty or more days after its Due Date. With respect to the Mortgage Loans in
the aggregate, the Mortgage Loan Schedule shall set forth the following
information, as of the Cut-off Date: (1) the number of Mortgage Loans; and (2)
the current aggregate outstanding principal balance of the Mortgage Loans.
"Mortgage Note" means the note or other evidence of the indebtedness
of a Mortgagor secured by a Mortgage.
"Mortgaged Property" means the real property securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" means the obligor on a Mortgage Note.
"Officer's Certificate" means a certificate signed by the Chairman of
the Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"Opinion of Counsel" means a written opinion of counsel, who may be
counsel for the Seller, reasonably acceptable to the Purchaser.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, limited liability company,
unincorporated organization, government or any agency or political subdivision
thereof.
"Prime Rate" means the prime rate announced to be in effect from time
to time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of
principal on a Mortgage Loan which is received in advance of its scheduled Due
Date, including any prepayment penalty or premium thereon and which is not
accompanied by an amount of interest representing scheduled interest due on any
date or dates in any month or months subsequent to the month of prepayment.
"Purchase Price" means the price paid on the Closing Date by the
Purchaser to the Seller in exchange for the Mortgage Loans purchased on the
Closing Date as set forth in Section 4 of this Agreement.
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<PAGE> 10
"Purchaser" means D&N Capital Corporation or its successor in interest
or assigns or any successor to the Purchaser under this Agreement as herein
provided.
"Qualified Appraiser" means an appraiser who had no interest, direct
or indirect in the Mortgaged Property or in any loan made on the security
thereof, and whose compensation is not affected by the approval or disapproval
of the Mortgage Loan, and such appraiser and the appraisal made by such
appraiser both satisfy the requirements of Title XI of the Federal Institutions
Reform, Recovery, and Enforcement Act of 1989 and the regulations promulgated
thereunder, all as in effect on the date the Mortgage Loan was originated.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located,
duly authorized and licensed in such states to transact the applicable
insurance business and to write the insurance provided, and in the two highest
rating categories by Best's with respect to hazard and flood insurance.
"Qualified Substitute Mortgage Loan" means a mortgage loan eligible to
be substituted by the Seller for a Deleted Mortgage Loan which must, on the
date of such substitution, (i) have an outstanding principal balance, after
deduction of all scheduled payments due in the month of substitution (or in the
case of a substitution of more than one mortgage loan for a Deleted Mortgage
Loan, an aggregate principal balance), not in excess of the outstanding
principal balance of the Deleted Mortgage Loan (the amount of any shortfall
will be deposited in the Custodial Account by the Seller in the month of
substitution); (ii) have a Mortgage Interest Rate not less than and not more
than 1.00% greater than the Mortgage Interest Rate of the Deleted Mortgage
Loan; (iii) have a remaining term to maturity not greater than and not more
than one year less than that of the Deleted Mortgage Loan (iv) be of the same
type as the Deleted Mortgage Loan; and (v) comply with each representation and
warranty (respecting individual Mortgage Loans) set forth in Section 8.02
hereof.
"Remittance Date" means the date specified in the Servicing Agreement
(with respect to each Mortgage Loan, as specified therein).
"Repurchase Price" means, with respect to any Mortgage Loan, a price
equal to (i) the unpaid principal balance of such Mortgage Loan plus (ii)
interest on such unpaid principal balance of such Mortgage Loan at the Mortgage
Interest Rate from the last date through which interest has been paid and
distributed to the Purchaser to the date of repurchase, less amounts received
or advanced, if any, by the Seller in respect of such repurchased Mortgage
Loan.
"RESPA" means Real Estate Settlement Procedures Act, as amended from
time to time.
"Seller" means D&N Bank, its successors in interest and assigns.
"Servicing Agreement" means the agreement, attached as Exhibit B
hereto, to be entered into by the Purchaser and the Seller, as servicer,
providing for the Seller to service the Mortgage Loans as specified by the
Servicing Agreement.
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<PAGE> 11
"Servicing Fee" means, with respect to each Mortgage Loan, subject to
the Servicing Agreement, the amount of the annual fee the Purchaser shall pay
to the Seller, which shall for a period of one full month be equal to
one-twelfth of the product of (a) the Servicing Fee Rate and (b) the
outstanding principal balance of such Mortgage Loan. Such fee shall be payable
monthly, and shall be pro-rated for any portion of a month during which the
Mortgage Loan is serviced by the Seller under the Servicing Agreement. The
obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by this Agreement) of such Monthly Payment collected by the Seller,
or as otherwise provided under this Agreement. In addition to the Servicing
Fee, the Seller shall be entitled to retain Ancillary Income.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the
rate specified in the Mortgage Loan Schedule with respect to such Mortgage
Loan.
"Servicing File" means with respect to each Mortgage Loan, the file
retained by the Seller during the period in which the Seller is acting as
servicer pursuant to the Servicing Agreement consisting of originals of all
documents in the Mortgage File which are not delivered to the Purchaser or its
designee and copies of the Mortgage Loan Documents.
"Stated Principal Balance" means as to each Mortgage Loan, (i) the
principal balance of the Mortgage Loan at the Cut-off Date after giving effect
to payments of principal due on or before such date, whether or not received,
minus (ii) all amounts previously distributed to the Purchaser with respect to
the related Mortgage Loan representing payments or recoveries of principal or
advances in lieu thereof.
"Variable Rate Mortgage Loan" means any individual Mortgage Loan
purchased pursuant to this Agreement the interest rate of which adjusts
periodically based on the index identified in the Mortgage Loan Schedule.
SECTION 2. AGREEMENT TO PURCHASE.
The Seller agrees to sell and the Purchaser agrees to purchase
Mortgage Loans having an aggregate principal balance on the Cut-off Date in an
amount equal to $[__________,] or in such other amount as agreed by the
Purchaser and the Seller as evidenced by the actual aggregate principal balance
of the Mortgage Loans accepted by the Purchaser on the Closing Date.
[SECTION 3. RESERVED.]
SECTION 4. PURCHASE PRICE.
The Purchase Price for the Mortgage Loans listed on the Mortgage Loan
Schedule shall be $[__________,] or in such other amount as agreed by the
Purchaser and the Seller as evidenced by the actual aggregate principal
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balance of the Mortgage Loans accepted by the Purchaser on the Closing Date.
The initial principal amount of the Mortgage Loans shall be the aggregate
principal balance of the Mortgage Loans, so computed as of the Cut-off Date,
after application of scheduled payments of principal due on or before the
Cut-off Date whether or not collected.
In addition to the Purchase Price as described above, the Purchaser
shall pay to the Seller, at closing, accrued interest on the initial principal
amount of the related Mortgage Loans at the weighted average Mortgage Interest
Rate of those Mortgage Loans, minus any amounts attributable to Servicing Fees
as provided in the Servicing Agreement from the Cut-off Date through the day
prior to the Closing Date, inclusive.
The Purchase Price plus accrued interest as set forth in the preceding
paragraph shall be paid on the Closing Date by wire transfer of immediately
available funds.
The Purchaser shall be entitled to (l) all scheduled principal due
after the Cut-off Date, (2) all other recoveries of principal collected on or
after the Cut-off Date (provided, however, that all scheduled payments of
principal due on or before the Cut-off Date and collected after the Cut-off
Date shall belong to the Seller), and (3) all payments of interest on the
Mortgage Loans net of applicable Servicing Fees collected on or after the
Cut-off Date (minus that portion of any such payment which is allocable to the
period prior to the Cut-off Date). The outstanding principal balance of each
Mortgage Loan as of the Cut-off Date is determined after application of
payments of principal due on or before the Cut-off Date whether or not
collected, together with any unscheduled principal prepayments collected prior
to the Cut-off Date; provided, however, that payments of scheduled principal
and interest prepaid for a Due Date beyond the Cut-off Date shall not be
applied to the principal balance as of the Cut-off Date. Such prepaid amounts
shall be the property of the Purchaser. Any such prepaid amounts shall be
deposited into the Custodial Account, which account is established for the
benefit of the Purchaser for subsequent remittance to the Purchaser.
SECTION 5. EXAMINATION OF MORTGAGE FILES.
Prior to the date hereof, the Seller has (a) delivered to the
Purchaser or its designee in escrow, for examination with respect to each
Mortgage Loan to be purchased, the related Mortgage File, including a copy of
the Assignment of Mortgage, pertaining to each Mortgage Loan, or (b) made the
related Mortgage File available to the Purchaser for examination at the
Seller's offices or such other location as shall otherwise be agreed upon by
the Purchaser and the Seller. The fact that the Purchaser or its designee has
conducted or has failed to conduct any partial or complete examination of the
Mortgage Files shall not affect the Purchaser's (or any of its successor's)
rights to demand repurchase, substitution or other relief as provided herein.
SECTION 6. CONVEYANCE FROM SELLER TO PURCHASER.
SUBSECTION 6.01. CONVEYANCE OF MORTGAGE LOANS; POSSESSION OF
SERVICING FILES.
The Seller hereby agrees to sell, transfer, assign, set over and
convey to the Purchaser on the Closing Date, without recourse, but subject to
the terms of this Agreement, all right, title and interest of the Seller in and
to the Mortgage Loans and the Mortgage Files and all rights and
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obligations arising under the documents contained therein. The Servicing File
shall be retained by the Seller in accordance with the terms of the Servicing
Agreement and, as provided therein, shall be appropriately identified in the
Seller's computer system and/or books and records, as appropriate, to clearly
reflect the sale of the related Mortgage Loan to the Purchaser.
SUBSECTION 6.02. BOOKS AND RECORDS.
Record title to each Mortgage Loan as of the Closing Date shall be in
the name of the Seller. Notwithstanding the foregoing, each Mortgage and
related Mortgage Note shall be possessed solely by the Purchaser or the
appropriate designee of the Purchaser, as the case may be. All rights arising
out of the Mortgage Loans including, but not limited to, all funds received by
the Seller after the Cut-off Date on or in connection with a Mortgage Loan
shall be vested in the Purchaser or one or more of its designees; provided,
however, that all funds received on or in connection with a Mortgage Loan shall
be received and held by the Seller in trust for the benefit of the Purchaser or
its designee, as the case may be, as the owner of the Mortgage Loans pursuant
to the terms of this Agreement.
The sale of each Mortgage Loan shall be reflected on the Seller's
balance sheet and other financial statements as a sale of assets by the Seller.
SUBSECTION 6.03. DELIVERY OF MORTGAGE LOAN DOCUMENTS.
The Seller shall deliver and release to the Purchaser or its designee
on the Closing Date the Mortgage Loan Documents with respect to each Mortgage
Loan set forth on the Mortgage Loan Schedule.
The Seller shall forward to the Purchaser or its designee original
documents evidencing an assumption, modification, consolidation, conversion or
extension of any Mortgage Loan entered into in accordance with this Agreement
within two (2) weeks of their execution, provided, however, that the Seller
shall provide the Purchaser or its designee with a certified true copy of any
such document submitted for recordation within two (2) weeks of its execution,
and shall promptly provide the original of any document submitted for
recordation or a copy of such document certified by the appropriate public
recording office to be a true and complete copy of the original within ninety
(90) days of its submission for recordation.
In the event that such original or copy of any document submitted for
recordation to the appropriate public recording office is not so delivered to
the Purchaser or its designee within 90 days following the Closing Date (other
than with respect to the Assignments of Mortgage which shall be delivered to
the Purchaser or its designee in blank), and in the event that the Seller does
not cure such failure within 30 days of discovery or receipt of written
notification of such failure from the Purchaser, the related Mortgage Loan
shall, upon the request of the Purchaser, be repurchased by the Seller at the
price and in the manner specified in Subsection 8.03. The foregoing repurchase
obligation shall not apply in the event that the Seller cannot deliver, or
cause to be delivered, such original or copy of any document submitted for
recordation to the appropriate public recording office within the specified
period due to a delay caused by the
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recording office in the applicable jurisdiction; provided that the Seller shall
instead deliver, or cause to be delivered, a recording receipt of such
recording office or, if such recording receipt is not available, an officer's
certificate of a servicing officer of the Seller, confirming that such
documents have been accepted for recording; provided that, upon request of the
Purchaser and delivery by the Purchaser to the Seller of a schedule of the
related Mortgage Loans, the Seller shall reissue and deliver to the Purchaser
or its designee said officer's certificate relating to the related Mortgage
Loans.
The Seller shall pay all fees or costs in transferring all original
documents to the Purchaser or its designee. The Purchaser or its designee shall
be responsible for recording the Assignments of Mortgage and shall be
reimbursed by the Seller for the reasonable costs associated therewith pursuant
to the preceding sentence.
SECTION 7. SERVICING OF THE MORTGAGE LOANS.
The Mortgage Loans have been sold by the Seller to the Purchaser on a
servicing retained basis. The Purchaser shall retain the Seller as independent
contract servicer of the Mortgage Loans pursuant to and in accordance with the
terms and conditions contained in the Servicing Agreement. The Purchaser and
the Seller shall execute the Servicing Agreement on the Closing Date in the
form attached hereto as Exhibit B.
Pursuant to the Servicing Agreement, the Seller shall begin servicing
the Mortgage Loans on behalf of the Purchaser and shall be entitled to the
Servicing Fee and any Ancillary Income with respect to such Mortgage Loans from
the Closing Date until the termination of the Servicing Agreement with respect
to any of the Mortgage Loans as set forth in the Servicing Agreement. The
Seller shall conduct such servicing in accordance with the terms of the
Servicing Agreement.
SECTION 8. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
SELLER; REMEDIES FOR BREACH.
SUBSECTION 8.01. REPRESENTATIONS AND WARRANTIES REGARDING THE SELLER.
The Seller represents, warrants and covenants to the Purchaser that as
of the date hereof and as of the Closing Date:
(a) Due Organization and Authority; Enforceability. The Seller is
a federally chartered savings bank duly organized and validly
existing under the laws of the United States and has all
licenses necessary to carry on its business as now being
conducted and is licensed, qualified and in good standing in
each state wherein it owns or leases any material properties
or where a Mortgaged Property is located, if the laws of such
state require licensing or qualification in order to conduct
business of the type conducted by the Seller, and in any event
the Seller is in compliance with the laws of any such state to
the extent necessary to ensure the enforceability of the
related Mortgage Loan in accordance with the terms of this
Agreement; the Seller has the full corporate power, authority
and legal right to
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hold, transfer and convey the Mortgage Loans and to execute
and deliver this Agreement and to perform its obligations
hereunder; the execution, delivery and performance of this
Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the
consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement and all agreements
contemplated hereby have been duly executed and delivered and
constitute the valid, legal, binding and enforceable
obligations of the Seller subject to bankruptcy laws and other
similar laws of general application affecting rights of
creditors and subject to the application of the rules of
equity, including those respecting the availability of
specific performance, none of which will materially interfere
with the realization of the benefits provided thereunder,
regardless of whether such enforcement is sought in a
proceeding in equity or at law; and all requisite corporate
action has been taken by the Seller to make this Agreement and
all agreements contemplated hereby valid and binding upon the
Seller in accordance with their terms;
(b) Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the
ordinary course of business of the Seller, and the transfer,
assignment and conveyance of the Mortgage Notes and the
Mortgages by the Seller pursuant to this Agreement are not
subject to the bulk transfer or any similar statutory
provisions in effect in any applicable jurisdiction;
(c) No Conflicts. Neither the execution and delivery of this
Agreement, the sale of the Mortgage Loans to the Purchaser,
the consummation of the transactions contemplated hereby, nor
the fulfillment of or compliance with the terms and conditions
of this Agreement, will conflict with or result in a breach of
any of the terms, conditions or provisions of the Seller's
charter or by-laws or any legal restriction or any agreement
or instrument to which the Seller is now a party or by which
it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the
violation of any law, rule, regulation, order, judgment or
decree to which the Seller or its property is subject, or
result in the creation or imposition of any lien, charge or
encumbrance that would have an adverse effect upon any of its
properties pursuant to the terms of any mortgage, contract,
deed of trust or other instrument, or impair the ability of
the Purchaser to realize on the Mortgage Loans, impair the
value of the Mortgage Loans, or impair the ability of the
Purchaser to realize the full amount of any mortgage insurance
benefits accruing pursuant to this Agreement;
(d) Ability to Perform: Solvency. The Seller does not believe,
nor does it have any reason or cause to believe, that it
cannot perform each and every covenant contained in this
Agreement. The Seller is solvent and the sale of the Mortgage
Loans will not cause the Seller to become insolvent. The sale
of the Mortgage Loans is not undertaken with the intent to
hinder, delay or defraud any of the Seller's creditors;
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(e) No Litigation Pending. There is no action, suit, proceeding or
investigation pending or threatened against the Seller, before
any court, administrative agency or other tribunal asserting
the invalidity of this Agreement, seeking to prevent the
consummation of any of the transactions contemplated by this
Agreement or which, either in any one instance or in the
aggregate, could result in any material adverse change in the
business, operations, financial condition, properties or
assets of the Seller, or in any material impairment of the
right or ability of the Seller to carry on its business
substantially as now conducted, or in any material liability
on the part of the Seller, or which would draw into question
the validity of this Agreement or the Mortgage Loans or of any
action taken or to be taken in connection with the obligations
of the Seller contemplated herein, or which would be likely to
impair materially the ability of the Seller to perform under
the terms of this Agreement;
(f) No Consent Required. No consent, approval, authorization or
order of, or registration or filing with, or notice to any
court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or
compliance by the Seller with this Agreement or the Mortgage
Loans, the delivery of a portion of the Mortgage Files to the
Purchaser or its designee or the sale of the Mortgage Loans or
the consummation of the transactions contemplated by this
Agreement, or if required, such approval has been obtained
prior to the Closing Date;
(g) Selection Process. The Mortgage Loans were selected from among
the outstanding commercial loans in the Seller's portfolio at
the Closing Date as to which the representations and
warranties set forth in Subsection 8.02 could be made and such
selection was not made in a manner so as to affect adversely
the interests of the Purchaser;
(h) Initial Portfolio. The aggregate characteristics of the
Mortgage Loans are as set forth under the heading "Business
and Strategy--Description of Initial Portfolio" in the
Prospectus of the Purchaser dated [___________,] 1997;
(i) No Untrue Information. Neither this Agreement nor any
information, statement, tape, diskette, report, form, or other
document furnished or to be furnished pursuant to this
Agreement or in connection with the transactions contemplated
hereby contains or will contain any untrue statement of a
material fact or omits or will omit to state a material fact
necessary to make the statements contained herein or therein
not misleading; and
(j) No Brokers. The Seller has not dealt with any broker,
investment banker, agent or other person that may be entitled
to any commission or compensation in connection with the sale
of the Mortgage Loans.
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SUBSECTION 8.02. REPRESENTATIONS AND WARRANTIES REGARDING INDIVIDUAL
MORTGAGE LOANS.
The Seller hereby represents and warrants to the Purchaser that, as to
each Mortgage Loan, as of the Closing Date for such Mortgage Loan:
(a) Mortgage Loans as Described. The information set forth in the
Mortgage Loan Schedule is complete, true and correct in all
material respects;
(b) Payments Current; Status. All payments required to be made up
to, but not including, the Cut-off Date for the Mortgage Loan
under the terms of the Mortgage Note have been made and
credited. No payment required under the Mortgage Loan is
delinquent nor has any payment under the Mortgage Loan been 30
days or more delinquent more than once within the period
falling twelve (12) months prior to the Cut-off Date. The
Mortgage Loan is not, and has not been at any time in the
preceding twelve months, (i) classified, (ii) in nonaccrual
status or (iii) renegotiated due to the financial
deterioration of the Mortgagor;
(c) No Outstanding Charges. There are no defaults in complying
with the terms of the Mortgage, and all taxes, governmental
assessments, insurance premiums, water, sewer and municipal
charges, leasehold payments or ground rents which previously
became due and owing have been paid, or an escrow of funds has
been established in an amount sufficient to pay for every such
item which remains unpaid and which has been assessed but is
not yet due and payable. The Seller has not advanced funds, or
induced, solicited or knowingly received any advance of funds
by a party other than the Mortgagor, directly or indirectly,
for the payment of any amount required under the Mortgage
Loan, except for interest accruing from the date of the
Mortgage Note or date of disbursement of the Mortgage Loan
proceeds, whichever is earlier, to the day which precedes by
one month the Due Date of the first installment of principal
and interest;
(d) Original Terms Unmodified. The terms of the Mortgage Note and
Mortgage have not been impaired, waived, altered or modified
in any respect, from the date of origination except by a
written instrument which has been recorded, if necessary to
protect the interests of the Purchaser, and which has been
delivered to the Purchaser or its designee and the terms of
which are reflected in the Mortgage Loan Schedule, if
applicable. The substance of any such waiver, alteration or
modification has been approved by the title insurer, if any,
to the extent required by the policy, and its terms are
reflected on the Mortgage Loan Schedule, if applicable. No
Mortgagor has been released, in whole or in part, except in
connection with an assumption agreement, which assumption
agreement is part of the Mortgage Loan File delivered to the
Purchaser or its designee and the terms of which are reflected
in the Mortgage Loan Schedule;
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(e) No Defenses. The Mortgage Loan is not subject to any right of
rescission, set-off, counterclaim or defense, including
without limitation the defense of usury, nor will the
operation of any of the terms of the Mortgage Note or the
Mortgage, or the exercise of any right thereunder, render
either the Mortgage Note or the Mortgage unenforceable, in
whole or in part and no such right of rescission, set-off,
counterclaim or defense has been asserted with respect
thereto, and no Mortgagor is now or was, at the time of
origination of the related Mortgage Loan, a debtor in any
state or Federal bankruptcy or insolvency proceeding;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all
buildings or other improvements upon the Mortgaged Property
are insured by a generally acceptable insurer against loss by
fire, hazards of extended coverage. If required by the Flood
Disaster Protection Act of 1973, as amended, the Mortgage Loan
is covered by a flood insurance policy, meeting the
requirements of the Federal Insurance Administration, as well
as all additional requirements set forth in Section 2.10 of
the Servicing Agreement attached hereto as Exhibit B. All
individual insurance policies contain a standard mortgagee
clause naming the Seller and its successors and assigns as
mortgagee, and all premiums thereon have been paid. The
Mortgage obligates the Mortgagor thereunder to maintain the
hazard insurance policy at the Mortgagor's cost and expense,
and on the Mortgagor's failure to do so, authorizes the holder
of the Mortgage to obtain and maintain such insurance at such
Mortgagor's cost and expense, and to seek reimbursement
therefor from the Mortgagor. Where required by state law or
regulation, the Mortgagor has been given an opportunity to
choose the carrier of the required hazard insurance. The
hazard insurance policy is the valid and binding obligation of
the insurer, is in full force and effect, and will be in full
force and effect and inure to the benefit of the Purchaser
upon the consummation of the transactions contemplated by this
Agreement. The Seller has not engaged in, and has no knowledge
of the Mortgagor's having engaged in, any act or omission
which would impair the coverage of any such policy, the
benefits of the endorsement provided for herein, or the
validity and binding effect of either including, without
limitation, no unlawful fee, commission, kickback or other
unlawful compensation or value of any kind has been or will be
received, retained or realized by any attorney, firm or other
person or entity, and no such unlawful items have been
received, retained or realized by the Seller;
(g) Compliance with Applicable Laws. Any and all requirements of
any federal, state or local law including, without limitation,
usury, truth-in-lending, real estate settlement procedures,
consumer credit protection, fair housing, equal credit
opportunity and disclosure laws applicable to the Mortgage
Loan have been complied with, the consummation of the
transactions contemplated hereby will not involve the
violation of any such laws or regulations, and the Seller
shall maintain in its possession, available for the
Purchaser's inspection, and shall deliver to the Purchaser
upon demand, evidence of compliance with all such
requirements;
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(h) No Satisfaction of Mortgage. The Mortgage has not been
satisfied, canceled, subordinated or rescinded, in whole or in
part, and the Mortgaged Property has not been released from
the lien of the Mortgage, in whole or in part, nor has any
instrument been executed that would effect any such release,
cancellation, subordination or rescission. The Seller has not
waived the performance by the Mortgagor of any action, if the
Mortgagor's failure to perform such action would cause the
Mortgage Loan to be in default, nor has the Seller waived any
default resulting from any action or in action by the
Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged
Property is located in the state identified in the Mortgage
Loan Schedule and consists of a single parcel of real property
improved by a commercial facility erected thereon.
(j) Valid First Lien. The Mortgage is a valid, subsisting,
enforceable and perfected first lien on the Mortgaged
Property, including all buildings and improvements on the
Mortgaged Property and all installations and mechanical,
electrical, plumbing, heating and air conditioning systems
located in or annexed to such buildings, and all additions,
alterations and replacements made at any time with respect to
the foregoing. The lien of the Mortgage is subject only to:
(1) the lien of current real property taxes and
assessments not yet due and payable;
(2) covenants, conditions and restrictions, rights of
way, easements and other matters of the public record
as of the date of recording acceptable to prudent
mortgage lending institutions generally and
specifically referred to in the lender's title
insurance policy delivered to the originator of the
Mortgage Loan and (a) specifically referred to or
otherwise considered in the appraisal made for the
originator of the Mortgage Loan or (b) which do not
adversely affect the Appraised Value of the Mortgaged
Property set forth in such appraisal; and
(3) other matters to which like properties are commonly
subject which do not materially interfere with the
benefits of the security intended to be provided by
the Mortgage or the use, enjoyment, value or
marketability of the related Mortgaged Property.
Any security agreement, chattel mortgage or equivalent document
related to and delivered in connection with the Mortgage Loan establishes and
creates a valid, subsisting, enforceable and perfected first lien and first
priority security interest on the property described therein and the Seller has
full right to sell and assign the same to the Purchaser. The Mortgaged Property
was not, as of the date of origination of the Mortgage Loan, subject to a
mortgage, deed of trust, deed to secure debt or other security instrument
creating a lien subordinate to the lien of the Mortgage (except any such
subordinate loan which was created in connection with the origination of the
related Mortgage Loan details of which are contained in the related Mortgage
File);
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(k) Validity of Mortgage Documents. The Mortgage Note and the
Mortgage and any other agreement executed and delivered by a
Mortgagor in connection with a Mortgage Loan are genuine, and
each is the legal, valid and binding obligation of the maker
thereof enforceable in accordance with its terms. All parties
to the Mortgage Note, the Mortgage and any other such related
agreement had legal capacity to enter into the Mortgage Loan
and to execute and deliver the Mortgage Note, the Mortgage and
any such agreement, and the Mortgage Note, the Mortgage and
any other such related agreement have been duly and properly
executed by such parties. No fraud, error, omission,
misrepresentation, negligence or similar occurrence with
respect to a Mortgage Loan has taken place on the part of any
Person, including without limitation, the Mortgagor, any
appraiser, any builder or developer, or any other party
involved in the origination of the Mortgage Loan. The Seller
has reviewed all of the documents constituting the Servicing
File and has made such inquiries as it deems necessary to make
and confirm the accuracy of the representations set forth
herein;
(l) Full Disbursement of Proceeds. The Mortgage Loan has been
closed and the proceeds of the Mortgage Loan have been fully
disbursed and there is no requirement for future advances
thereunder, and any and all requirements as to completion of
any on-site or off-site improvement and as to disbursements of
any escrow funds therefor have been complied with. All costs,
fees and expenses incurred in making or closing the Mortgage
Loan and the recording of the Mortgage were paid, and the
Mortgagor is not entitled to any refund of any amounts paid or
due under the Mortgage Note or Mortgage;
(m) Ownership. The Seller is the sole owner of record and holder
of the Mortgage Loan and the indebtedness evidenced by each
Mortgage Note, except for the assignments of mortgage which
have been sent for recording, and upon recordation the Seller
will be the owner of record of each Mortgage and the
indebtedness evidenced by each Mortgage Note, and upon the
sale of the Mortgage Loans to the Purchaser, the Seller will
retain the Mortgage Files or any part thereof with respect
thereto not delivered to the Purchaser or its designee in
trust only for the purpose of servicing and supervising the
servicing of each Mortgage Loan. The Mortgage Loan is not
assigned or pledged, and the Seller has good, indefeasible and
marketable title thereto, and has full right to transfer and
sell the Mortgage Loan to the Purchaser free and clear of any
encumbrance, equity, participation interest, lien, pledge,
charge, claim or security interest, and has full right and
authority subject to no interest or participation of, or
agreement with, any other party, to sell and assign each
Mortgage Loan pursuant to this Agreement and following the
sale of each Mortgage Loan, the Purchaser will own such
Mortgage Loan free and clear of any encumbrance, equity,
participation interest, lien, pledge, charge, claim or
security interest. The Seller intends to relinquish all rights
to possess, control and monitor the Mortgage Loan, except
indirectly for purposes of servicing the Mortgage Loan as set
forth in the Servicing Agreement. After the Closing Date, the
Seller will have no right to modify or alter the terms of the
sale of the
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Mortgage Loan and the Seller will have no obligation or right
to repurchase the Mortgage Loan or substitute another Mortgage
Loan, except as provided in this Agreement;
(n) Doing Business. All parties which have had any interest in the
Mortgage Loan, whether as mortgagee, assignee, pledgee or
otherwise, are (or, during the period in which they held and
disposed of such interest, were) (1) in compliance with any
and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and (2)
either (i) organized under the laws of such state, or (ii)
qualified to do business in such state, or (iii) a federal
savings and loan association, a savings bank or a national
bank having a principal office in such state, or (3) not doing
business in such state;
(o) LTV. No Conventional Loan has an LTV greater than 95%. The
original LTV of each Conventional Loan was not more than 80%;
(p) Title Insurance. The Mortgage Loan is covered by an ALTA
lender's title insurance policy or other generally acceptable
form of policy or insurance and each such title insurance
policy is issued by a title insurer qualified to do business
in the jurisdiction where the Mortgaged Property is located,
insuring the Seller, its successors and assigns, as to the
first priority lien of the Mortgage in the original principal
amount of the Mortgage Loan, subject only to the exceptions
contained in clauses (1), (2) and (3) of paragraph (j) of this
Subsection 8.02, and against any loss by reason of the
invalidity or unenforceability of the lien resulting from the
provisions of the Mortgage providing for adjustment to the
Mortgage Interest Rate and Monthly Payment. Where required by
state law or regulation, the Mortgagor has been given the
opportunity to choose the carrier of the required mortgage
title insurance. Additionally, such lender's title insurance
policy affirmatively insures ingress and egress, and against
encroachments by or upon the Mortgaged Property or any
interest therein. The Seller, its successor and assigns, are
the sole insurers of such lender's title insurance policy, and
such lender's title insurance policy is valid and remains in
full force and effect and will be in force and effect upon the
consummation of the transactions contemplated by this
Agreement. No claims have been made under such lender's title
insurance policy, and no prior holder of the related Mortgage,
including the Seller, has done, by act or omission, anything
which would impair the coverage of such lender's title
insurance policy, including without limitation, no unlawful
fee, commission, kickback or other unlawful compensation or
value of any kind has been or will be received, retained or
realized by any attorney, firm or other person or entity, and
no such unlawful items have been received, retained or
realized by the Seller;
(q) No Defaults. There is no default, breach, violation or event
which would permit acceleration existing under the Mortgage or
the Mortgage Note and no event which, with the passage of time
or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event which
would
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permit acceleration, and neither the Seller nor its
predecessors have waived any default, breach, violation or
event which would permit acceleration;
(r) No Mechanics' Liens. There are no mechanics' or similar liens
or claims which have been filed for work, labor or material
(and no rights are outstanding that under law could give rise
to such liens) affecting the related Mortgaged Property which
are or may be liens prior to, or equal or coordinate with, the
lien of the related Mortgage;
(s) Location of Improvements; No Encroachments. All improvements
which were considered in determining the Appraised Value of
the Mortgaged Property lay wholly within the boundaries and
building restriction lines of the Mortgaged Property, and no
improvements on adjoining properties encroach upon the
Mortgaged Property. No improvement located on or being part of
the Mortgaged Property is in violation of any applicable
zoning law or regulation;
(t) Origination; Payment Terms. The Mortgage Loan was originated
by a savings and loan association, a savings bank, a
commercial bank, credit union, insurance company or similar
institution which is supervised and examined by a federal or
state authority. The documents, instruments and agreements
submitted for loan underwriting were not falsified and contain
no untrue statement of material fact or omit to state a
material fact required to be stated therein or necessary to
make the information and statements therein not misleading.
Principal payments on the Mortgage Loan commenced no more than
sixty (60) days after funds were disbursed in connection with
the Mortgage Loan. The Mortgage Interest Rate for each
Mortgage Loan is as set forth on Exhibit J hereto. The
Mortgage Note is payable on the first day of each month in
equal monthly installments of principal and interest, which
installments of interest are subject to change if the Mortgage
Loan is an Variable Rate Mortgage Loan due to the adjustments
to the Mortgage Interest Rate on each Interest Rate Adjustment
Date, with interest calculated and payable in arrears,
sufficient to amortize the Mortgage Loan fully by the stated
maturity date, over an original term of not more than thirty
years from commencement of amortization. There is no negative
amortization with respect to any Mortgage Loan. Each
Convertible Mortgage Loan contains a provision allowing the
Mortgagor to convert the Mortgage Note from an adjustable
interest rate Mortgage Note to a fixed interest rate Mortgage
Note in accordance with the terms of the Mortgage Note or a
rider to the related Mortgage Note;
(u) Customary Provisions. The Mortgage contains customary and
enforceable provisions such as to render the rights and
remedies of the holder thereof adequate for the realization
against the Mortgaged Property of the benefits of the security
provided thereby, including, (i) in the case of a Mortgage
designated as a deed of trust, by trustee's sale, and (ii)
otherwise by judicial foreclosure. Upon default by a Mortgagor
on a Mortgage Loan and foreclosure on, or trustee's sale of,
the Mortgaged Property pursuant to the proper procedures, the
holder of the Mortgage
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Loan will be able to deliver good and merchantable title to
the Mortgaged Property. There is no homestead or other
exemption available to a Mortgagor which would interfere with
the right to sell the Mortgaged Property at a trustee's sale
or the right to foreclose the Mortgage, subject to applicable
federal and state laws and judicial precedent with respect to
bankruptcy and right of redemption or similar law;
(v) Conformance with Agency and Underwriting Standards. The
Mortgage Loan was underwritten in accordance with the
underwriting standards of the Seller (a copy of each of which
is attached hereto as Exhibit L), in effect at the time the
Mortgage Loan was originated. The Mortgage Note and Mortgage
are on forms acceptable to the Purchaser, in the Purchaser's
sole discretion, as evidenced by the Purchaser's purchase of
the related Mortgage Loans, and, the Seller has not made any
representations to a Mortgagor that are inconsistent with the
mortgage instruments used. All Mortgage Loans have full asset
verification;
(w) Occupancy of the Mortgaged Property. As of the Closing Date,
the Mortgaged Property is lawfully occupied under applicable
law. All inspections, licenses and certificates required to
be made or issued with respect to all occupied portions of the
Mortgaged Property and, with respect to the use and occupancy
of the same, including but not limited to certificates of
occupancy and fire underwriting certificates, have been made
or obtained from the appropriate authorities;
(x) No Additional Collateral. The Mortgage Note is not and has not
been secured by any collateral except the lien of the
corresponding Mortgage and the security interest of any
applicable security agreement or chattel mortgage referred to
in clause (j) above;
(y) Deeds of Trust. In the event the Mortgage constitutes a deed
of trust, a trustee, authorized and duly qualified under
applicable law to serve as such, has been properly designated
and currently so serves and is named in the Mortgage, and no
fees or expenses are or will become payable by the Purchaser
to the trustee under the deed of trust, except in connection
with a trustee's sale after default by the Mortgagor;
(z) Acceptable Investment. There are no circumstances or
conditions with respect to the Mortgage, the Mortgaged
Property, the Mortgagor, the Mortgage File or the Mortgagor's
credit standing that can reasonably be expected to cause the
Mortgage Loan to become delinquent, or adversely affect the
value or marketability of the Mortgage Loan;
(aa) Delivery of Mortgage Documents. The Mortgage Note, the
Mortgage, the Assignment of Mortgage and any other Mortgage
Loan Documents for each Mortgage Loan have been delivered to
the Purchaser or its designee. The Seller is in possession of
a complete, true and accurate Mortgage File in compliance with
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Exhibit A hereto, except for such documents the originals of
which have been delivered to the Purchaser or its designee;
(bb) Transfer of Mortgage Loans. The Assignment of Mortgage with
respect to each Mortgage Loan is in recordable form and is
acceptable for recording under the laws of the jurisdiction in
which the Mortgaged Property is located;
(cc) Assumability. The Mortgage Loan Documents provide that a
related Mortgage Loan may only be assumed if the party
assuming such Mortgage Loan meets certain credit requirements
stated in the Mortgage Loan Documents.
(dd) No Buydown Provisions; No Graduated Payments or Contingent
Interests. The Mortgage Loan does not contain provisions
pursuant to which Monthly Payments are paid or partially paid
with funds deposited in any separate account established by
the Seller, the Mortgagor, or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor
does it contain any other similar provisions which may
constitute a "buydown" provision. The Mortgage Loan is not a
graduated payment mortgage loan and the Mortgage Loan does not
have a shared appreciation or other contingent interest
feature;
(ee) RESERVED
(ff) Mortgaged Property Undamaged; No Condemnation Proceedings.
There is no proceeding pending or threatened for the total or
partial condemnation of the Mortgaged Property. The Mortgaged
Property is undamaged by waste, fire, earthquake or earth
movement, windstorm, flood, tornado or other casualty so as to
affect adversely the value of the Mortgaged Property as
security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good
repair. There have not been any condemnation proceedings with
respect to the Mortgaged Property and the Seller has no
knowledge of any such proceedings in the future;
(gg) Collection Practices; Escrow Deposits; Interest Rate
Adjustments. The origination and collection practices used by
the Seller with respect to the Mortgage Loan have been in all
respects in compliance with Accepted Servicing Practices,
applicable laws and regulations, and have been in all respects
legal and proper. With respect to escrow deposits and Escrow
Payments, all such payments are in the possession of, or under
the control of, the Seller or the Seller and there exist no
deficiencies in connection therewith for which customary
arrangements for repayment thereof have not been made. All
Escrow Payments have been collected in full compliance with
state and federal law and the provisions of the related
Mortgage Note and Mortgage. An escrow of funds is not
prohibited by applicable law and has been established in an
amount sufficient to pay for every item that remains unpaid
and has been assessed but is not yet due and payable. No
escrow deposits or Escrow
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Payments or other charges or payments due the Seller have been
capitalized under the Mortgage or the Mortgage Note. All
Mortgage Interest Rate adjustments to the Monthly Payment, if
the Mortgage Loan is an Variable Rate Mortgage Loan, have been
made in strict compliance with state and federal law and the
terms of the related Mortgage and Mortgage Note on the related
Interest Rate Adjustment Date. With respect to each Variable
Rate Mortgage Loan, the Mortgage Interest Rate adjusts
annually as set forth herein. If, pursuant to the terms of the
Mortgage Note, another index was selected for determining the
Mortgage Interest Rate, the same index was used with respect
to each Mortgage Note which required a new index to be
selected, and such selection did not conflict with the terms
of the related Mortgage Note. The Seller executed and
delivered any and all notices required under applicable law
and the terms of the related Mortgage Note and Mortgage
regarding the Mortgage Interest Rate and the Monthly Payment
adjustments. Any interest required to be paid pursuant to
state, federal and local law has been properly paid and
credited;
(hh) Other Insurance Policies. No action, inaction or event has
occurred and no state of facts exists or has existed that has
resulted or could result in the exclusion from, denial of, or
defense to coverage under any hazard insurance policy. In
connection with the placement of any such insurance, no
commission, fee, or other compensation has been or will be
received by the Seller or by any officer, director, or
employee of the Seller or any designee of the Seller or any
corporation in which the Seller or any officer, director, or
employee had a financial interest at the time of placement of
such insurance; [CONFIRM]
(ii) No Violation of Environmental Laws. There is no pending action
or proceeding directly involving the Mortgaged Property in
which compliance with any environmental law, rule or
regulation is an issue; there is no violation of any
environmental law, rule or regulation with respect to the
Mortgaged Property; and nothing further remains to be done to
satisfy in full all requirements of each such law, rule or
regulation constituting a prerequisite to use and enjoyment of
said property;
(jj) Appraisal. The Mortgage File contains an appraisal of the
related Mortgaged Property signed prior to the approval of the
Mortgage Loan application by a Qualified Appraiser who had no
interest, direct or indirect in the Mortgaged Property or in
any loan made on the security thereof, and whose compensation
is not affected by the approval or disapproval of the Mortgage
Loan, and the appraisal and appraiser both satisfy the
requirements of Title XI of the Federal Institutions Reform,
Recovery, and Enforcement Act of 1989 and the regulations
promulgated thereunder, all as in effect on the date the
Mortgage Loan was originated;
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(kk) Disclosure Materials. The Mortgagor has received all
disclosure materials required by and the Seller complied with
all applicable law with respect to the making of the Mortgage
Loans;
(ll) Construction or Rehabilitation of Mortgaged Property. No
Mortgage Loan was made in connection with the construction or
rehabilitation of a Mortgaged Property or facilitating the
trade-in or exchange of a Mortgaged Property;
(mm) Value of Mortgaged Property. The Seller has no knowledge of
any circumstances existing that could reasonably be expected
to adversely affect the value or the marketability of any
Mortgaged Property or Mortgage Loan or to cause the Mortgage
Loan to prepay during any period materially faster or slower
than mortgage loans originated by the Seller generally;
(nn) No Defense to Insurance Coverage. No action has been taken or
failed to be taken, no event has occurred and no state of
facts exists or has existed on or prior to the Closing Date
(whether or not known to the Seller on or prior to such date)
which has resulted or will result in an exclusion from, denial
of, or defense to coverage under any primary mortgage
insurance policy (including, without limitation, any
exclusions, denials or defenses which would limit or reduce
the availability of the timely payment of the full amount of
the loss otherwise due thereunder to the insured) whether
arising out of actions, representations, errors, omissions,
negligence, or fraud of the Seller, the related Mortgagor or
any party involved in the application for such coverage,
including the appraisal, plans and specifications and other
exhibits or documents submitted therewith to the insurer under
such insurance policy, or for any other reason under such
coverage, but not including the failure of such insurer to pay
by reason of such insurer's breach of such insurance policy or
such insurer's financial inability to pay;
(oo) Escrow Analysis. With respect to each Mortgage, Seller has
within the last twelve months (unless such Mortgage was
originated within such twelve month period) analyzed the
required Escrow Payments for each Mortgage and adjusted the
amount of such payments so that, assuming all required
payments are timely made, any deficiency will be eliminated on
or before the first anniversary of such analysis, or any
overage will be refunded to the Mortgagor, in accordance with
RESPA and any other applicable law; and
(pp) Prior Servicing. Each Mortgage Loan has been serviced in all
material respects in compliance with Accepted Servicing
Practices; provided that, in the event of any breach of the
representation and warranty set forth in this Subsection (pp),
the Seller shall not be required to repurchase any such
Mortgage Loan unless such breach had, and continues to have, a
material and adverse effect on the value of the related
Mortgage Loan or the interest of the Purchaser therein.
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SUBSECTION 8.03. REMEDIES FOR BREACH OF REPRESENTATIONS AND
WARRANTIES.
It is understood and agreed that the representations and warranties
set forth in Subsections 8.01 and 8.02 shall survive the sale of the Mortgage
Loans to the Purchaser and shall inure to the benefit of the Purchaser,
notwithstanding any restrictive or qualified endorsement on any Mortgage Note
or Assignment of Mortgage or the examination or failure to examine any Mortgage
File. Upon discovery by either the Seller or the Purchaser of a breach of any
of the foregoing representations and warranties which materially and adversely
affects the value of the Mortgage Loans or the interest of the Purchaser (or
which materially and adversely affects the interests of the Purchaser in the
related Mortgage Loan in the case of a representation and warranty relating to
a particular Mortgage Loan), the party discovering such breach shall give
prompt written notice to the other.
The Seller, promptly after discovery of a breach of any representation
or warranty, shall notify the Purchaser of such breach and the details thereof.
Within sixty (60) days of the earlier of (i) notice by the Seller pursuant to
the immediately preceding sentence or (ii) notice by the Purchaser to the
Seller of any breach of a representation or warranty with respect to a Mortgage
Loan, the Seller shall use its best efforts promptly to cure such breach in all
material respects and, if such breach cannot be cured, the Seller shall, at the
Purchaser's option and subject to Subsection 8.04, repurchase such Mortgage
Loan at the Repurchase Price, unless the Seller elects to substitute a
Qualified Substitute Mortgage Loan for such Mortgage Loan pursuant to this
Subsection. In the event that a breach shall involve any representation or
warranty set forth in Subsection 8.01, and such breach cannot be cured within
sixty (60) days of the earlier of either discovery by or notice to the Seller
of such breach, all of the Mortgage Loans shall, at the Purchaser's option and
subject to Subsection 8.04, be repurchased by the Seller at the Repurchase
Price. However, if the breach shall involve a representation or warranty set
forth in Subsection 8.02 and the Seller discovers or receives notice of any
such breach within two (2) years of the Closing Date, the Seller may, at the
Seller's option and provided that the Seller has a Qualified Substitute
Mortgage Loan, rather than repurchase the Mortgage Loan as provided above,
remove such Mortgage Loan (a "Deleted Mortgage Loan") and substitute in its
place a Qualified Substitute Mortgage Loan or Loans, provided that any such
substitution shall be effected not later than two (2) years after the Closing
Date. If the Seller has no Qualified Substitute Mortgage Loan, it shall
repurchase the deficient Mortgage Loan. Any repurchase of a Mortgage Loan or
Loans pursuant to the foregoing provisions of this Subsection 8.03 shall be
accomplished by either (a) if the Servicing Agreement is in effect, deposit in
the Custodial Account of the amount of the Repurchase Price for distribution to
the Purchaser on the next scheduled Remittance Date, after deducting therefrom
any amount received in respect of such repurchased Mortgage Loan or Loans and
being held in the Custodial Account for future distribution or (b) if the
Servicing Agreement is no longer in effect, by direct remittance of the
Repurchase Price to the Purchaser or its designee in accordance with the
Purchaser's instructions.
At the time of repurchase or substitution, the Purchaser and the
Seller shall arrange for the reassignment of the Deleted Mortgage Loan to the
Seller and the delivery to the Seller of any documents held by the Purchaser or
its designee relating to the Deleted Mortgage Loan. In addition, upon any such
repurchase, all funds maintained in the Escrow Account with respect to
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such Deleted Mortgage Loan shall be transferred to the Seller. In the event of
a repurchase or substitution, the Seller shall, simultaneously with such
reassignment, give written notice to the Purchaser that such repurchase or
substitution has taken place, amend the Mortgage Loan Schedule to reflect the
withdrawal of the Deleted Mortgage Loan from this Agreement, and, in the case
of substitution, identify a Qualified Substitute Mortgage Loan and amend the
Mortgage Loan Schedule to reflect the addition of such Qualified Substitute
Mortgage Loan to this Agreement. In connection with any such substitution, the
Seller shall be deemed to have made as to such Qualified Substitute Mortgage
Loan the representations and warranties set forth in this Agreement except that
all such representations and warranties set forth in this Agreement shall be
deemed made as of the date of such substitution. The Seller shall effect such
substitution by delivering to the Purchaser or its designee for such Qualified
Substitute Mortgage Loan the documents required by Subsection 6.03, with the
Mortgage Note endorsed as required by Subsection 6.03. No substitution will be
made in any calendar month after the Determination Date for such month. The
Seller shall deposit in the Custodial Account the Monthly Payment, or in the
event that the Servicing Agreement is no longer in effect remit directly to the
Purchaser or its designee in accordance with the Purchaser's instructions the
Monthly Payment less the Servicing Fee due, if any, on such Qualified
Substitute Mortgage Loan or Loans in the month following the date of such
substitution. Monthly Payments due with respect to Qualified Substitute
Mortgage Loans in the month of substitution shall be retained by the Seller.
For the month of substitution, payments to the Purchaser shall include the
Monthly Payment due on any Deleted Mortgage Loan in the month of substitution,
and the Seller shall thereafter be entitled to retain all amounts subsequently
received by the Seller in respect of such Deleted Mortgage Loan.
For any month in which the Seller substitutes a Qualified Substitute
Mortgage Loan for a Deleted Mortgage Loan, the Seller shall determine the
amount (if any) by which the aggregate principal balance of all Qualified
Substitute Mortgage Loans as of the date of substitution is less than the
aggregate Stated Principal Balance of all Deleted Mortgage Loans (after
application of scheduled principal payments due in the month of substitution).
The amount of such shortfall shall be distributed by the Seller directly to the
Purchaser or its designee in accordance with the Purchaser's instructions
within two (2) Business Days of such substitution.
In addition to such repurchase or substitution obligation, the Seller
shall indemnify the Purchaser and hold it harmless against any losses, damages,
penalties, fines, forfeitures, reasonable and necessary legal fees and related
costs, judgments, and other costs and expenses resulting from any claim,
demand, defense or assertion based on or grounded upon, or resulting from, a
breach of the Seller representations and warranties contained in this
Agreement. It is understood and agreed that the obligations of the Seller set
forth in this Subsection 8.03 to cure, substitute for or repurchase a defective
Mortgage Loan and to indemnify the Purchaser as provided in this Subsection
8.03 constitute the sole remedies of the Purchaser respecting a breach of the
foregoing representations and warranties.
Any cause of action against the Seller relating to or arising out of
the breach of any representations and warranties made in Subsections 8.01 and
8.02 shall accrue as to any Mortgage Loan upon (i) discovery of such breach by
the Purchaser or notice thereof by the Seller to the Purchaser, (ii) failure by
the Seller to cure such breach or repurchase such Mortgage Loan as
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specified above, and (iii) demand upon the Seller by the Purchaser for
compliance with this Agreement.
SECTION 9. CLOSING.
The closing for the purchase and sale of the Mortgage Loans shall take
place on the Closing Date. At the Purchaser's option, the closing shall be
either: by telephone, confirmed by letter or wire as the parties shall agree,
or conducted in person, at such place as the parties shall agree.
The closing for the Mortgage Loans to be purchased on the Closing Date
shall be subject to each of the following conditions:
(a) all of the representations and warranties of the
Seller under this Agreement and under the Servicing
Agreement (with respect to each Mortgage Loan, as
specified therein) shall be true and correct as of
the Closing Date and no event shall have occurred
which, with notice or the passage of time, would
constitute a default under this Agreement or an Event
of Default under the Servicing Agreement;
(b) the Purchaser shall have received, or the Purchaser's
attorneys shall have received in escrow, all closing
documents as specified in Section 10 of this
Agreement, in such forms as are agreed upon and
acceptable to the Purchaser, duly executed by all
signatories other than the Purchaser as required
pursuant to the terms hereof;
(c) the Seller shall have delivered and released to the
Purchaser or its designee all Mortgage Loan Documents
with respect to each Mortgage Loan; and
(d) all other terms and conditions of this Agreement
shall have been complied with.
Subject to the foregoing conditions, the Purchaser shall pay to the
Seller on the Closing Date the Purchase Price, plus accrued interest pursuant
to Section 4 of this Agreement, by wire transfer of immediately available funds
to the account designated by the Seller.
SECTION 10. CLOSING DOCUMENTS.
The closing documents for the Mortgage Loans to be purchased on the
Closing Date shall consist of fully executed originals of the following
documents:
1. this Agreement;
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2. the Servicing Agreement, dated as of the Cut-off Date, in the
form of Exhibit B hereto;
3. a Custodial Account Letter Agreement or a Custodial Account
Certification, as applicable, as required under the Servicing
Agreement;
4. an Escrow Account Letter Agreement or an Escrow Account
Certification, as applicable, as required under the Servicing
Agreement;
5. an Officer's Certificate, in the form of Exhibit C hereto,
including all attachments thereto;
6. an Opinion of Counsel of the Seller/Servicer (who may be an
employee of the Seller/Servicer), in the form of Exhibit D
hereto;
7. a Security Release Certification, in the form of Exhibit E or
Exhibit F, if applicable, hereto executed by any person, as
requested by the Purchaser, if any of the Mortgage Loans have
at any time been subject to any security interest, pledge or
hypothecation for the benefit of such person;
8. a certificate or other evidence of merger or change of name,
signed or stamped by the applicable regulatory authority, if
any, if the Mortgage Loans were acquired by the Seller by
merger or acquired or originated by the Seller while
conducting business under a name other than its present name,
if applicable; and
9. the underwriting guidelines of the Seller to be attached
hereto as Exhibit I.
The Seller shall bear the risk of loss of the closing documents until
such time as they are received by the Purchaser or its attorneys.
SECTION 11. COSTS.
The Purchaser shall pay the legal fees and expenses of its attorneys.
All other costs and expenses incurred in connection with the transfer and
delivery of the Mortgage Loans including recording fees, fees for recording
Assignments of Mortgage, fees for title policy endorsements and continuations,
if applicable, the Seller's attorney's fees, shall be paid by the Seller.
SECTION 12. MERGER OR CONSOLIDATION OF THE SELLER.
The Seller will keep in full effect its existence, rights and
franchises as a federally chartered savings bank, and will obtain and preserve
its qualification to do business as a foreign corporation in each jurisdiction
in which such qualification is or shall be necessary to protect the validity
and enforceability of this Agreement, or any of the Mortgage Loans and to
perform its duties under this Agreement.
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Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the
Seller, shall be the successor of the Seller hereunder, without the execution
or filing of any paper or any further act on the part of any of the parties
hereto, anything herein to the contrary notwithstanding; provided, however,
that the successor or surviving Person shall have a tangible net worth of at
least $30,000,000.
SECTION 13. MANDATORY DELIVERY; GRANT OF SECURITY INTEREST.
The sale and delivery on the Closing Date of the Mortgage Loans
described on the Mortgage Loan Schedule is mandatory from and after the date of
the execution of this Agreement, it being specifically understood and agreed
that each Mortgage Loan is unique and identifiable on the date hereof and that
an award of money damages would be insufficient to compensate the Purchaser for
the losses and damages incurred by the Purchaser (including damages to
prospective purchasers of the Mortgage Loans) in the event of the Seller's
failure to deliver (i) each of the Mortgage Loans or (ii) one or more Qualified
Substitute Mortgage Loans or (iii) one or more Mortgage Loans otherwise
acceptable to the Purchaser on or before the Closing Date. The Seller hereby
grants to the Purchaser a lien on and a continuing security interest in each
Mortgage Loan and each document and instrument evidencing each such Mortgage
Loan to secure the performance by the Seller of its obligations under this
Agreement, and the Seller agrees that it shall hold such Mortgage Loans in
custody for the Purchaser subject to the Purchaser's (i) right to reject any
Mortgage Loan (or Qualified Substitute Mortgage Loan) under the terms of this
Agreement and to require another Mortgage Loan (or Qualified Substitute
Mortgage Loan) to be substituted therefor, and (ii) obligation to pay the
Purchase Price plus accrued interest as set forth in Section 4 hereof for the
Mortgage Loans. All rights and remedies of the Purchaser under this Agreement
are distinct from, and cumulative with, any other rights or remedies under this
Agreement or afforded by law or equity and all such rights and remedies may be
exercised concurrently, independently or successively.
SECTION 14. NOTICES.
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if mailed, by registered or
certified mail, return receipt requested, or, if by other means, when received
by the other party at the address as follows:
(i) if to the Seller:
D&N Bank
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
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(ii) if to the Purchaser:
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
or such other address as may hereafter be furnished to the other party by like
notice. Any such demand, notice or communication hereunder shall be deemed to
have been received on the date delivered to or received at the premises of the
addressee (as evidenced, in the case of registered or certified mail, by the
date noted on the return receipt).
SECTION 15. SEVERABILITY CLAUSE.
Any part, provision, representation or warranty of this Agreement
which is prohibited or unenforceable or is held to be void or unenforceable in
any jurisdiction shall be ineffective, as to such jurisdiction, to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction as to any Mortgage Loan shall not invalidate or render
unenforceable such provision in any other jurisdiction. To the extent permitted
by applicable law, the parties hereto waive any provision of law which
prohibits or renders void or unenforceable any provision hereof. If the
invalidity of any part, provision, representation or warranty of this Agreement
shall deprive any party of the economic benefit intended to be conferred by
this Agreement, the parties shall negotiate, in good faith, to develop a
structure the economic effect of which is nearly as possible the same as the
economic effect of this Agreement without regard to such invalidity.
SECTION 16. COUNTERPARTS.
This Agreement may be executed simultaneously in any number of
counterparts. Each counterpart shall be deemed to be an original, and all such
counterparts shall constitute one and the same instrument.
SECTION 17. GOVERNING LAW.
The Agreement shall be construed in accordance with the laws of the
State of Michigan and the obligations, rights and remedies of the parties
hereunder shall be determined-in accordance with the substantive laws of the
Michigan (without regard to conflicts of laws principles), except to the extent
preempted by Federal law.
SECTION 18. INTENTION OF THE PARTIES.
It is the intention of the parties that the Purchaser is purchasing,
and the Seller is selling the Mortgage Loans and not a debt instrument of the
Seller or another security. Accordingly, the parties hereto each intend to
treat the transaction for Federal income tax purposes as a sale by the Seller,
and a purchase by the Purchaser, of the Mortgage Loans.
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SECTION 19. SUCCESSORS AND ASSIGNS; ASSIGNMENT OF
PURCHASE AGREEMENT.
This Agreement shall bind and inure to the benefit of and be
enforceable by the Seller and the Purchaser and the respective permitted
successors and assigns of the Seller and the successors and assigns of the
Purchaser. This Agreement shall not be assigned, pledged or hypothecated by the
Seller to a third party without the consent of the Purchaser. This Agreement
may be assigned, pledged or hypothecated by the Purchaser without the prior
consent of the Seller. If the Purchaser assigns all or any of its rights as
Purchaser hereunder, the assignee of the Purchaser will become the "Purchaser"
hereunder to the extent of such assignment, provided that at no time shall
there be more than fifteen (15) persons having the status of "Purchaser"
hereunder. Any assignment by the Purchaser shall be accompanied by the delivery
and execution of an Assignment and Assumption Agreement (the "Assignment and
Assumption Agreement") substantially in the form attached hereto as Exhibit G.
The Seller shall be required to remit all amounts required to be remitted to
the Purchaser hereunder to said assignee commencing with the first Remittance
Date falling after receipt of said copy of the related Assignment and
Assumption Agreement provided that the Seller receives said copy no later than
three (3) Business Days immediately prior to the first day of the month of the
related Remittance Date.
SECTION 20. WAIVERS.
No term or provision of this Agreement may be waived or modified
unless such waiver or modification is in writing and signed by the party
against whom such waiver or modification is sought to be enforced.
SECTION 21. EXHIBITS.
The exhibits to this Agreement are hereby incorporated and made a part
hereof and are an integral part of this Agreement.
SECTION 22. GENERAL INTERPRETIVE PRINCIPLES.
For purposes of this Agreement, except as otherwise expressly provided
or unless the context otherwise requires:
(a) the terms defined in this Agreement have the meanings assigned
to them in this Agreement and include the plural as well as
the singular, and the use of any gender herein shall be deemed
to include the other gender;
(b) accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally
accepted accounting principles;
(c) references herein to "Articles," "Sections," "Subsections,"
"Paragraphs," and other subdivisions without reference to a
document are to designated Articles, Sections, Subsections,
Paragraphs and other subdivisions of this Agreement;
30
<PAGE> 34
(d) reference to a Subsection without further reference to a
Section is a reference to such Subsection as contained in the
same Section in which the reference appears, and this rule
shall also apply to Paragraphs and other subdivisions;
(e) the words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole and not to
any particular provision; and
(f) the term "include" or "including" shall mean without limitation
by reason of enumeration.
SECTION 23. REPRODUCTION OF DOCUMENTS.
This Agreement and all documents relating thereto, including, without
limitation, (a) consents, waivers and modifications which may hereafter be
executed, (b) documents received by any party at the closing, and (c) financial
statements, certificates and other information previously or hereafter
furnished, may be reproduced by any photographic, photostatic, microfilm,
micro-card, miniature photographic or other similar process. The parties agree
that any such reproduction shall be admissible in evidence as the original
itself in any judicial or administrative proceeding, whether or not the
original is in existence and whether or not such reproduction was made by a
party in the regular course of business, and that any enlargement, facsimile or
further reproduction of such reproduction shall likewise be admissible in
evidence.
SECTION 24. FURTHER AGREEMENTS.
The Seller and the Purchaser each agree to execute and deliver to the
other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of
this Agreement.
SECTION 25. RECORDATION OF ASSIGNMENTS OF MORTGAGE.
To the extent permitted by applicable law, each of the Assignments of
Mortgage is subject to recordation in all appropriate public offices for real
property records in all the counties or their comparable jurisdictions in which
any or all of the Mortgaged Properties are situated, and in any other
appropriate public recording office or elsewhere, such recordation to be
effected at the Seller's expense for a single recordation with respect to each
Assignment of Mortgage in the event recordation is either necessary under
applicable law or requested by the Purchaser at its sole option.
31
<PAGE> 35
IN WITNESS WHEREOF, the parties have executed this Agreement under
seal as of the date and year first above written.
D&N CAPITAL CORPORATION
(the Purchaser)
By:_________________________________
Name:_______________________________
Title:______________________________
D&N BANK
(the Seller)
By:_________________________________
Name:_______________________________
Title:______________________________
32
<PAGE> 36
EXHIBIT A
CONTENTS OF EACH MORTGAGE FILE
With respect to each Mortgage Loan, the Mortgage File shall include
each of the following items, which shall be available for inspection by the
Purchaser and any prospective Purchaser, and which shall be delivered to the
Purchaser or its designee pursuant to Section 6.03 of the Mortgage Loan
Purchase and Warranties Agreement to which this Exhibit is attached (the
"Agreement"):
1. The original Mortgage Note (or, with respect to the Mortgage
Loan listed on Schedule I hereto, a lost note affidavit, executed by an officer
of the Seller, with a copy of the original note attached thereto) bearing all
intervening endorsements, endorsed "Pay to the order of _______, without
recourse" and signed in the name of the Seller by an authorized officer. To
the extent that there is no room on the face of the Mortgage Notes for
endorsements, the endorsement may be contained on an allonge, if state law so
allows. If the Mortgage Loan was acquired by the Seller in a merger, the
endorsement must be by "[Seller], successor by merger to [name of
predecessor]". If the Mortgage Loan was acquired or originated by the Seller
while doing business under another name, the endorsement must be by "[Seller],
formerly known as [previous name]".
2. The original of any guarantee executed in connection with the
Mortgage Note.
3. The original Mortgage, with evidence of recording thereon. If
in connection with any Mortgage Loan, the Seller cannot deliver or cause to be
delivered the original Mortgage with evidence of recording thereon on or prior
to the Closing Date because of a delay caused by the public recording office
where such Mortgage has been delivered for recordation, a photocopy of such
Mortgage certified by the Seller to be true and correct will be delivered; if
such Mortgage has been lost or if such public recording office retains the
original recorded Mortgage, the Seller shall deliver or cause to be delivered
to the Purchaser, a photocopy of such Mortgage, certified by such public
recording office to be a true and complete copy of the original recorded
Mortgage.
4. The originals of all assumption, modification, consolidation
or extension agreements, if any, with evidence of recording thereon or
certified copies of such documents if the originals thereof are unavailable.
5. The original Assignment of Mortgage for each Mortgage Loan
endorsed "Pay to the order of ____________________" and signed in the name of
the Seller by an authorized officer. If the Mortgage Loan was acquired by the
Seller in a merger, the Assignment of Mortgage must be made by "[Seller],
successor by merger to [name of predecessor]". If the Mortgage Loan was
acquired or originated by the Seller while doing business under another name,
the Assignment of Mortgage must be by "[Seller], formerly known as [previous
name]".
6. Originals of all intervening assignments of the Mortgage with
evidence of recording thereon if such intervening assignment has been recorded.
<PAGE> 37
7. The original mortgagee policy of title insurance or, in the
event such original title policy is unavailable, a certified true copy of the
related policy binder or commitment for title certified to be true and complete
by the title insurance company.
8. Any original security agreement executed in connection with
the Mortgage.
9. The original hazard insurance policy and, if required by law,
flood insurance policy, in accordance with Section 8.02(f) of the Agreement.
10. Mortgage Loan closing statement.
11. Credit report on the Mortgagor.
12. Appraisal report.
13. Photograph of the Mortgaged Property.
14. Survey of the Mortgaged Property, if any.
15. Copy of each instrument necessary to complete identification
of any exception set forth in the exception schedule in the title policy, i.e.,
map or plat, restrictions, easements, sewer agreements, etc.
16. All required disclosure statements.
17. If available, termite report, structural engineer's report,
water potability and septic certification.
18. Sales contract.
19. Tax receipts, insurance premium receipts, ledger sheets,
insurance claim files, correspondence, current and historical computerized data
files, and all other processing, underwriting and closing papers and records
which are customarily contained in a mortgage loan file and which are required
to document the Mortgage Loan or to service the Mortgage Loan.
In the event that such original or copy of any document submitted
for recordation to the appropriate public recording office is not so delivered
to the Purchaser or its designee within 90 days following the Closing Date
(other than with respect to the Assignments of Mortgage which shall be
delivered to the Purchaser or its designee in blank), and in the event that the
Seller does not cure such failure within 30 days of discovery or receipt of
written notification of such failure from the Purchaser, the related Mortgage
Loan shall, upon the request of the Purchaser, be repurchased by the Seller at
the price and in the manner specified in Subsection 8.03 of the Agreement. The
foregoing repurchase obligation shall not apply in the event that the Seller
cannot deliver such original or copy of any document submitted for recordation
to the appropriate public recording office within the specified period due to a
delay caused by the recording office in the
A-2
<PAGE> 38
applicable jurisdiction; provided that the Seller shall instead deliver a
recording receipt of such recording office or, if such recording receipt is not
available, an officer's certificate of a servicing officer of the Seller,
confirming that all such documents have been accepted for recording; provided
that, upon request of the Purchaser and delivery by the Purchaser to the Seller
of a schedule of the related Mortgage Loans, the Seller shall reissue and
deliver to the Purchaser or its designee said officer's certificate relating to
the related Mortgage Loans.
A-3
<PAGE> 39
EXHIBIT B
<PAGE> 40
EXHIBIT C
FORM OF SELLER'S/SERVICER'S OFFICER'S CERTIFICATE
I, _____________, hereby certify that I am the duly elected [Vice]
President of D&N Bank, a federally chartered savings bank (the "Seller") and
further as follows:
1. Attached hereto as Exhibit 1 is a true, correct and complete
copy of the restated charter of the Seller which is in full
force and effect on the date hereof and which has been in
effect without amendment, waiver, rescission or modification
since [_________.]
2. Attached hereto as Exhibit 2 is a true, correct and complete
copy of the bylaws of the Seller which are in effect on the
date hereof and which have been in effect without amendment,
waiver, rescission or modification since [_________.]
3. Attached hereto as Exhibit 3 is an original certificate of due
incorporation and valid existence of the Seller issued within
ten days of the date hereof, and no event has occurred since
the date thereof which would impair such standing.
4. Attached hereto as Exhibit 4 is a true, correct and complete
copy of the corporate resolutions of the Board of Directors of
the Seller authorizing the Seller to execute and deliver each
of the Mortgage Loan Purchase and Warranties Agreements, dated
as of [__________], 1997, by and between D&N Capital
Corporation (the "Purchaser") and the Seller (the "Purchase
Agreement"), to endorse the mortgage notes and execute the
assignments of mortgages by original [or facsimile] signature,
and to execute and deliver each of the Servicing Agreements
dated as of [______], 1997, by and between D&N Capital
Corporation (the "Purchaser") and the Seller as Servicer (the
"Servicing Agreement") and such resolutions are in effect on
the date hereof and have been in effect without amendment,
waiver, rescission or modification since [_________.]
5. Either (i) no consent, approval, authorization or order of any
court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or
compliance by the Seller with the Purchase Agreement and the
Servicing Agreement, the sale of the mortgage loans or the
consummation of the transactions contemplated by the Purchase
Agreement and the Servicing Agreement; or (ii) any required
consent, approval, authorization or order has been obtained by
the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement
and the Servicing Agreement conflicts or will conflict with or
results or will result in a breach of or constitutes or will
constitute a default under the charter or by-laws of the
Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is
bound or to which it is subject, or any statute or order,
rule,
<PAGE> 41
regulations, writ, injunction or decree of any court,
governmental authority or regulatory body to which the Seller
is subject or by which it is bound.
7. To the best of my knowledge, there is no action, suit,
proceeding or investigation pending or threatened against the
Seller which, in my judgment, either in any one instance or in
the aggregate, may result in any material adverse change in
the business, operations, financial condition, properties or
assets of the Seller or in any material impairment of the
right or ability of the Seller to carry on its business
substantially as now conducted or in any material liability on
the part of the Seller or which would draw into question the
validity of the Purchase Agreement and the Servicing Agreement
or the mortgage loans or of any action taken or to be taken in
connection with the transactions contemplated hereby, or which
would be likely to impair materially the ability of the Seller
to perform under the terms of the Purchase Agreement and the
Servicing Agreement.
8. Each person listed on Exhibit 5 attached hereto who, as an
officer or representative of the Seller, signed the Purchase
Agreement and any other document delivered prior to or on the
date hereof in connection with any purchase described in the
Purchase Agreement was, at the respective times of such
signing and delivery, and is now, a duly elected or appointed,
qualified and acting officer or representative of the Seller,
who holds the office set forth opposite his or her name on
Exhibit 5, and the signatures of such persons appearing on
such documents are their genuine signatures. The person who,
as an officer or representative of the Seller, signed the
Servicing Agreement and any other document delivered prior to
or on the date hereof in connection with any servicing duties
described in the Servicing Agreement was, at the respective
times of such signing and delivery, and is now, a duly elected
or appointed, qualified and acting officer or representative
of the Seller, who holds the office set forth beneath his or
her name on the Servicing Agreement and the signature of such
person appearing on such document is his or her genuine
signature.
9. The Seller is duly authorized to engage in the transactions
described and contemplated in the Purchase Agreement and
Servicing Agreement.
C-2
<PAGE> 42
IN WITNESS WHEREOF, I have hereunto signed my name and affixed the
seal of the Seller.
Dated:____________, 1997 By:__________________________
Name:________________________
Title: [VICE] President
[Seal]
I, _________________________, an [ASSISTANT] [VICE PRESIDENT] of D&N
Bank, hereby certify that _____________________ is the duly elected, qualified
and acting [Vice] President of the Seller and that the signature appearing
above is [HIS] genuine signature.
IN WITNESS WHEREOF, I have hereunto signed my name.
Dated:______________, 1997 By:_____________________________
Name:___________________________
Title: [ASSISTANT] [VICE PRESIDENT]
C-3
<PAGE> 43
EXHIBIT 5
to Seller's/Servicer's Officer's Certificate
NAME TITLE SIGNATURE
<PAGE> 44
EXHIBIT D
FORM OF OPINION OF COUNSEL TO THE SELLER/SERVICER
_________________, 1997
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Dear Sirs:
You have requested my opinion, as General Counsel to D&N Bank (the
"Seller"), with respect to certain matters in connection with the sale by the
Seller of the Mortgage Loans pursuant to that certain Mortgage Loan Purchase
and Warranties Agreement by and between the Seller and D&N Capital Corporation
(the "Purchaser"), dated as of __________, 1997 (the "Purchase Agreement")
which sale is in the form of whole loans, delivered pursuant to a Purchase
Agreement and serviced pursuant to an Servicing Agreement, dated as of
__________, 1997, by and between the Purchaser and the Seller as Servicer (the
"Servicing Agreement"). Capitalized terms not otherwise defined herein have
the meanings set forth in the Purchase Agreement and the Servicing Agreement.
I have examined the following documents:
1. the Purchase Agreement;
2. the Servicing Agreement;
3. the form of Assignment of Mortgage;
4. the form of endorsement of the Mortgage Notes; and
5. such other documents, records and papers as we have deemed
necessary and relevant as a basis for this opinion.
To the extent I have deemed necessary and proper, I have relied upon
the representations and warranties of the Seller contained in the Purchase
Agreement and the Servicing Agreement. I have assumed the authenticity of all
documents submitted to me as originals, the genuineness of all signatures, the
legal capacity of natural persons and the conformity to the originals of all
documents.
Based upon the foregoing, it is my opinion that:
1. The Seller is a federally chartered savings bank duly
organized and validly existing under the laws of the United
States and is qualified to transact business in, and is in
good standing under, the laws of Michigan.
<PAGE> 45
2. The Seller has the power to engage in the transactions
contemplated by the Purchase Agreement and the Servicing
Agreement and all requisite power, authority and legal right
to execute and deliver the Purchase Agreement and the
Servicing Agreement and to perform and observe the terms and
conditions of such agreements.
3. The Purchase Agreement and Servicing Agreement have been duly
authorized, executed and delivered by the Seller and are
legal, valid and binding agreements enforceable in accordance
with their respective terms against the Seller, subject to
bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application
of the rules of equity, including those respecting the
availability of specific performance, none of which will
materially interfere with the realization of the benefits
provided thereunder or with the Purchaser's ownership of the
Mortgage Loans.
4. The Seller has been duly authorized to allow any of its
officers to execute any and all documents by original
signature in order to complete the transactions contemplated
by the Purchase Agreement and the Servicing Agreement and by
original or facsimile signature in order to execute the
endorsements to the Mortgage Notes and the Assignments of
Mortgages, and the original or facsimile signature of the
officer at the Seller executing the endorsements to the
Mortgage Notes and the Assignments of Mortgages represents the
legal and valid signature of said officer of the Seller.
5. Either (i) no consent, approval, authorization or order of any
court or governmental agency or body is required for the
execution, delivery and performance by the Seller of or
compliance by the Seller with the Purchase Agreement and the
Servicing Agreement and the sale of the Mortgage Loans or the
consummation of the transactions contemplated by the Purchase
Agreement and the Servicing Agreement or (ii) any required
consent, approval, authorization or order has been obtained by
the Seller.
6. Neither the consummation of the transactions contemplated by,
nor the fulfillment of the terms of, the Purchase Agreement
and the Servicing Agreement conflicts or will conflict with or
results or will result in a breach of or constitutes or will
constitute a default under the charter or by-laws of the
Seller, the terms of any indenture or other agreement or
instrument to which the Seller is a party or by which it is
bound or to which it is subject, or violates any statute or
order, rule, regulations, writ, injunction or decree of any
court, governmental authority or regulatory body to which the
Seller is subject or by which it is bound.
7. There is no action, suit, proceeding or investigation pending
or, to the best of my knowledge, threatened against the Seller
which, in my judgment, either in any one instance or in the
aggregate, may result in any material adverse change in the
business, operations, financial condition, properties or
assets of the Seller or in any
D-2
<PAGE> 46
material impairment of the right or ability of the Seller to
carry on its business substantially as now conducted or in any
material liability on the part of the Seller or which would
draw into question the validity of the Purchase Agreement and
the Servicing Agreement or the Mortgage Loans or of any action
taken or to be taken in connection with the transactions
contemplated thereby, or which would be likely to impair
materially the ability of the Seller to perform under the
terms of the Purchase Agreement and the Servicing Agreement.
8. The sale of each Mortgage Note and Mortgage as and in the
manner contemplated by the Purchase Agreement is sufficient to
fully transfer to the Purchaser all right, title and interest
of the Seller thereto as noteholder and mortgagee.
9. The Mortgages have been duly assigned and the Mortgage Notes
have been duly endorsed as provided in the Purchase Agreement.
The Assignments of Mortgage are in recordable form, except
for the insertion of the name of the assignee, and upon the
name of the assignee being inserted, and to the best of my
knowledge, with respect to all other states, the Assignments
of Mortgage are in recordable form, except for the insertion
of the name of the assignee, and upon the name of the assignee
being inserted, are acceptable for recording under the laws of
such other states. The endorsement of the Mortgage Notes, the
delivery to the Purchaser, or its designee, of the Assignments
of Mortgage, and the delivery of the original endorsed
Mortgage Notes to the Purchaser, or its designee, are
sufficient to permit the Purchaser to avail itself of all
protection available under applicable law against the claims
of any present or future creditors of the Seller, and are
sufficient to prevent any other sale, transfer, assignment,
pledge or hypothecation of the Mortgages and the Mortgage
Notes by the Seller from being enforceable.
This opinion is given to you for your sole benefit, and no other
person or entity is entitled to rely hereon except that the purchaser or
purchasers to which you initially and directly resell the Mortgage Loans may
rely on this opinion as if it were addressed to them as of its date.
Very truly yours,
Peter L. Lemmer
General Counsel
D-3
<PAGE> 47
EXHIBIT E
______________________, 1997
Federal Home Loan Bank of ______(the "Association")
___________________________________________________
___________________________________________________
Attention: ___________________________________________________
___________________________________________________
Re: Notice of Sale and Release of Collateral
Dear Sirs:
This letter serves as notice that D&N Bank, a federally chartered
savings bank (the "Bank") has committed to sell to D&N Capital Corporation
under a Mortgage Loan Purchase and Warranties Agreement, dated as of
__________, 1997, certain mortgage loans originated or owned by the Bank. The
Bank warrants that the mortgage loans to be sold to D&N Capital Corporation are
in addition to and beyond any collateral required to secure advances made by
the Association to the Bank.
The Bank acknowledges that the mortgage loans to be sold to D&N
Capital Corporation shall not be used as additional or substitute collateral
for advances made by the Association. D&N Capital Corporation understands that
the balance of the Bank's mortgage loan portfolio may be used as collateral or
additional collateral for advances made by the Association, and confirms that
it has no interest therein.
Execution of this letter by the Association shall constitute a full
and complete release of any security interest, claim, or lien which the
Association may have against the mortgage loans to be sold to D&N Capital
Corporation.
Very truly yours,
____________________________________________
By:_________________________________________
Name:_______________________________________
Title:______________________________________
Date:_______________________________________
Acknowledge and approved:
FEDERAL HOME LOAN BANK OF
_____________________________________________
By:__________________________________________
Name:________________________________________
Title:_______________________________________
Date:________________________________________
<PAGE> 48
EXHIBIT F
FORM OF SECURITY RELEASE CERTIFICATION
I. RELEASE OF SECURITY INTEREST
The financial institution named below hereby relinquishes any and all
right, title and interest it may have in all Mortgage Loans to be purchased by
D&N Capital Corporation from D&N Bank pursuant to that certain Mortgage Loan
Purchase and Warranties Agreement, dated as of [__________, 1997,] and
certifies that all notes, mortgages, assignments and other documents in its
possession relating to such Mortgage Loans have been delivered and released to
D&N Bank or its designees, as of the date and time of the sale of such Mortgage
Loans to D&N Capital Corporation.
Name and Address of Financial Institution
________________________________
(name)
________________________________
(Address)
By:_____________________________
II. CERTIFICATION OF RELEASE
D&N Bank hereby certifies to D&N Capital Corporation that, as of the
date and time of the sale of the above-mentioned Mortgage Loans to D&N Capital
Corporation, the security interests in the Mortgage Loans released by the
above-named financial institution comprise all security interests relating to
or affecting any and all such Mortgage Loans. The Company warrants that, as of
such time, there are and will be no other security interests affecting any or
all of such Mortgage Loans.
_________________________________
By: _____________________________
Title: __________________________
Date:____________________________
<PAGE> 49
EXHIBIT G
FORM OF ASSIGNMENT AND ASSUMPTION AGREEMENT
ASSIGNMENT AND ASSUMPTION AGREEMENT, dated [__________________,]
between D&N Bank, a federally chartered savings bank ("Assignor") and D&N
Capital Corporation, a Delaware corporation ("Assignee"):
For good and valuable consideration the receipt and sufficiency of
which hereby are acknowledged, and in consideration of the mutual covenants
herein contained, the parties hereto hereby agree as follows:
1. The Assignor hereby grants, transfers and assigns to Assignee,
as Purchaser, all of the right, title and interest of Assignor
with respect to the mortgage loans listed on Exhibit A
attached hereto (the "Mortgage Loans"), and with respect to
such Mortgage Loans, in, to and under (a) that certain
Mortgage Loan Purchase and Warranties Agreement dated
[__________,] 1997 by and between D&N Bank (the "Seller") and
D&N Capital Corporation (the "Purchase Agreement"), and (b)
that certain Servicing Agreement dated as of [_______], by and
between the Purchaser and the Seller (the "Servicing
Agreement"; the Servicing Agreement and the Purchase Agreement
are collectively referred to as the "Agreements").
2. The Assignor warrants and represents to, and covenants with,
the Assignee that:
a. the Assignor is the lawful owner of the Mortgage
Loans with the full right to transfer the Mortgage
Loans free from any and all claims and encumbrances
whatsoever;
b. the Assignor has not received notice of, and has no
knowledge of, any offsets, counterclaims or other
defenses available to the Seller with respect to the
Agreements or the Mortgage Loans;
c. the Assignor has not waived or agreed to any waiver
under, or agreed to any amendment or other
modification of, the Agreements. The Assignor has no
knowledge of, and has not received notice of, any
waivers under or amendments or other modifications
of, or assignments of rights or obligations under,
the Agreements; and
d. Neither the Assignor nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise
disposed of the Mortgage Loans or any interest in the
Mortgage Loans, or solicited any offer to buy or
accept a transfer, pledge or other disposition of the
Mortgage Loans, or any interest in the Mortgage Loans
or otherwise approached or negotiated with respect to
the Mortgage Loans, or any interest in the Mortgage
with any person in any manner, or made any general
solicitation by means of general advertising or in
any other manner, or taken any other action which
would
<PAGE> 50
constitute a distribution of the Mortgage Loans under
the Securities Act of 1933, as amended (the "1933
Act") or which would render the disposition of the
Mortgage Loans a violation of Section 5 of the 1933
Act or require registration pursuant thereto.
3. The Assignee warrants and represents to, and covenants with,
the Assignor and the Seller pursuant to the Agreements that:
a. the Assignee is a corporation duly organized, validly
existing and in good standing under the laws of the
jurisdiction of its incorporation, and has all
requisite corporate power and authority to acquire,
own and purchase the Mortgage Loans;
b. the Assignee has full corporate power and authority
to execute, deliver and perform under this Assignment
and Assumption Agreement, and to consummate the
transactions set forth herein. The execution,
delivery and performance of the Assignee of this
Assignment and Assumption Agreement, and the
consummation by it of the transactions contemplated
hereby, have been duly authorized by all necessary
corporate action of the Assignee. This Assignment
and Assumption Agreement has been duly executed and
delivered by the Assignee and constitutes the valid
and legally binding obligation of the Assignee
enforceable against the Assignee in accordance with
its respective terms;
c. To the best of Assignee's knowledge, no material
consent, approval, order or authorization of, or
declaration, filing or registration with, any
governmental entity is required to be obtained or
made by the Assignee in connection with the
execution, delivery or performance by the Assignee of
this Assignment and Assumption Agreement, or the
consummation by it of the transactions contemplated
hereby;
d. The Assignee agrees to be bound, as Purchaser, by all
of the terms, covenants and conditions of the
Agreements, the Mortgage Loans, and from and after
the date hereof, the Assignee assumes for the benefit
of each of the Seller and the Assignor all of the
Assignor' s obligations as Purchaser thereunder,
including, without limitation, the limitation on
assignment set forth in Section __ of the Purchase
Agreement;
e. The Assignee understands that the Mortgage Loans have
not been registered under the 1933 Act or the
securities laws of any state;
f. The purchase price being paid by the Assignee for the
Mortgage Loans is in excess of $250,000 and will be
paid by cash remittance of the full purchase price
within sixty (60) days of the sale;
G-2
<PAGE> 51
g. The Assignee is acquiring the Mortgage Loans for
investment for its own account only and not for any
other person;
h. The Assignee considers itself a sophisticated
institutional investor having such knowledge and
experience in financial and business matters that it
is capable of evaluating the merits and risks of
investment in the Mortgage Loans;
i. The Assignee has been furnished with all information
regarding the Mortgage Loans that it has requested
from the Assignor or the Seller;
j. Neither the Assignee nor anyone acting on its behalf
has offered, transferred, pledged, sold or otherwise
disposed of the Mortgage Loans or any interest in the
Mortgage Loans, or solicited any offer to buy or
accept a transfer, pledge or other disposition of the
Mortgage Loans or any interest in the Mortgage Loans,
or otherwise approached or negotiated with respect to
the Mortgage Loans or any interest in the Mortgage
Loans with any person in any manner which would
constitute a distribution of the Mortgage Loans under
the 1933 Act or which would render the disposition of
the Mortgage Loans a violation of Section 5 of the
1933 Act or require registration pursuant thereto,
nor will it act, nor has it authorized or will it
authorize any person to act, in such manner with
respect to the Mortgage Loans; and
k. Either: (1) the Assignee is not an employee benefit
plan ("Plan") within the meaning of section 3(3) of
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA") or a plan (also "Plan") within
the meaning of section 4975(e)(1) of the Internal
Revenue Code of 1986 ("Code"), and the Assignee is
not directly or indirectly purchasing the Mortgage
Loans on behalf of, investment manager of, as named
fiduciary of, as Trustee of, or with assets of, a
Plan; or (2) the Assignee's purchase of the Mortgage
Loans will not result in a prohibited transaction
under section 406 of ERISA or section 4975 of the
Code.
4. (a) The Assignee's address for purposes of all notices
and correspondence related to the Mortgage Loans and
the Agreements is: 400 Quincy Street, Hancock,
Michigan 49930.
The Assignee's wire instructions for purposes of all remittances and
payments related to the Mortgage Loans are to be confirmed in writing.
(b) The Assignor's address for purposes for all notices
and correspondence related to the Mortgage Loans and
this Agreement is: 400 Quincy Street, Hancock,
Michigan 49930.
G-3
<PAGE> 52
5. This Agreement shall be construed in accordance with the
substantive laws of the State of Michigan (without regard to
conflicts of laws principles) and the obligations, rights and
remedies of the parties hereunder shall be determined in
accordance with such laws, except to the extent preempted by
federal law.
6. This Agreement shall inure to the benefit of the successors
and assigns of the parties hereto. This Agreement may not be
assigned by the Assignee without the express written consent
of the Assignor. Any entity into which the Assignor or
Assignee may be merged or consolidated shall, without the
requirement for any further writing, be deemed the Assignor or
Assignee, respectively, hereunder.
7. No term or provision of this Agreement may be waived or
modified unless such waiver or modification is in writing and
signed by the party against whom such waiver or modification
is sought to be enforced.
8. This Agreement shall survive the conveyance of the Mortgage
Loans and the assignment of the Agreements by the Assignor.
9. Notwithstanding the assignment of the Agreements by either the
Assignor or Assignee, this Agreement shall not be deemed
assigned by the Assignor or the Assignee unless assigned by
separate written instrument.
10. For the purpose for facilitating the execution of this
Agreement as herein provided and for other purposes, this
Agreement may be executed simultaneously in any number of
counterparts, each of which counterparts shall be deemed to be
an original, and such counterparts shall constitute and be one
and the same instrument.
G-4
<PAGE> 53
IN WITNESS WHEREOF, the parties have caused this Assignment and
Assumption Agreement to be executed by their duly authorized officers as of the
date first above written.
_________________________ ___________________________
Assignor Assignee
By:______________________ By:________________________
Its:_____________________ Its:_______________________
Taxpayer Taxpayer
Identification No._______ Identification No._________
G-5
<PAGE> 1
EXHIBIT 10(c)
SERVICING AGREEMENT
BETWEEN
D&N CAPITAL CORPORATION
PURCHASER
D&N BANK
SERVICER
DATED AS OF [__________], 1997
CONVENTIONAL RESIDENTIAL MORTGAGE LOANS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE I
<S> <C>
DEFINITIONS.......................................................................................1
Section 1. Definitions.................................................................1
ARTICLE II
SERVICING.........................................................................................5
Section 2.01 Bank to Act as Servicer....................................................5
Section 2.02 Liquidation of Mortgage Loans..............................................7
Section 2.03 Collection of Mortgage Loan Payments.......................................8
Section 2.04 Establishment of and Deposits to Custodial Account.........................8
Section 2.05 Permitted Withdrawals From Custodial Account...............................9
Section 2.06 Establishment of and Deposits to Escrow Account...........................10
Section 2.07 Permitted Withdrawals From Escrow Account.................................11
Section 2.08 Payment of Taxes, Insurance and Other Charges, Tax Contracts..............12
Section 2.09 Protection of Accounts....................................................12
Section 2.10 Maintenance of Hazard Insurance...........................................12
Section 2.11 Maintenance of Mortgage Impairment Insurance..............................13
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions Insurance...........14
Section 2.13 Inspections...............................................................14
Section 2.14 Restoration of Mortgaged Property.........................................15
Section 2.15 Maintenance of PMI Policy, Claims.........................................15
Section 2.16 Deteriorating Mortgage Loans..............................................16
Section 2.17 Title, Management and Disposition of REO Property.........................16
Section 2.18 Permitted Withdrawals with respect to REO Property........................17
Section 2.19 Real Estate Owned Reports.................................................18
Section 2.20 Liquidation Reports.......................................................18
Section 2.21 Reports Of Foreclosures and Abandonments..................................18
Section 2.22 Notification of Adjustments...............................................18
Section 2.23 Notification of Maturity Date.............................................18
ARTICLE III
PAYMENTS TO PURCHASER............................................................................19
Section 3.01 Remittances...............................................................19
Section 3.02 Statements to Purchaser...................................................19
Section 3.03 Advances by Servicer......................................................20
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
ARTICLE IV
<S> <C>
GENERAL SERVICING PROCEDURES.....................................................................21
Section 4.01 Transfers of Mortgaged Property...........................................21
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files...................21
Section 4.03 Servicing Compensation....................................................22
Section 4.04 Annual Statement as to Compliance.........................................22
Section 4.05 Annual Independent Public Accountants' Servicing Report...................22
Section 4.06 Right to Examine Seller Records...........................................23
ARTICLE V
SERVICER TO COOPERATE............................................................................23
Section 5.01 Provision of Information..................................................23
Section 5.02 Financial Statements; Servicing Facilities................................23
ARTICLE VI
TERMINATION......................................................................................24
Section 6.01 Agency Suspensions........................................................24
Section 6.02 Damages...................................................................24
Section 6.03 Termination...............................................................24
Section 6.04 Termination Without Cause.................................................24
ARTICLE VII
BOOKS AND RECORDS................................................................................24
Section 7.01 Possession of Servicing Files.............................................24
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT...................................................................26
Section 8.01 Indemnification...........................................................26
Section 8.02 Limitation on Liability of Seller and Others..............................26
Section 8.03 Limitation on Registration and Assignment by Seller.......................26
Section 8.04 Assignment by Purchaser...................................................27
Section 8.05 Merger or Consolidation of the Seller.....................................27
Section 8.06 Successor to the Seller...................................................28
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE IX
<S> <C>
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER...........................................29
Section 9.01 Due Organization and Authority............................................29
Section 9.02 No Conflicts..............................................................29
Section 9.03 Ability to Perform........................................................29
Section 9.04 No Litigation Pending.....................................................29
Section 9.05 No Consent Required.......................................................30
Section 9.06 Assistance................................................................30
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER.........................................................30
Section 10.01 Due Organization and Authority...........................................30
Section 10.02 Ordinary Course of Business..............................................30
Section 10.03 No Conflicts.............................................................30
Section 10.04 Ability to Service.......................................................31
Section 10.05 Ability to Perform.......................................................31
Section 10.06 No Litigation Pending....................................................31
Section 10.07 No Consent Required......................................................31
Section 10.08 No Untrue Information....................................................31
Section 10.09 Reasonable Servicing Fee.................................................32
Section 10.10 Financial Statements.....................................................32
Section 10.11 Conflict of Interest.....................................................32
ARTICLE XI
DEFAULT..........................................................................................32
Section 11.01 Events of Default........................................................32
Section 11.02 Waiver of Defaults.......................................................34
ARTICLE XII
MISCELLANEOUS PROVISIONS.........................................................................34
Section 12.01 Notices..................................................................34
Section 12.02 Waivers..................................................................34
Section 12.03 Entire Agreement; Amendment..............................................35
Section 12.04 Execution; Binding Effect................................................35
Section 12.05 Headings.................................................................35
Section 12.06 Applicable Law...........................................................35
Section 12.07 Relationship of Parties..................................................35
Section 12.08 Severability of Provisions...............................................35
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C> <C>
Section 12.09 Recordation of Assignments of Mortgage...................................35
Section 12.10 Exhibits.................................................................36
EXHIBITS
EXHIBIT 1 FORM OF MONTHLY REMITTANCE ADVICE
EXHIBIT 2 FORM OF CUSTODIAL ACCOUNT CERTIFICATION
EXHIBIT 3 FORM OF CUSTODIAL ACCOUNT LETTER AGREEMENT
EXHIBIT 4 FORM OF ESCROW ACCOUNT CERTIFICATION
EXHIBIT 5 FORM OF ESCROW ACCOUNT LETTER AGREEMENT
EXHIBIT 6 FORM OF CONFIDENTIALITY AGREEMENT
</TABLE>
iv
<PAGE> 6
SERVICING AGREEMENT
This Servicing Agreement (the "Servicing Agreement" or the "Agreement")
is entered into as of [__________,] 1997, by and between D&N BANK (the "Seller"
or "Servicer"), a federally chartered savings bank, and D&N CAPITAL CORPORATION,
a Delaware corporation (the "Purchaser").
WHEREAS, the Purchaser and Seller entered into a Mortgage Loan Purchase
and Warranties Agreement dated as of [________,] 1997 (the "Purchase Agreement")
pursuant to which the Purchaser agreed to purchase from the Seller certain
conventional, residential, adjustable and fixed rate first mortgage loans (the
"Mortgage Loans") to be delivered as whole loans, with the Servicer retaining
servicing rights in connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Servicer service the
Mortgage Loans, the Servicer desires to service and administer the Mortgage
Loans on behalf of the Purchaser, and the parties desire to provide the terms
and conditions of such servicing by the Servicer.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein and for other good and valuable consideration, the receipt and
the sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein have the respective meanings set forth in the Purchase Agreement. The
following terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage Loan
in the jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, escrow account benefits,
reinstatement fees, and similar types of fees arising from or in connection
with any Mortgage Loan to the extent not otherwise payable to the Mortgagor
under applicable law or pursuant to the terms of the related Mortgage Note.
"Bank" means D&N Bank.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
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<PAGE> 7
"Closing Date" means [_______], 1997, or such other date as is mutually
agreed upon by the parties hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means [__________], 1997.
"Due Period" means with respect to each Remittance Date, the period
commencing on the second day of the month preceding the month of the Remittance
Date and ending on the first day of the month of the Remittance Date.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Servicer pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, the amounts
constituting taxes, assessments, water rates, sewer rents, municipal charges,
mortgage insurance premiums, fire and hazard insurance premiums, condominium
charges, and any other payments required to be escrowed by the Mortgagor with
the mortgagee pursuant to the Mortgage or any other document.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any
successor thereto.
"FHLMC Guide" means the FHLMC Sellers' and Servicers' Guide and all
amendments or additions thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Servicer
pursuant to Section 2.12.
"FNMA Guides" means the FNMA Sellers' Guide and the FNMA Servicers'
Guide and all amendments or additions thereto.
2
<PAGE> 8
"Insurance Proceeds" means, with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Servicer, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The determination
by the Servicer that it has made a Nonrecoverable Advance or that any proposed
advance of principal and interest, if made, would constitute a Nonrecoverable
Advance, shall be evidenced by an Officers' Certificate delivered to the
Purchaser.
"Officer's Certificate" means a certificate signed by the Chairman of
the Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Servicer, and delivered to the Purchaser as
required by this Agreement.
"OTS" means Office of Thrift Supervision, or any successor thereto.
"PMI Policy" means a policy of primary mortgage guaranty insurance
issued by a Qualified Insurer, as required by this Agreement with respect to
certain Mortgage Loans.
"Prime Rate" means the prime rate announced to be in effect from time
to time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of principal
on a Mortgage Loan which is received in advance of its scheduled Due Date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Mortgage Loan Purchase and Warranties
Agreement between the Purchaser and the Seller related to the purchase of the
Mortgage Loans dated as of [__________,] 1997.
3
<PAGE> 9
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, approved as an insurer by FNMA and
FHLMC with respect to primary mortgage insurance and, in addition, in the two
highest rating categories by Best's with respect to hazard and flood insurance.
"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month,
beginning with the first Remittance Date on [_______,] 1997.
"REO Property" means a Mortgaged Property acquired by the Servicer on
behalf of the Purchaser through foreclosure or by deed in lieu of foreclosure,
as described in Section 2.17.
"SAIF" means The Savings Association Insurance Fund, or any successor
thereto.
"Servicer Employees" has the meaning set forth in Section 2.12.
"Servicing Advances" means all customary, reasonable and necessary "out
of pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Servicer of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and liquidation
of the Mortgaged Property if the Mortgaged Property is acquired in satisfaction
of the Mortgage and (d) compliance with the obligations under Section 2.08
(except with respect to any expenses incurred in connection with procuring or
transferring Tax Service Contracts, as provided therein).
"Servicing Agreement" means this agreement between the Purchaser and
the Servicer for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount
of the annual fee the Purchaser shall pay to the Servicer, which shall, for a
period of one (1) full month, be equal to one-twelfth of the product of the
Servicing Fee Rate and (2) the Stated Principal Balance of such Mortgage Loan.
Such fee shall be payable monthly, computed on the basis of the same
principal amount and period in respect of which any related interest payment on
a Mortgage Loan is computed and shall be pro rated for any portion of a month
during which the Mortgage Loan is serviced by the Servicer under this Agreement.
The obligation of the Purchaser to pay the Servicing Fee is limited to, and the
Servicing Fee is payable solely from, the interest portion (including recoveries
with respect to interest from Liquidation Proceeds, to the extent permitted by
Section 4.03) of such Monthly Payment collected by the Servicer, or as otherwise
provided under Section 4.03.
4
<PAGE> 10
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the
rate specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Servicer consisting of originals of all documents in the
Mortgage File which are not delivered to the Purchaser or its designee and
copies of the Mortgage Loan Documents listed on Exhibit A to the Purchase
Agreement.
"Termination Fee" means the amount paid by the Purchaser to the
Servicer in the event of the Servicer's termination, without cause, as servicer.
Such fee shall equal the percentage amount set forth in Section 6.04 hereof of
the then current aggregate unpaid principal balance of the related Mortgage
Loans.
ARTICLE II
SERVICING
SECTION 2.01 The Bank to Act as Servicer. From and after the Closing
Date, the Servicer, as an independent contractor, shall service and administer
the Mortgage Loans and shall have full power and authority, acting alone, to do
any and all things in connection with such servicing and administration which
the Servicer may deem necessary or desirable, consistent with the terms of this
Agreement and with Accepted Servicing Practices. Except as set forth in this
Agreement, the Servicer shall service the Mortgage Loans in strict compliance
with the servicing provisions related to the FNMA MBS Program (Special Servicing
Option) of the FNMA Guides. In the event of any conflict, inconsistency or
discrepancy between any of the servicing provisions of this Agreement and any of
the servicing provisions of the FNMA Guides, the provisions of this Agreement
shall control and be binding upon the Purchaser and the Servicer.
Consistent with the terms of this Agreement, the Servicer may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Servicer's reasonable and prudent determination such waiver,
modification, postponement or indulgence is not materially adverse to the
Purchaser, provided, however, that unless the Servicer has obtained the prior
written consent of the Purchaser, the Servicer shall not permit any modification
with respect to any Mortgage Loan that would change the Mortgage Interest Rate,
defer or forgive the payment of principal or interest, reduce or increase the
outstanding principal balance (except for actual payments of principal) or
change the final maturity date on such Mortgage Loan. In the event of any such
modification which permits the deferral of interest or principal payments on any
Mortgage Loan, the Servicer shall, on the Business Day immediately preceding the
Remittance Date in any month in which any such principal or interest payment has
been deferred, deposit in the Custodial Account from its own funds, in
accordance with Section 2.04, the difference between (a) such month's principal
and one (1) month's interest at the Mortgage Interest Rate on the unpaid
principal balance of such Mortgage Loan and (b) the amount paid by the
Mortgagor.
5
<PAGE> 11
The Servicer shall be entitled to reimbursement for such advances to
the same extent as for all other advances made pursuant to Section 2.05. Without
limiting the generality of the foregoing, the Servicer shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself and
the Purchaser, all instruments of satisfaction or cancellation, or of partial or
full release, discharge and all other comparable instruments, with respect to
the Mortgage Loans and with respect to the Mortgaged Properties. If reasonably
required by the Servicer, the Purchaser shall furnish the Servicer with any
powers of attorney and other documents necessary or appropriate to enable the
Servicer to carry out its servicing and administrative duties under this
Agreement.
In servicing and administering the Mortgage Loans, the Servicer shall
employ procedures (including collection procedures) and exercise the same care
that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due consideration to Accepted
Servicing Practices where such practices do not conflict with the requirements
of this Agreement, the FNMA Guides and the Purchaser's reliance on the Servicer.
The Servicer shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Servicer
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, the Servicer shall be under no obligation to deal
with any Person with respect to this Agreement or the Mortgage Loans unless the
Servicer has been notified of such transfers as provided in this Section 2.01.
The Purchaser may sell and transfer, in whole or in part, the Mortgage Loans,
provided that no such sale and transfer shall be binding upon the Servicer
unless such transferee shall agree in writing in the form of the Assignment and
Assumption Agreement attached to the Purchase Agreement as Exhibit G, to be
bound by the terms of this Agreement and the Purchase Agreement, and an executed
copy of the same shall have been delivered to the Servicer. Upon receipt
thereof, the Servicer shall mark its books and records to reflect the ownership
of the Mortgage Loans by such assignee, and the previous Purchaser shall be
released from its obligations hereunder. The Servicer shall be required to remit
all amounts required to be remitted to the Purchaser hereunder to said
transferee commencing with the first Remittance Date falling after receipt of
said copy of the related Assignment and Assumption Agreement provided that the
Servicer receives said copy no later than three (3) Business Days immediately
prior to the first day of the month of the related Remittance Date. This
Agreement shall be binding upon and inure to the benefit of the Purchaser and
the Servicer and their permitted successors, assignees and designees.
The Servicing File retained by the Servicer pursuant to this Agreement
shall be appropriately marked and identified in the Servicer's computer system
to clearly reflect the sale of the related Mortgage Loan to the Purchaser. The
Servicer shall release from its custody the contents of any Servicing File
retained by it only in accordance with this Agreement, except when such release
is required in connection with a repurchase of any such Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement.
The Servicer must have an internal quality control program that
verifies, on a regular basis, the existence and accuracy of the legal documents,
credit documents, property appraisals,
6
<PAGE> 12
and underwriting decisions. The program must be capable of evaluating and
monitoring the overall quality of its loan production and servicing activities.
The program is to ensure that the Mortgage Loans are serviced in accordance with
prudent mortgage banking practices and accounting principles; guard against
dishonest, fraudulent, or negligent acts; and guard against errors and omissions
by officers, employees, or other authorized persons.
SECTION 2.02 Liquidation of Mortgage Loans. In the event that any
payment due under any Mortgage Loan and not postponed pursuant to Section 2.01
is not paid when the same becomes due and payable, or in the event the Mortgagor
fails to perform any other covenant or obligation under the Mortgage Loan and
such failure continues beyond any applicable grace period, the Servicer shall
take such action as (1) the Servicer would take under similar circumstances with
respect to a similar mortgage loan held for its own account for investment, (2)
shall be consistent with Accepted Servicing Practices, (3) the Servicer shall
determine prudently to be in the best interest of Purchaser, and (4) is
consistent with any related PMI Policy. In the event that any payment due under
any Mortgage Loan is not postponed pursuant to Section 2.01 and remains
delinquent for a period of ninety (90) days or any other default continues for a
period of ninety (90) days beyond the expiration of any grace or cure period (or
such other period as is required by law in the jurisdiction where the related
Mortgaged Property is located), the Servicer shall commence foreclosure
proceedings in accordance with the FNMA Guides, provided that, prior to
commencing foreclosure proceedings, the Servicer shall notify the Purchaser in
writing of the Servicer's intention to do so, and the Servicer shall not
commence foreclosure proceedings if the Purchaser objects to such action within
ten (10) Business Days of receiving such notice or, if the provisions of the
next two paragraphs apply, in any event without the prior written consent of
Purchaser. In such connection, the Servicer shall from its own funds make all
necessary and proper Servicing Advances, provided, however, that the Servicer
shall not be required to expend its own funds in connection with any foreclosure
or towards the restoration or preservation of any Mortgaged Property, unless it
shall determine (a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Purchaser after
reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority).
Notwithstanding anything to the contrary contained herein, in
connection with a foreclosure, in the event the Servicer has reasonable cause to
believe that a Mortgaged Property is contaminated by hazardous or toxic
substances or wastes, or if the Purchaser otherwise requests an environmental
inspection or review of such Mortgaged Property to be conducted by a qualified
inspector, the Servicer shall cause the Mortgaged Property to be so inspected at
the expense of the Purchaser. Upon completion of the inspection, the Servicer
shall promptly provide the Purchaser with a written report of the environmental
inspection.
After reviewing the environmental inspection report, the Purchaser
shall determine how the Servicer shall proceed with respect to the Mortgaged
Property. In the event (a) the environmental inspection report indicates that
the Mortgaged Property is contaminated by hazardous or toxic substances or
wastes and (b) the Purchaser directs the Servicer to proceed with
7
<PAGE> 13
foreclosure or acceptance of a deed in lieu of foreclosure, the Servicer shall
be reimbursed for all reasonable costs associated with such foreclosure or
acceptance of a deed in lieu of foreclosure and any related environmental clean
up costs, as applicable, from the related Liquidation Proceeds, or if the
Liquidation Proceeds are insufficient to fully reimburse the Servicer, the
Servicer shall be entitled to be reimbursed from amounts in the Custodial
Account pursuant to Section 2.05 hereof and to the extent amounts in the
Custodial Account are insufficient to fully reimburse the Servicer, the Servicer
shall be entitled to be reimbursed by the Purchaser for such deficiencies (upon
presentation of evidence of such deficiency). In the event the Purchaser directs
the Servicer not to proceed with foreclosure or acceptance of a deed in lieu of
foreclosure, the Servicer shall be reimbursed for all Servicing Advances made
with respect to the related Mortgaged Property from the Custodial Account
pursuant to Section 2.05 hereof.
SECTION 2.03 Collection of Mortgage Loan Payments. Continuously from
the Closing Date, the Servicer shall proceed diligently to collect all payments
due under each of the Mortgage Loans when the same shall become due and payable
and shall take special care in ascertaining and estimating Escrow Payments and
all other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
SECTION 2.04 Establishment of and Deposits to Custodial Account. The
Servicer shall segregate and hold all funds collected and received pursuant to
the Mortgage Loans separate and apart from any of its own funds and general
assets and shall establish and maintain one or more Custodial Accounts, in the
form of time deposit or demand accounts, titled "D&N Bank in trust for Purchaser
of Conventional Residential Mortgage Loans, and various Mortgagors". The
Custodial Account shall be established with a Qualified Depository acceptable to
the Purchaser. Any funds deposited in the Custodial Account shall at all times
be fully insured to the full extent permitted under applicable law. Funds
deposited in the Custodial Account may be drawn on by the Servicer in accordance
with Section 2.05. The creation of any Custodial Account shall be evidenced by a
certification in the form of Exhibit 2 hereto, in the case of an account
established with the Servicer, or by a letter agreement in the form of Exhibit 3
hereto, in the case of an account held by a depository other than the Servicer.
A copy of such certification or letter agreement shall be furnished to the
Purchaser and, upon request, to any subsequent Purchaser.
The Servicer shall deposit in the Custodial Account within one Business
Day of receipt, and retain therein, the following collections received by the
Servicer and payments made by the Servicer after the Cut-off Date, other than
payments of principal and interest due on or before the Cut-off Date, or
received by the Servicer prior to the Cut-off Date but allocable to a period
subsequent thereto:
(I) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
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(iii) all Liquidation Proceeds and any amount received with respect
to REO Property;
(iv) all Insurance Proceeds including amounts required to be
deposited pursuant to Section 2.10 (other than proceeds to be
held in the Escrow Account and applied to the restoration or
repair of the Mortgaged Property or released to the Mortgagor
in accordance with Section 2.14), and Section 2.11;
(v) all Condemnation Proceeds which are not applied to the
restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account
pursuant to Section 2.01, 2.09, 2.15, 2.17, 3.01, 3.03 or
4.02;
(vii) any amounts payable in connection with the repurchase of any
Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement; and
(viii) any amounts required to be deposited by the Servicer pursuant
to Section 2.11 in connection with the deductible clause in
any blanket hazard insurance policy.
The foregoing requirements for deposit into the Custodial Account shall
be exclusive, it being understood and agreed that, without limiting the
generality of the foregoing, Ancillary Income need not be deposited by the
Servicer into the Custodial Account. Any interest paid on funds deposited in the
Custodial Account by the depository institution shall accrue to the benefit of
the Servicer and the Servicer shall be entitled to retain and withdraw such
interest from the Custodial Account pursuant to Section 2.05.
SECTION 2.05 Permitted Withdrawals From Custodial Account. Subject to
Section 2.17 hereof, the Servicer shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the
manner provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for advances of the Servicer's funds made
pursuant to Section 3.03, the Servicer's right to reimburse
itself pursuant to this subclause (iii) being limited to
amounts received on the related Mortgage Loan which represent
late payments of principal and/or interest in respect of which
any such advance was made, it being understood that, in the
case of any such reimbursement, the Servicer's right thereto
shall be prior to the rights of Purchaser, except that, where
the Seller or the Servicer is required to repurchase a
Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement or Section 4.02 of this Agreement, respectively, the
Servicer's right to such reimbursement shall be subsequent to
the payment to the Purchaser of the Repurchase Price pursuant
to such sections and all
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other amounts required to be paid to the Purchaser with
respect to such Mortgage Loan;
(iv) to reimburse itself for unreimbursed Servicing Advances
(except to the extent reimbursed pursuant to Section 2.07),
any accrued but unpaid Servicing Fees and for unreimbursed
advances of Servicer funds made pursuant to Sections 2.15,
2.17 or 3.03, the Servicer's right to reimburse itself
pursuant to this subclause (iv) with respect to any Mortgage
Loan being limited to related Liquidation Proceeds,
Condemnation Proceeds, Insurance Proceeds and such other
amounts as may be collected by the Servicer from the Mortgagor
or otherwise relating to the Mortgage Loan, it being
understood that, in the case of any such reimbursement, the
Servicer's right thereto shall be prior to the rights of the
Purchaser except that, where the Seller or the Servicer is
required to repurchase a Mortgage Loan pursuant to Section
8.03 of the Purchase Agreement or Section 4.02 of this
Agreement, respectively, the Servicer's right to such
reimbursement shall be subsequent to the payment to the
Purchaser of the Repurchase Price pursuant to such sections
and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
(v) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly
not later than each Remittance Date); and
(vi) to clear and terminate the Custodial Account upon the
termination of this Agreement.
In the event that the Custodial Account is interest bearing, on each
Remittance Date, the Servicer shall withdraw all funds from the Custodial
Account except for those amounts which, pursuant to Section 3.01, the Servicer
is not obligated to remit on such Remittance Date. The Servicer may use such
withdrawn funds only for the purposes described in this Section 2.05.
SECTION 2.06 Establishment of and Deposits to Escrow Account. The
Servicer shall segregate and hold all funds collected and received pursuant to a
Mortgage Loan constituting Escrow Payments separate and apart from any of its
own funds and general assets and shall establish and maintain one or more Escrow
Accounts, in the form of time deposit or demand accounts. The Escrow Account or
Accounts shall be established with a Qualified Depositary, in a manner which
shall provide maximum available insurance thereunder. Funds deposited in the
Escrow Accounts may be drawn on by the Servicer in accordance with Section 2.07.
The creation of any Escrow Account shall be evidenced by a certification in the
form of Exhibit 2 hereto, in the case of an account established with the
Servicer, or by a letter agreement in the form of Exhibit 5 hereto, in the case
of an account held by a depository other than the Servicer. A copy of such
certification shall be furnished to the Purchaser and, upon request, to any
subsequent Purchaser.
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The Servicer shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
(I) all Escrow Payments collected on account of the Mortgage
Loans, for the purpose of effecting timely payment of any such
items as required under the terms of this Agreement; and
(ii) all amounts representing Insurance Proceeds or Condemnation
Proceeds which are to be applied to the restoration or repair
of any Mortgaged Property.
The Servicer shall make withdrawals from the Escrow Account only to
effect such payments as are required under this Agreement, as set forth in
Section 2.07. The Servicer shall be entitled to retain any interest paid on
funds deposited in the Escrow Account by the depository institution, other than
interest on escrowed funds required by law to be paid to the Mortgagor. To the
extent required by law, the Servicer shall pay from its own funds interest on
escrowed funds to the Mortgagor notwithstanding that the Escrow Account may be
noninterest bearing or that interest paid thereon is insufficient for such
purposes.
SECTION 2.07 Permitted Withdrawals From Escrow Account. Withdrawals
from each Escrow Account may be made by the Servicer only:
(I) to effect timely payments of taxes, assessments, water rates,
mortgage insurance premiums, condominium charges, fire and
hazard insurance premiums or other items constituting Escrow
Payments for the related Mortgage;
(ii) to reimburse the Servicer for any Servicing Advance made by
the Servicer pursuant to Section 2.08 with respect to a
related Mortgage Loan, but only from amounts received on the
related Mortgage Loan which represent late collections of
Escrow Payments thereunder;
(iii) to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the related
Mortgage Loan or applicable federal or state law or judicial
or administrative ruling;
(iv) for transfer to the Custodial Account and application to
reduce the principal balance of the Mortgage Loan in
accordance with the terms of the related Mortgage and Mortgage
Note;
(v) for application to restoration or repair of the related
Mortgaged Property in accordance with the procedures outlined
in Section 2.14;
(vi) to pay to the Servicer, or any Mortgagor to the extent
required by law, any interest paid on the funds deposited in
the Escrow Account; and
(vii) to clear and terminate the Escrow Account on the termination
of this Agreement.
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SECTION 2.08 Payment of Taxes, Insurance and Other Charges, Tax
Contracts. With respect to each Mortgage Loan, the Servicer shall maintain
accurate records reflecting the status of taxes, assessments, water rates, sewer
rents, and other charges, as applicable, which are or may become a lien upon the
Mortgaged Property and the status of PMI Policy premiums and fire and hazard
insurance coverage and shall obtain, from time to time, all bills for the
payment of such charges (including renewal premiums) and shall effect payment
thereof prior to the applicable penalty or termination date, employing for such
purpose deposits of the Mortgagor in the Escrow Account which shall have been
estimated and accumulated by the Servicer in amounts sufficient for such
purposes, as allowed under the terms of the Mortgage. To the extent that a
Mortgage does not provide for Escrow Payments, the Servicer shall determine that
any such payments relating to taxes or maintaining insurance policies are made
by the Mortgagor at the time they first become due. The Servicer assumes full
responsibility for the timely payment of all such bills to the extent it has or
should have notice of such bills and shall effect timely payment of all such
charges irrespective of each Mortgagor's faithful performance in the payment of
same or the making of the Escrow Payments, and the Servicer shall make advances
from its own funds to effect such payments, such advances to be reimbursable to
the same extent as Servicing Advances.
SECTION 2.09 Protection of Accounts. The Servicer may transfer the
Custodial Account or the Escrow Account to a different Qualified Depository from
time to time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably. The Servicer shall
bear any expenses, losses or damages sustained by the Purchaser because the
Custodial Account and/or the Escrow Account are not demand deposit accounts.
SECTION 2.10 Maintenance of Hazard Insurance. The Servicer shall cause
to be maintained for each Mortgage Loan, hazard insurance such that all
buildings upon the Mortgaged Property are insured by a generally acceptable
insurer rated A:VI or better in the current Best's against loss by fire, hazards
of extended coverage and such other hazards as are required to be insured
pursuant to the FNMA Guides or the FHLMC Guide, in an amount which is at least
equal to the lesser of (i) the maximum insurable value of the improvements
securing such Mortgage Loan and (ii) the greater of (a) the outstanding
principal balance of the Mortgage Loan and (b) an amount such that the proceeds
thereof shall be sufficient to prevent the Mortgagor or the loss payee from
becoming a co-insurer.
If required by the Flood Disaster Protection Act of 1973, as amended,
each Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
in effect with a generally acceptable insurance carrier rated A:VI or better in
Best's in an amount representing coverage not less than the lesser of (i) the
outstanding principal balance of the related Mortgage Loan and (ii) the maximum
amount of insurance which is available under the Flood Disaster Protection Act
of 1973, as amended. If at any time during the term of the Mortgage Loan, the
Servicer determines in accordance with applicable law and pursuant to the FNMA
Guides that a Mortgaged Property is located in a special flood hazard area and
is not covered by flood insurance or is covered in an amount less than the
amount required by the Flood Disaster Protection Act of 1973, as amended, the
Servicer shall notify the related Mortgagor that the Mortgagor must obtain such
flood insurance coverage, and if said Mortgagor fails to obtain the required
flood insurance coverage within forty five (45) days after such
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notification, the Servicer shall immediately purchase the required flood
insurance on the Mortgagor's behalf.
If a Mortgage is secured by a unit in a condominium project, the
Servicer shall verify that the coverage required of the owner's association,
including hazard, flood, liability, and fidelity coverage, is being maintained
in accordance with then current FNMA requirements, and secure from the owner's
association its agreement to notify the Servicer promptly of any change in the
insurance coverage or of any condemnation or casualty loss that may have a
material effect on the value of the Mortgaged Property as security.
The Servicer shall cause to be maintained on each Mortgaged Property
such other or additional insurance as may be required pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance, or pursuant to the requirements of any
primary mortgage guaranty insurer.
All policies required hereunder shall name the Servicer and its
successors and assigns as mortgagee and shall be endorsed with non-contributory
standard Michigan mortgagee clauses which shall provide for at least thirty (30)
days' prior written notice of any cancellation, reduction in amount or material
change in coverage.
The Servicer shall not interfere with the Mortgagor's freedom of choice
in selecting either his insurance carrier or agent, provided, however, that the
Servicer shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to do
business in the jurisdiction in which the Mortgaged Property is located. The
Servicer shall determine that such policies provide sufficient risk coverage and
amounts as required pursuant to the FNMA Guides or the FHLMC Guide, that they
insure the property owner, and that they properly describe the property address.
To the extent reasonably possible the Servicer shall furnish to the Mortgagor a
formal notice of expiration of any such insurance in sufficient time for the
Mortgagor to arrange for renewal coverage by the expiration date; provided,
however, that in the event that no such notice is furnished by the Servicer, the
Servicer shall ensure that replacement insurance policies are in place in the
required coverages and the Servicer shall be solely liable for any losses in the
event such coverage is not provided.
Pursuant to Section 2.04, any amounts collected by the Servicer under
any such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Servicer's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11 Maintenance of Mortgage Impairment Insurance. In the event
that the Servicer shall obtain and maintain a blanket policy insuring against
losses arising from fire and hazards covered under extended coverage on all of
the Mortgage Loans, then, to the extent such policy provides coverage in an
amount equal to the amount required pursuant to Section 2.10 and otherwise
complies with all other requirements of Section 2.10, it shall conclusively be
deemed
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to have satisfied its obligations as set forth in Section 2.10. Any amounts
collected by the Servicer under any such policy relating to a Mortgage Loan
shall be deposited in the Custodial Account subject to withdrawal pursuant to
Section 2.05. Such policy may contain a deductible clause, in which case, in the
event that there shall not have been maintained on the related Mortgaged
Property a policy complying with Section 2.10, and there shall have been a loss
which would have been covered by such policy, the Servicer shall deposit in the
Custodial Account at the time of such loss the amount not otherwise payable
under the blanket policy because of such deductible clause, such amount to be
deposited from the Servicer's funds, without reimbursement therefor. Upon
request of the Purchaser, the Servicer shall cause to be delivered to the
Purchaser a certified true copy of such policy and a statement from the insurer
thereunder that such policy shall in no event be terminated or materially
modified without thirty (30) days' prior written notice to the Purchaser.
SECTION 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance. The Servicer shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and an Errors and Omissions Insurance Policy,
with broad coverage on all officers, employees or other persons acting in any
capacity requiring such persons to handle funds, money, documents or papers
relating to the Mortgage Loans ("Servicer Employees"). Any such Fidelity Bond
and Errors and Omissions Insurance Policy shall be in the form of the Mortgage
Banker's Blanket Bond and shall protect and insure the Servicer against losses,
including forgery, theft, embezzlement, fraud, errors and omissions and
negligent acts of such Servicer Employees. Such Fidelity Bond and Errors and
Omissions Insurance Policy also shall protect and insure the Servicer against
losses in connection with the release or satisfaction of a Mortgage Loan without
having obtained payment in full of the indebtedness secured thereby. No
provision of this Section 2.12 requiring such Fidelity Bond and Errors and
Omissions Insurance Policy shall diminish or relieve the Servicer from its
duties and obligations as set forth in this Agreement. The minimum coverage
under any such Fidelity Bond and Errors and Omissions Insurance Policy shall be
at least equal to the corresponding amounts required by FNMA in the FNMA
Mortgage-Backed Securities Selling and Servicing Guide or by FHLMC in the FHLMC
Guide. Upon the request of the Purchaser, the Servicer shall cause to be
delivered to the Purchaser a certified true copy of such Fidelity Bond and
Errors and Omissions Insurance Policy and a statement from the surety and the
insurer that such Fidelity Bond and Errors and Omissions Insurance Policy shall
in no event be terminated or materially modified without thirty (30) days' prior
written notice to the Purchaser. In the event that the surety or insurer charges
the Servicer a fee for providing such evidence, the Purchaser shall reimburse
the Servicer for the reasonable expense incurred by the Servicer in furnishing
such evidence.
SECTION 2.13 Inspections. The Servicer shall inspect the Mortgaged
Property as often as deemed necessary by the Servicer to assure itself that the
value of the Mortgaged Property is being preserved. In addition, if any Mortgage
Loan is more than sixty (60) days delinquent, the Servicer immediately shall
inspect the Mortgaged Property and shall conduct subsequent inspections in
accordance with Accepted Servicing Practices or as may be required by the
primary mortgage guaranty insurer. The Servicer shall keep a written report of
each such inspection.
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SECTION 2.14 Restoration of Mortgaged Property. The Servicer need not
obtain the approval of the Purchaser prior to releasing any Insurance Proceeds
or Condemnation Proceeds to the Mortgagor to be applied to the restoration or
repair of the Mortgaged Property if such release is in accordance with Accepted
Servicing Practices and the terms of this Agreement. At a minimum, the Servicer
shall comply with the following conditions in connection with any such release
of Insurance Proceeds or Condemnation Proceeds:
(i) the Servicer shall receive satisfactory independent
verification of completion of repairs and issuance of any
required approvals with respect thereto;
(ii) the Servicer shall take all steps necessary to preserve the
priority of the lien of the Mortgage, including, but not
limited to requiring waivers with respect to mechanics' and
materialmen's liens;
(iii) the Servicer shall verify that the Mortgage Loan is not in
default; and
(iv) pending repairs or restoration, the Servicer shall place the
Insurance Proceeds or Condemnation Proceeds in the Escrow
Account.
If the Purchaser is named as an additional mortgagee, the Servicer is
hereby empowered to endorse any loss draft issued in respect of such a claim in
the name of the Purchaser.
SECTION 2.15 Maintenance of PMI Policy, Claims. With respect to each
Mortgage Loan with an LTV in excess of 85%, the Servicer shall, without any cost
to the Purchaser, maintain or cause the Mortgagor to maintain in full force and
effect a PMI Policy insuring that portion of the Mortgage Loan in excess of 75%
of value, and shall pay or shall cause the Mortgagor to pay the premium thereon
on a timely basis, until the LTV of such Mortgage Loan is reduced to 85%. In the
event that such PMI Policy shall be terminated, the Servicer shall obtain from
another Qualified Insurer a comparable replacement policy, with a total coverage
equal to the remaining coverage of such terminated PMI Policy. If the insurer
shall cease to be a Qualified Insurer, the Servicer shall determine whether
recoveries under the PMI Policy are jeopardized for reasons related to the
financial condition of such insurer, it being understood that the Servicer shall
in no event have any responsibility or liability for any failure to recover
under the PMI Policy for such reason. If the Servicer determines that recoveries
are so jeopardized, it shall notify the Purchaser and the Mortgagor, if
required, and obtain from another Qualified Insurer a replacement insurance
policy. The Servicer shall not take any action which would result in noncoverage
under any applicable PMI Policy of any loss which, but for the actions of the
Servicer, would have been covered thereunder. In connection with any assumption
or substitution agreement entered into or to be entered into pursuant to Section
4.01, the Servicer shall promptly notify the insurer under the related PMI
Policy, if any, of such assumption or substitution of liability in accordance
with the terms of such PMI Policy and shall take all actions which may be
required by such insurer as a condition to the continuation of coverage under
such PMI Policy. If such PMI Policy is terminated as a result of such assumption
or substitution of liability, the Servicer shall obtain a replacement PMI Policy
as provided above.
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In connection with its activities as servicer, the Servicer agrees to
prepare and present, on behalf of itself and the Purchaser, claims to the
insurer under any PMI Policy in a timely fashion in accordance with the terms of
such PMI Policy and, in this regard, to take such action as shall be necessary
to permit recovery under any PMI Policy with respect to a defaulted Mortgage
Loan. Pursuant to Section 2.04, any amounts collected by the Servicer under any
PMI Policy shall be deposited in the Custodial Account, subject to withdrawal
pursuant to Section 2.05.
SECTION 2.16 Deteriorating Mortgage Loans. If, in the course of
carrying out its obligations under this Agreement, the Servicer discovers that a
Mortgage Loan (or an interest therein) (i) is or has been, at any time during
the preceding twelve months, (a) classified, (b) in nonaccrual status or (c)
renegotiated due to the financial deterioration of the Mortgagor or (ii) has
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest, the Servicer shall notify the
Purchaser as soon as possible and cooperate with the Purchaser in the
disposition of any such Mortgage Loan as soon as possible.
SECTION 2.17 Title, Management and Disposition of REO Property. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale shall be taken in the
name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be consistent with an
Opinion of Counsel obtained by the Servicer from any attorney duly licensed to
practice law in the state where the REO Property is located. The Person or
Persons holding such title other than the Purchaser shall acknowledge in writing
that such title is being held as nominee for the Purchaser.
The Servicer shall manage, conserve, protect and operate each REO
Property for the Purchaser solely for the purpose of its prompt disposition and
sale. The Servicer, either itself or through an agent selected by the Servicer
and reasonably acceptable to the Purchaser, shall manage, conserve, protect and
operate the REO Property in the same manner that it manages, conserves, protects
and operates other foreclosed property for its own account, and in the same
manner that similar property in the same locality as the REO Property is
managed. The Servicer shall attempt to sell the same (and may temporarily rent
the same for a period not greater than one (1) year, except as otherwise
provided below) on such terms and conditions as the Servicer deems to be in the
best interest of the Purchaser.
The Servicer shall use its best efforts to dispose of the REO Property
as soon as possible and shall sell such REO Property in any event within one
year after title has been taken to such REO Property, unless the Servicer
determines, and gives an appropriate notice to the Purchaser to such effect,
that a longer period is necessary for the orderly liquidation of such REO
Property. If a period longer than one (1) year is permitted under the foregoing
sentence and is necessary to sell any REO Property, the Servicer shall report
monthly to the Purchaser as to the progress being made in selling such REO
Property.
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The Servicer shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available under the Flood
Disaster Protection Act of 1973, as amended, flood insurance in the amount
required above.
The disposition of REO Property shall be carried out by the Servicer at
such price, and upon such terms and conditions, as the Servicer deems to be in
the best interests of the Purchaser. The proceeds of sale of the REO Property
shall be promptly deposited in the Custodial Account. As soon as practical
thereafter the expenses of such sale shall be paid and the Servicer shall
reimburse itself pursuant to Section 2.05(iii) or 2.05(iv) hereof, as
applicable, for any related unreimbursed Servicing Advances, unpaid Servicing
Fees and unreimbursed advances made pursuant to this Section, and on the
Remittance Date immediately following the Due Period in which such sale proceeds
are received the net cash proceeds of such sale remaining in the Custodial
Account shall be distributed to the Purchaser; provided that such distribution
shall, in any event, be made within ninety (90) days from and after the closing
of the sale of such REO Property.
In addition to the Servicer's obligations set forth in this Section
2.17, the Servicer shall deliver written notice to the Purchaser whenever title
to any Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure together with a copy of the drive-by appraisal of the related
Mortgaged Property obtained by the Servicer on or prior to the date of such
acquisition. Notwithstanding anything to the contrary contained herein, the
Purchaser may, at the Purchaser's sole option, terminate the Servicer as
servicer of any such REO Property without payment of any Termination Fee with
respect thereto, provided that (i) the Purchaser gives the Servicer notice of
such termination within ten (10) Business Days of receipt of said written notice
from the Servicer which termination shall be effective no more than fifteen (15)
Business Days from and after the date of said notice from the Purchaser and (ii)
the Servicer shall on the date said termination takes effect be reimbursed by
Purchaser for any unreimbursed advances of the Servicer's funds made pursuant to
Section 3.02 and any unreimbursed Servicing Advances in each case relating to
the Mortgage Loan underlying such REO Property. In the event of any such
termination, the provisions of Section 8.06 hereof shall apply to said
termination and the transfer of servicing responsibilities with respect to such
REO Property to the Purchaser or its designee.
With respect to each REO Property, the Servicer shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Servicer shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.18 Permitted Withdrawals with respect to REO Property. For so
long as the Servicer is acting as servicer of any Mortgage Loan relating to any
REO Property, the Servicer shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of
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any managing agent acting on behalf of the Servicer. The Servicer shall make
monthly distributions on each Remittance Date to the Purchaser of the net cash
flow from the REO Property (which shall equal the revenues from such REO
Property net of the expenses described in Section 2.17 and of any reserves
reasonably required from time to time to be maintained to satisfy anticipated
liabilities for such expenses).
SECTION 2.19 Real Estate Owned Reports. For so long as the Servicer is
acting as servicer of any Mortgage Loan relating to any REO Property, the
Servicer shall furnish to the Purchaser on or before the 15th day of each month
a statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Servicer's efforts in connection with
the sale of such REO Property and any rental of such REO Property incidental to
the sale thereof for the previous month. That statement shall be accompanied by
such other information as the Purchaser shall reasonably request.
SECTION 2.20 Liquidation Reports. For so long as the Servicer is acting
as servicer of any Mortgage Loan relating to any REO Property, upon the
foreclosure sale of any Mortgaged Property or the acquisition thereof by the
Purchaser pursuant to a deed in lieu of foreclosure, the Servicer shall submit
to the Purchaser a liquidation report with respect to such Mortgaged Property.
SECTION 2.21 Reports Of Foreclosures and Abandonments. For so long as
the Servicer is acting as servicer of any Mortgage Loan relating to any REO
Property, following the foreclosure sale or abandonment of any Mortgaged
Property, the Servicer shall report such foreclosure or abandonment as required
pursuant to Section 6050J of the Internal Revenue Code of 1986, as amended
("Code").
SECTION 2.22 Notification of Adjustments. With respect to each
Adjustable Rate Mortgage Loan, the Servicer shall adjust the Mortgage Interest
Rate on the related Interest Rate Adjustment Date and shall adjust the Monthly
Payment accordingly in compliance with the requirements of applicable law and
the related Mortgage and Mortgage Note. If, pursuant to the terms of the
Mortgage Note, another index is selected for determining the Mortgage Interest
Rate, the same index will be used with respect to each Mortgage Note which
requires a new index to be selected, provided that such selection does not
conflict with the terms of the related Mortgage Note. The Servicer shall execute
and deliver any and all necessary notices required under applicable law and the
terms of the related Mortgage Note and Mortgage regarding the Mortgage Interest
Rate and the Monthly Payment adjustments. The Servicer shall promptly upon
written request therefor, deliver to the Purchaser such notifications and any
additional applicable data regarding such adjustments and the methods used to
calculate and implement such adjustments. Upon the discovery by the Servicer or
the Purchaser that the Servicer has failed to adjust a Mortgage Interest Rate or
a Monthly Payment pursuant to the terms of the related Mortgage Note and
Mortgage, the Servicer shall immediately deposit in the Custodial Account from
its own funds the amount of any interest loss caused the Purchaser thereby.
SECTION 2.23 Notification of Maturity Date. With respect to each Fixed
Rate Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any
and all necessary notices
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required under applicable law and the terms of the related Mortgage Note and
Mortgage regarding the maturity date if required under applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 Remittances. On each Remittance Date the Servicer shall
remit by wire transfer of immediately available funds to the Purchaser (a) all
amounts deposited in the Custodial Account as of the close of business on the
Determination Date, except Principal Prepayments received on or after the first
day of the month in which the Remittance Date occurs which shall be remitted to
the Purchaser on the next following Remittance Date; plus (b) an amount
representing compensating interest (up to a maximum amount equal to the
aggregate Servicing Fee for the Mortgage Loans held by the Purchaser with
respect to such Mortgage Loans) which, when added to all amounts allocable to
interest received in connection with such Principal Prepayment equals thirty
(30) days' interest at the Mortgage Interest Rate net of the Servicing Fee on
the amount of principal so prepaid (net of charges against or withdrawals from
the Custodial Account pursuant to Section 2.05), plus (c) all amounts, if any,
which the Servicer is obligated to distribute pursuant to Section 3.03 and minus
(d) any amounts attributable to Monthly Payments collected but due on a Due Date
or Dates subsequent to the first day of the month of the Remittance Date, which
amounts shall be remitted on the Remittance Date next succeeding the Due Period
for such amounts.
With respect to any remittance received by the Purchaser after the
second Business Day following the Business Day on which such payment was due,
the Servicer shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Servicer on the date such late payment is made and shall cover
the period commencing with and including the day following such second Business
Day and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Servicer remits
such amounts after 11:00 A.M. (Michigan time) on any day, such period shall
include such day. Such interest shall be remitted along with the distribution
payable on the next succeeding Remittance Date. The payment by the Servicer of
any such interest shall not be deemed an extension of time for payment or a
waiver of any Event of Default by the Servicer.
SECTION 3.02 Statements to Purchaser. Not later than the twentieth day
of each month, the Servicer shall furnish by modem and/or diskette to the
Purchaser or its designee a listing of the outstanding Mortgage Loans, including
with respect to each Mortgage Loan: the Mortgage Loan number, the actual
balance, the actual paid-through dates and the Mortgage Interest Rate and
principal and interest payment, and with respect to Adjustable Rate Mortgage
Loans, the next Interest Rate Adjustment Date, the Mortgage Interest Rate and
the principal and interest payment effective as of the next Interest Rate
Adjustment Date (if available), and shall furnish to the
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Purchaser manually a Monthly Remittance Advice, with a trial balance report
attached thereto, in the form of Exhibit 1 annexed hereto as to the preceding
remittance and the period ending on the preceding Determination Date.
In addition, not more than sixty (60) days after the end of each
calendar year, the Servicer shall furnish to each Person who was a Purchaser at
any time during such calendar year an annual statement in accordance with the
requirements of applicable federal income tax law as to the aggregate of
remittances for the applicable portion of such year.
Such obligation of the Servicer shall be deemed to have been satisfied
to the extent that substantially comparable information shall be provided by the
Servicer pursuant to any requirements of the Code as from time to time are in
force.
The Servicer shall prepare and file, with respect to each Mortgage
Loan, any and all tax returns, information statements or other filings required
to be delivered to any governmental taxing authority or to the Purchaser
pursuant to any applicable law with respect to the Mortgage Loans and the
transactions contemplated hereby. In addition, the Servicer shall provide the
Purchaser with such information concerning the Mortgage Loans as is necessary
for the Purchaser to prepare its federal income tax return as the Purchaser may
reasonably request from time to time.
SECTION 3.03 Advances by Servicer. On the Business Day immediately
preceding each Remittance Date, the Servicer shall deposit in the Custodial
Account from its own funds an amount equal to all Monthly Payments which were
due on the Mortgage Loans during the applicable Due Period and which were
delinquent at the close of business on the immediately preceding Determination
Date or which were deferred pursuant to Section 2.01, provided that the Servicer
shall only be required to make such advances with respect to a Mortgage Loan
until such advances are, in the Servicer's good faith determination as evidenced
by an Officer's Certificate of the Servicer delivered to the Purchaser on the
Business Day next following the Determination Date on or prior to which said
determination is or was made, deemed to be a Nonrecoverable Advance. The
Servicer's obligation to make such advances as to any Mortgage Loan will
continue through the earlier of (i) the disposition of such Mortgage Loan and
(ii) the date of foreclosure sale with respect to such Mortgage Loan. Except as
otherwise provided herein, the Servicer shall be entitled to first priority
reimbursement pursuant to Section 2.05 hereof for principal and interest
advances and for servicing advances from recoveries from the related mortgagor
or from all Liquidation Proceeds and other payments or recoveries (including
Insurance Proceeds and Condemnation Proceeds) with respect to the related
Mortgage Loan.
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ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 Transfers of Mortgaged Property. The Servicer shall be
required to enforce any "due-on-sale" provision contained in any Mortgage or
Mortgage Note and to deny assumption by the person to whom the Mortgaged
Property has been or is about to be sold whether by absolute conveyance or by
contract of sale, whether or not the Mortgagor remains liable on the Mortgage
and the Mortgage Note. When the Mortgaged Property has been conveyed by the
Mortgagor, the Servicer shall, to the extent it has knowledge of such
conveyance, exercise its rights to accelerate the maturity of such Mortgage Loan
under the "due-on-sale" clause applicable thereto, provided, however, that the
Servicer shall not exercise such rights if prohibited by law from doing so or if
the exercise of such rights would impair or threaten to impair any recovery
under the related PMI Policy, if any.
If the Servicer reasonably believes it is unable under applicable law
to enforce such "due-on-sale" clause, the Servicer, in the Purchaser's name,
shall, to the extent permitted by applicable law, enter into (i) an assumption
and modification agreement with the person to whom such property has been
conveyed, pursuant to which such person becomes liable under the Mortgage Note
and the original Mortgagor remains liable thereon or (ii) in the event the
Servicer is unable under applicable law to require that the original Mortgagor
remain liable under the Mortgage Note and the Servicer has the prior consent of
the primary mortgagee guaranty insurer, a substitution of liability agreement
with the purchaser of the Mortgaged Property pursuant to which the original
Mortgagor is released from liability and the purchaser of the Mortgaged Property
is substituted as Mortgagor and becomes liable under the Mortgage Note. In
connection with any such assumption, neither the Mortgage Interest Rate borne by
the related Mortgage Note, the term of the Mortgage Loan nor the outstanding
principal amount of the Mortgage Loan shall be changed.
To the extent that any Mortgage Loan is assumable, the Servicer shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by FNMA with respect to underwriting mortgage loans of
the same type as the Mortgage Loans. If the credit of the proposed transferee
does not meet such underwriting criteria, the Servicer diligently shall, to the
extent permitted by the Mortgage or the Mortgage Note and by applicable law,
accelerate the maturity of the Mortgage Loan.
SECTION 4.02 Satisfaction of Mortgages and Release of Mortgage Files.
Upon the payment in full of any Mortgage Loan, or the receipt by the Servicer of
a notification that payment in full will be escrowed in a manner customary for
such purposes, the Servicer shall notify the Purchaser in the Monthly Remittance
Advice as provided in Section 3.02, and may request the release of any Mortgage
Loan Documents from the Purchaser in accordance with this Section 4.02 hereof.
The Servicer shall obtain discharge of the related Mortgage Loan as of record
within any related time limit required by applicable law.
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If the Servicer satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage or should
the Servicer otherwise prejudice any rights the Purchaser may have under the
mortgage instruments, upon written demand of the Purchaser, the Servicer shall
repurchase the related Mortgage Loan at the Repurchase Price by deposit thereof
in the Custodial Account within two (2) Business Days of receipt of such demand
by the Purchaser. Upon such repurchase, all funds maintained in the Escrow
Account with respect to such repurchased Mortgage Loan shall be transferred to
the Servicer. The Servicer shall maintain the Fidelity Bond and Errors and
Omissions Insurance Policy as provided for in Section 2.12 insuring the Servicer
against any loss it may sustain with respect to any Mortgage Loan not satisfied
in accordance with the procedures set forth herein.
SECTION 4.03 Servicing Compensation. As consideration for servicing the
Mortgage Loans hereunder, the Servicer shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the Custodial Account pursuant to Section
2.05 hereof. Such Servicing Fee shall be payable monthly, computed on the basis
of the same principal amount and period in respect of which any related interest
payment on a Mortgage Loan is computed. The Servicing Fee shall be pro-rated
when servicing is for less than one month. The obligation of the Purchaser to
pay, and the Servicer's right to withdraw, the Servicing Fee is limited to, and
the Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by Section 2.05), of such Monthly Payment collected by the Servicer,
or as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall
be retained by the Servicer. The Servicer shall be required to pay all expenses
incurred by it in connection with its servicing activities hereunder and shall
not be entitled to reimbursement thereof except as specifically provided for
herein.
SECTION 4.04 Annual Statement as to Compliance. The Servicer shall
deliver to the Purchaser, on or before March 31 each year beginning March 31,
1998, an Officer's Certificate, stating that (i) a review of the activities of
the Servicer during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Servicer
has complied in all material respects with the provisions of Article II and
Article IV, and (iii) to the best of such officer's knowledge, based on such
review, the Servicer has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Servicer to cure such default.
SECTION 4.05 Annual Independent Public Accountants' Servicing Report.
On or before March 31 of each year, beginning with the first March 31 that
occurs at least six months after the Closing Date, the Servicer at its expense
shall cause a firm of independent public accountants (who may also render other
services to the Servicer or any affiliate thereof) which is a member of the
American Institute of Certified Public Accountants to furnish a statement to the
Purchaser to the effect that such firm has, as part of their examination of the
financial statements of the Servicer performed tests embracing the records and
documents relating to mortgage loans serviced
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by the Servicer in accordance with the requirements of the Uniform Single Audit
Program for Mortgage Bankers and that their examination disclosed no exceptions
that, in their opinion were material, relating to mortgage loans serviced by the
Servicer.
SECTION 4.06 Right to Examine Servicer Records. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of the Servicer, whether held by the
Servicer or by another on its behalf, with respect to or concerning this
Agreement or the Mortgage Loans, during business hours or at such other times as
may be reasonable under applicable circumstances, upon reasonable advance
notice.
ARTICLE V
SERVICER TO COOPERATE
SECTION 5.01 Provision of Information. During the term of this
Agreement, the Servicer shall furnish to the Purchaser such periodic, special,
or other reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Servicer shall execute and deliver all such instruments and take
all such action as the Purchaser may reasonably request from time to time, in
order to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 Financial Statements; Servicing Facilities. In connection
with disposition of Mortgage Loans, the Purchaser may make available to a
prospective purchaser audited financial statements of the Servicer for the most
recently completed two (2) fiscal years for which such statements are available,
as well as a Consolidated Statement of Condition at the end of the last two (2)
fiscal years covered by any Consolidated Statement of Operations. If it has not
already done so, the Servicer shall furnish promptly to the Purchaser or a
prospective purchaser copies of the statements specified above; provided,
however, that prior to furnishing such statements or information to any
prospective purchaser, the Servicer may require such prospective purchaser to
execute a confidentiality agreement in form reasonably satisfactory to it.
The Servicer shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Servicer
or the financial statements of the Servicer, and to permit any prospective
purchaser to inspect the Servicer's servicing facilities for the purpose of
satisfying such prospective purchaser that the Servicer has the ability to
service the Mortgage Loans as provided in this Agreement.
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ARTICLE VI
TERMINATION
SECTION 6.01 Agency Suspension. Should the Servicer at any time during
the term of this Agreement have its right to service temporarily or permanently
suspended by FNMA or FHLMC or otherwise cease to be an approved seller/servicer
of conventional residential mortgage loans for FNMA or FHLMC, then the Purchaser
may immediately terminate this Agreement and accelerate performance of the
provisions of the Purchase Agreement to require immediate transfer of the
Servicing Rights.
SECTION 6.02 Damages. The Purchaser shall have the right at any time to
seek and recover from the Servicer any damages or losses suffered by it as a
result of any failure by the Servicer to observe or perform any duties,
obligations, covenants or agreements herein contained, or as a result of a
party's failure to remain an approved FNMA mortgage servicer.
SECTION 6.03 Termination. The respective obligations and
responsibilities of the Servicer shall terminate upon: (i) the later of the
final payment or other liquidation (or any advance with respect thereto) of the
last Mortgage Loan serviced by the Servicer or the disposition of all REO
Property serviced by the Servicer and the remittance of all funds due hereunder;
or (ii) by mutual consent of the Servicer and the Purchaser in writing, unless
earlier terminated pursuant to this Agreement.
SECTION 6.04 Termination Without Cause. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the
Servicer terminate any rights the Servicer may have hereunder with respect to
any or all of the Mortgage Loans, without cause, upon written notice, provided
that the Servicer shall have an additional period of not more than sixty (60)
days from and after the date of said notice from the Purchaser within which to
effect the related transfer of servicing. Any such notice of termination shall
be in writing and delivered to the Servicer as provided in Section 12.01 of this
Agreement. In the event of such termination, the Servicer shall be entitled to a
Termination Fee, equal to 2.0% of the then current aggregate unpaid principal
balance of the related Mortgage Loans; provided, however, that the successor
servicer is not an Affiliate of the Servicer.
ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 Possession of Servicing Files. The contents of each
Servicing File are and shall be held in trust by the Servicer for the benefit of
the Purchaser as the owner thereof. The Servicer shall maintain in the Servicing
File a copy of the contents of each Mortgage File and the originals of the
documents in each Mortgage File not delivered to the Purchaser. The possession
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of the Servicing File by the Servicer is at the will of the Purchaser for the
sole purpose of servicing the related Mortgage Loan, pursuant to this Agreement,
and such retention and possession by the Servicer is in its capacity as Servicer
only and at the election of the Purchaser. The Servicer shall release its
custody of the contents of any Servicing File only in accordance with written
instructions from the Purchaser or other termination of the Servicer with
respect to the related Mortgage Loans, unless such release is required as
incidental to the Servicer's servicing of the Mortgage Loans pursuant to this
Agreement, or is in connection with a repurchase of any Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement or Section 4.02 of this Agreement.
The Servicer shall be responsible for maintaining, and shall maintain,
a complete set of books and records for each Mortgage Loan which shall be marked
clearly to reflect the ownership of each Mortgage Loan by the Purchaser. In
particular, the Servicer shall maintain in its possession, available for
inspection by the Purchaser or its designee during normal business hours, and
shall deliver to the Purchaser or its designee upon reasonable notice, evidence
of compliance with all federal, state and local laws, rules and regulations, and
requirements of FNMA or FHLMC, including but not limited to documentation as to
the method used in determining the applicability of the provisions of the Flood
Disaster Protection Act of 1973, as amended, to the Mortgaged Property,
documentation evidencing insurance coverage and eligibility of any condominium
project for approval by FNMA and periodic inspection reports as required by
Section 2.13 and the FNMA Guides.
To the extent that original documents are not required for purposes of
realization of Liquidation Proceeds or Insurance Proceeds, documents maintained
by the Servicer may be in the form of microfilm or microfiche so long as the
Servicer complies with the requirements of the FNMA Guides.
The Servicer shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Servicer
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, the Servicer shall be under no obligation to deal
with any person with respect to this Agreement or the Mortgage Loans unless the
books and records show such person as the owner of the Mortgage Loan. The
Purchaser may, subject to the terms of this Agreement, sell or transfer one or
more of the Mortgage Loans. The Purchaser also shall advise the Servicer of the
transfer.
Upon receipt of notice of the transfer, the Servicer shall mark its
books and records to reflect the ownership of the Mortgage Loans of such
assignee, and shall release the Purchaser from its obligations hereunder with
respect to the Mortgage Loans sold or transferred.
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ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 Indemnification. The Servicer agrees to indemnify and hold
the Purchaser harmless from any liability, claim, loss or damage (including,
without limitation, any reasonable legal fees, judgments or expenses relating to
such liability, claim, loss or damage) to the Purchaser directly or indirectly
resulting from the Servicer's failure to observe and perform any or all of
Servicer's duties, obligations, covenants, agreements, warranties or
representations contained in this Agreement or in the Purchase Agreement or the
Servicer's failure to comply with all applicable requirements with respect to
the transfer of Servicing Rights as set forth herein.
The Servicer shall notify the Purchaser as soon as reasonably possible
if a claim is made by a third party with respect to this Agreement.
SECTION 8.02 Limitation on Liability of Servicer and Others. Neither
the Servicer nor any of the directors, officers, employees or agents of the
Servicer shall be under any liability to the Purchaser for any action taken or
for refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Servicer or any such person against any breach of
warranties or representations made herein, or failure to perform its obligations
in material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Servicer and any director, officer,
employee or agent of the Servicer may rely in good faith on any document of any
kind prima facie properly executed and submitted by any Person with respect to
any matter arising hereunder. The Servicer shall not be under any obligation to
appear in, prosecute or defend any legal action which is not incidental to its
duties to service the Mortgage Loans in accordance with this Agreement and which
in its opinion may involve it in any expense or liability, provided, however,
that the Servicer may, with the prior written consent of the Purchaser,
undertake any such action which it may deem necessary or desirable in respect to
this Agreement and the rights and duties of the parties hereto. In such event,
the Servicer shall be entitled to reimbursement from the Purchaser of the
reasonable legal expenses and costs of such action.
SECTION 8.03 Limitation on Registration and Assignment by Servicer. The
Purchaser has entered into this Agreement with the Servicer in reliance upon the
independent status of the Servicer, and the representations as to the adequacy
of its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Nonetheless, the Servicer may subcontract all or a portion of its servicing
obligations under the Agreement to one or more of its affiliates. However, if
none of its affiliates is engaged in the business of servicing mortgage loans,
the Servicer may subcontract all or a portion of its obligations under the
Servicing Agreement to an unrelated third party subject to approval of a
majority of the Independent Directors. Any delegation of such rights or duties
shall not release the Servicer from its obligations hereunder and the Servicer
shall remain responsible hereunder for all acts and omissions of any delegee as
if such acts or omissions were those of the Servicer
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and any such assignee or designee shall satisfy the requirements for a successor
or surviving Person set forth in Section 8.05 and Section 8.06 hereof. The
Servicer shall notify the Purchaser in writing at least 30 days prior to selling
or otherwise disposing of all or substantially all of its assets and receipt of
such notice shall entitle the Purchaser to terminate this Agreement except as
set forth in Section 8.05 hereof.
The Servicer shall not resign from the obligations and duties hereby
imposed on it, except by mutual consent of the Servicer and the Purchaser or
upon the determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Servicer. Any such
determination permitting the resignation of the Servicer shall be evidenced by
an Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Servicer's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
Without in any way limiting the generality of this Section 8.03, in the
event that the Servicer either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without satisfying the requirements set forth herein, then the Purchaser
shall have the right to terminate this Agreement as set forth in Section 6.04,
without any payment of any penalty or damages and without any liability
whatsoever to the Servicer (other than with respect to accrued but unpaid
Servicing Fees and Servicing Advances remaining unpaid) or any third party.
SECTION 8.04 Assignment by Purchaser. The Purchaser shall have the
right, without the consent of the Servicer, to assign, in whole or in part, its
interest under this Agreement with respect to some or all of the Mortgage Loans,
and designate any person to exercise any rights of the Purchaser hereunder, by
executing an Assignment and Assumption Agreement substantially in the form of
Exhibit G to the Purchase Agreement and the assignee or designee shall accede to
the rights and obligations hereunder of the Purchaser with respect to such
Mortgage Loans. All references to the Purchaser in this Agreement shall be
deemed to include its assignee or designee. Notwithstanding the foregoing, at
any one time there shall not be more than fifteen (15) separate Purchasers under
this Agreement.
SECTION 8.05 Merger or Consolidation of the Servicer. The Servicer will
keep in full effect its existence, rights and franchises as a corporation under
the laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Servicer may be merged or consolidated, or
any corporation resulting from any merger, conversion or consolidation to which
the Servicer shall be a party, or any Person succeeding to the business of the
Servicer, shall be the successor of the Servicer hereunder, without the
execution or filing of any paper or any further act on the part of any of the
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parties hereto, anything herein to the contrary notwithstanding; provided,
however, that the successor or surviving Person shall be an institution whose
deposits are insured by FDIC or a company whose business includes the
origination and servicing of mortgage loans, shall be qualified to service
mortgage loans on behalf of FNMA or FHLMC and shall satisfy the requirements of
Section 8.06 with respect to the qualifications of a successor to the Servicer.
SECTION 8.06 Successor to the Servicer. Prior to termination of
Servicer's responsibilities and duties under this Agreement pursuant to Sections
2.17, 6.04, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of
the Servicer's responsibilities, rights, duties and obligations under this
Agreement, or (ii) appoint a successor having a tangible net worth of not less
than $30,000,000 and which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Servicer under this Agreement
prior to the termination of Servicer's responsibilities, duties and liabilities
under this Agreement. Any successor to the Servicer shall be a FNMA- or
FHLMC-approved servicer in good standing. In connection with such appointment
and assumption, the Purchaser may make such arrangements for the compensation of
such successor out of payments on Mortgage Loans as it and such successor shall
agree. In the event that the Servicer's duties, responsibilities and liabilities
under this Agreement should be terminated pursuant to the aforementioned
sections, the Servicer shall discharge such duties and responsibilities during
the period from the date it acquires knowledge of such termination until the
effective date thereof with the same degree of diligence and prudence which it
is obligated to exercise under this Agreement, and shall take no action
whatsoever that might impair or prejudice the rights or financial condition of
its successor. The resignation or removal of Servicer pursuant to the
aforementioned Sections shall not become effective until a successor shall be
appointed pursuant to Article X hereof this Section and shall in no event
relieve the Servicer of the representations, warranties and covenants made
pursuant to and the remedies available to the Purchaser with respect thereto, it
being understood and agreed that the provisions of such Article X shall be
applicable to the Servicer notwithstanding any such resignation or termination
of the Servicer, or the termination of this Agreement.
Any successor appointed as provided herein shall execute, acknowledge
and deliver to the Servicer and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Servicer, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.17, 6.04, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Servicer
arising prior to any such termination or resignation.
The Servicer shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Servicer shall account for
all funds. The Servicer shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Servicer. The successor shall make
arrangements as it may deem appropriate to reimburse the Servicer for amounts
the Servicer actually expended pursuant to this Agreement
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which the successor is entitled to retain hereunder and which would otherwise
have been recovered by the Servicer pursuant to this Agreement but for the
appointment of the successor servicer.
Upon a successor's acceptance of appointment as such, the Servicer
shall notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of the Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Servicer as follows:
SECTION 9.01 Due Organization and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware. The Purchaser has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Purchaser and the consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement evidences the valid, binding and
enforceable obligation of the Purchaser; and all requisite corporate action has
been taken by the Purchaser to make this Agreement valid and binding upon the
Purchaser in accordance with its terms.
SECTION 9.02 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's charter or by-laws or any legal
restriction or any agreement or instrument to which the Purchaser is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Purchaser or its property is
subject.
SECTION 9.03 Ability to Perform. The Purchaser does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant made by it in this Agreement.
SECTION 9.04 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Purchaser, before
any court, administrative agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
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SECTION 9.05 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Purchaser of, or compliance by the
Purchaser with, this Agreement as evidenced by the consummation of the
transactions contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date.
SECTION 9.06 Assistance. To the extent reasonably possible, the
Purchaser shall cooperate with and assist the Servicer as requested by the
Servicer, in carrying out Servicer's covenants, agreements, duties and
responsibilities under the Purchase Agreement and in connection therewith shall
execute and deliver all such papers, documents and instruments as nay be
necessary and appropriate in furtherance thereof.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SERVICER
As of the Closing Date, the Servicer warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
SECTION 10.01 Due Organization and Authority. The Servicer is a
federally chartered savings bank duly organized and validly existing under the
laws of the United States and is licensed, qualified and in good standing in
each state where a Mortgaged Property is located if the laws of such state
require licensing or qualification in order to conduct business of the type
conducted by the Servicer, and in any event the Servicer is in compliance with
the laws of any such state to the extent necessary to ensure the enforceability
of the related Mortgage Loan in accordance with the terms of this Agreement; the
Servicer has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery and
performance of this Agreement (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Servicer and the consummation of
the transactions contemplated hereby have been duly and validly authorized; this
Agreement evidences the valid, legal, binding and enforceable obligation of the
Servicer subject to bankruptcy laws and other similar laws of general
application affecting rights of creditors and subject to the application of the
rules of equity, including those respecting the availability of specific
performance, none of which will materially interfere with the realization of the
benefits provided thereunder, regardless of whether such enforcement is sought
in a proceeding in equity or at law; and all requisite corporate action has been
taken by the Servicer to make this Agreement valid and binding upon the Servicer
in accordance with its terms.
SECTION 10.02 Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Servicer.
SECTION 10.03 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Servicer's charter
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<PAGE> 36
or by-laws or any legal restriction or any agreement or instrument to which the
Servicer is now a party or by which it is bound, or constitute a default or
result in an acceleration under any of the foregoing, or result in the violation
of any law, rule, regulation, order, judgment or decree to which the Servicer or
its property is subject, or impair the ability of the Purchaser to realize on
the Mortgage Loans, impair the value of the Mortgage Loans, or impair the
ability of the Purchaser to realize the full amount of any mortgage insurance
benefits accruing pursuant to this Agreement.
SECTION 10.04 Ability to Service. The Servicer is an approved
seller/servicer of conventional residential mortgage loans for FNMA and FHLMC,
with the facilities, procedures, and experienced personnel necessary for the
sound servicing of mortgage loans of the same type as the Mortgage Loans. The
Servicer is duly qualified, licensed, registered and otherwise authorized under
all applicable federal, state and local laws, and regulations, if applicable,
meets the minimum capital requirements set forth by the OTS, and is in good
standing to enforce, originate, sell mortgage loans to, and service mortgage
loans in the jurisdiction wherein the Mortgaged Properties are located for,
either FNMA or FHLMC, and no event has occurred, including but not limited to a
change in insurance coverage, which would make the Servicer unable to comply
with either FNMA or FHLMC eligibility requirements or which would require
notification to FNMA or FHLMC.
SECTION 10.05 Ability to Perform. The Servicer does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant contained in this Agreement.
SECTION 10.06 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Servicer, before
any court, administrative agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Servicer, or in any
material impairment of the right or ability of the Servicer to carry on its
business substantially as now conducted, or in any material liability on the
part of the Servicer, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Servicer contemplated herein, or which
would be likely to impair materially the ability of the Servicer to perform
under the terms of this Agreement.
SECTION 10.07 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Servicer of or compliance by the
Servicer with this Agreement or the servicing of the Mortgage Loans as evidenced
by the consummation of the transactions contemplated by this Agreement, or if
required, such approval has been obtained prior to the Closing Date.
SECTION 10.08 No Untrue Information. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement
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<PAGE> 37
or in connection with the transactions contemplated hereby contains any untrue
statement of fact or omits to state a fact necessary to make the statements
contained therein not misleading.
SECTION 10.09 Reasonable Servicing Fee. The Servicer acknowledges and
agrees that the Servicing Fee represents reasonable compensation for performing
such services and that the entire Servicing Fee shall be treated by the
Servicer, for accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 Financial Statements. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Servicer since the date of the Servicer's
financial statements that would have a material adverse effect on its ability to
perform its obligations under this Agreement.
SECTION 10.11 Conflict of Interest. The Servicer agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the interests of the Seller or its other
affiliates.
ARTICLE XI
DEFAULT
SECTION 11.01 Events of Default. The following shall constitute an
Event of Default under this Agreement on the part of the Servicer:
(a) any failure by the Servicer to remit to the Purchaser any
payment required to be made under the terms of this Agreement
which continues unremedied for a period of five (5) Business
Days after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to
the Servicer by the Purchaser; or
(b) the failure by the Servicer duly to observe or perform in any
material respect any other of the covenants or agreements on
the part of the Servicer set forth in this Agreement which
continues unremedied for a period of thirty (30) days (except
that such number of days shall be fifteen (15) in the case of
a failure to pay any premium for any insurance policy required
to be maintained under this Agreement) after the date on which
written notice of such failure, requiring the same to be
remedied, shall have been given to the Servicer by the
Purchaser; or
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<PAGE> 38
(c) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency,
bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against
the Servicer and such decree or order shall have remained in
force undischarged or unstayed for a period of sixty (60)
days; or
(d) the Servicer shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, bankruptcy,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Servicer or of or
relating to all or substantially all of its property; or
(e) the Servicer shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations; or
(f) the Servicer ceases to meet the qualifications of a FNMA or
FHLMC seller/servicer which continues unremedied for a period
of thirty (30) days after the date of such cessation; or
(g) the Servicer, without the consent of the Purchaser, attempts
to assign this Agreement or the servicing responsibilities
hereunder or to delegate any substantial part of its duties
hereunder or any portion thereof; or
(h) the Servicer fails to maintain its license to do business or
service residential mortgage loans in any jurisdiction where
the Mortgaged Properties are located and such failure results
in a material adverse effect on the Mortgage Loans, the
servicing of the Mortgage Loans, or the Purchaser's rights
with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not
have been remedied, in addition to whatsoever rights the Purchaser may have at
law or equity to damages, including injunctive relief and specific performance,
the Purchaser, by notice in writing to the Servicer, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Servicer under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Servicer of such written notice, all authority and
power of the Servicer under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the successor appointed
pursuant to Section 8.06. Upon written request from the Purchaser, the Servicer
shall prepare, execute and deliver any and all documents and other instruments
reasonably requested by the Purchaser, place in such successor's possession all
33
<PAGE> 39
Mortgage Files (to the extent not properly delivered to the Purchaser by the
Servicer previously), and do or accomplish all other acts or things necessary or
appropriate to effect the purposes of such notice of termination, whether to
complete the transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise, at the Servicer's sole expense. The Servicer
agrees to reasonably cooperate with the Purchaser and such successor in
effecting the termination of the Servicer's responsibilities and rights
hereunder, including, without limitation, the transfer to such successor for
administration by it of all cash amounts which shall at the time be credited by
the Servicer to the Custodial Account or Escrow Account or thereafter received
with respect to the Mortgage Loans.
SECTION 11.02 Waiver of Defaults. The Purchaser may waive any default
by the Servicer in the performance of its obligations hereunder and its
consequences. Upon any such waiver of a past default, such default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been remedied for every purpose of this Agreement. No such waiver shall extend
to any subsequent or other default or impair any right consequent thereon except
to the extent expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or certified
mail, return receipt requested:
(a) If to Purchaser to:
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
(b) If to Servicer to:
D&N Bank
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
SECTION 12.02 Waivers. Either the Servicer or the Purchaser may upon
consent of all parties, by written notice to the others:
34
<PAGE> 40
(a) Waive compliance with any of the terms, conditions or
covenants required to be complied with by the others
hereunder; and
(b) Waive or modify performance of any of the obligations of the
others hereunder.
The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other subsequent
breach.
SECTION 12.03 Entire Agreement; Amendment. This Agreement and the
Purchase Agreement constitute the entire agreement between the parties with
respect to servicing of the Mortgage Loans. This Agreement may be amended and
any provision hereof waived, but, only in writing signed by the party against
whom such enforcement is sought.
SECTION 12.04 Execution; Binding Effect. This Agreement may be executed
in one or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Servicer and the Purchaser and their
respective successors and assigns.
SECTION 12.05 Headings. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of Michigan and the obligations, rights
and remedies hereunder shall be determined in accordance with the substantive
laws of the State of Michigan (without regard to conflicts of laws principles),
except to the extent preempted by Federal law.
SECTION 12.07 Relationship of Parties. Nothing herein contained shall
be deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Servicer shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Servicer
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
SECTION 12.08 Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09 Recordation of Assignments of Mortgage. To the extent
permitted by applicable law, each of the Assignments of Mortgage is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
Mortgaged Properties are situated, and in any other appropriate public
35
<PAGE> 41
recording office or elsewhere, such recordation to be effected by the Purchaser
or the Purchaser's designee, but in any event, at the Servicer's expense for a
single recordation relating to each Assignment of Mortgage in the event
recordation is either necessary under applicable law or requested by the
Purchaser at its sole option.
SECTION 12.10 Exhibits. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
36
<PAGE> 42
IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date and year first above written.
D&N CAPITAL CORPORATION
(the Purchaser)
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
D&N BANK
(the Servicer)
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
37
<PAGE> 43
EXHIBIT 1
MONTHLY REMITTANCE ADVICE
38
<PAGE> 44
EXHIBIT 2
CUSTODIAL ACCOUNT CERTIFICATION
___________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the Servicing
Agreement, dated as of ______, 1997.
Title of Account: "D&N Bank, in trust for Purchaser of Residential Mortgage
Loans, and various Mortgagors."
Account Number: ________________________
Address of office or branch of the Servicer at which Account is
maintained:
_________________________
_________________________
_________________________
_________________________
_________________________
D&N BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
39
<PAGE> 45
EXHIBIT 3
CUSTODIAL ACCOUNT LETTER AGREEMENT
___________, 1997
To: ____________________
(the "Depository")
As Servicer under the Servicing Agreement, dated as of ______, 1997,
(the "Agreement"), we hereby authorize and request you to establish an account,
as a Custodial Account pursuant to Section 2.04 of the Agreement, to be
designated as D&N Bank, in trust for Purchaser of Residential Mortgage Loans,
and various Mortgagors." All deposits in the account shall be subject to
withdrawal therefrom by order signed by the Servicer. You may refuse any deposit
which would result in violation of the requirement that the account be fully
insured as described below. This letter is submitted to you in duplicate. Please
execute and return one original to us.
D&N BANK
By:______________________________________
Name:____________________________________
Title:___________________________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number , at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
-------------------------------------------
Depository
By:_______________________________________
Name:_____________________________________
Title:____________________________________
40
<PAGE> 46
EXHIBIT 4
ESCROW ACCOUNT CERTIFICATION
_____________, 1997
____________________________hereby certifies that it has established
the account described below as an Escrow Account pursuant to Section 2.06 of the
Servicing Agreement, dated as of ________, 1997, Conventional Residential
Mortgage Loans.
Title of Account: "D&N Bank, in trust for Purchaser of Residential and various
Mortgagors."
Account Number: _________________________
Address of office or branch of the Servicer at which Account is maintained:
_________________________
_________________________
_________________________
_________________________
_________________________
D&N BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
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<PAGE> 47
EXHIBIT 5
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1997
To: __________________________
__________________________
__________________________
(the "Depository")
As Servicer under the Servicing Agreement, dated as of ____________,
1997, Conventional Residential Mortgage Loans (the "Agreement"), we hereby
authorize and request you to establish an account, as an Escrow Account pursuant
to Section 2.06 of the Agreement, to be designated as "D&N Bank in trust for the
Purchasers of Residential Mortgage Loans, and various Mortgagors." All deposits
in the account shall be subject to withdrawal therefrom by order signed by the
Servicer. You may refuse any deposit which would result in violation of the
requirement that the account be fully insured as described below. This letter is
submitted to you in duplicate. Please execute and return one original to us.
D&N BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number , at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
-------------------------------------------
Depository
By:_______________________________________
Name:_____________________________________
Title:____________________________________
42
<PAGE> 1
EXHIBIT 10(d)
SERVICING AGREEMENT
BETWEEN
D&N CAPITAL CORPORATION
PURCHASER
D&N BANK
SELLER
DATED AS OF [___________], 1997
CONVENTIONAL COMMERCIAL MORTGAGE LOANS
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
Page
----
ARTICLE I
<S> <C>
DEFINITIONS.....................................................................................1
Section 1. Definitions..............................................................1
ARTICLE II
SERVICING.......................................................................................5
Section 2.01 Seller to Act as Servicer................................................5
Section 2.02 Liquidation of Mortgage Loans............................................6
Section 2.03 Collection of Mortgage Loan Payments.....................................7
Section 2.04 Establishment of and Deposits to Custodial Account.......................7
Section 2.05 Permitted Withdrawals From Custodial Account.............................9
Section 2.06 Establishment of and Deposits to Escrow Account.........................10
Section 2.07 Permitted Withdrawals From Escrow Account...............................10
Section 2.08 Payment of Taxes, Insurance and Other Charges, Tax Contracts............11
Section 2.09 Protection of Accounts..................................................11
Section 2.10 Maintenance of Hazard Insurance.........................................11
Section 2.11 Maintenance of Mortgage Impairment Insurance............................12
Section 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance..................................................13
Section 2.13 Inspections.............................................................13
Section 2.14 Restoration of Mortgaged Property.......................................13
Section 2.15 Deteriorating Mortgage Loans............................................14
Section 2.16 Title, Management and Disposition of REO Property.......................14
Section 2.17 Permitted Withdrawals with respect to REO Property......................16
Section 2.18 Real Estate Owned Reports...............................................16
Section 2.19 Liquidation Reports.....................................................16
Section 2.20 Reports Of Foreclosures and Abandonments................................16
Section 2.21 Notification of Adjustments.............................................16
Section 2.22 Notification of Maturity Date...........................................17
ARTICLE III
PAYMENTS TO PURCHASER..........................................................................17
Section 3.01 Remittances.............................................................17
Section 3.02 Statements to Purchaser.................................................18
Section 3.03 Advances by Seller.......................................................18
ARTICLE IV
GENERAL SERVICING PROCEDURES...................................................................19
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 4.01 Transfers of Mortgaged Property.........................................19
Section 4.02 Satisfaction of Mortgages and Release of Mortgage Files.................19
Section 4.03 Servicing Compensation..................................................20
Section 4.04 Annual Statement as to Compliance.......................................20
Section 4.05 Annual Independent Public Accountants' Servicing Report.................20
Section 4.06 Right to Examine Seller Records.........................................21
ARTICLE V
SELLER TO COOPERATE............................................................................21
Section 5.01 Provision of Information................................................21
Section 5.02 Financial Statements; Servicing Facilities..............................21
ARTICLE VI
TERMINATION....................................................................................22
Section 6.01 Damages.................................................................22
Section 6.02 Termination.............................................................22
Section 6.03 Termination Without Cause...............................................22
ARTICLE VII
BOOKS AND RECORDS..............................................................................22
Section 7.01 Possession of Servicing Files...........................................22
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT.................................................................23
Section 8.01 Indemnification.........................................................23
Section 8.02 Limitation on Liability of Seller and Others............................23
Section 8.03 Limitation on Registration and Assignment by Seller.....................24
Section 8.04 Assignment by Purchaser.................................................24
Section 8.05 Merger or Consolidation of the Seller...................................25
Section 8.06 Successor to the Seller.................................................25
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER.........................................26
Section 9.01 Due Organization and Authority..........................................26
Section 9.02 No Conflicts............................................................26
Section 9.03 Ability to Perform......................................................27
Section 9.04 No Litigation Pending...................................................27
Section 9.05 No Consent Required.....................................................27
Section 9.06 Assistance..............................................................27
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C>
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER.......................................................27
Section 10.01 Due Organization and Authority.........................................27
Section 10.02 Ordinary Course of Business............................................28
Section 10.03 No Conflicts...........................................................28
Section 10.05 Ability to Service.....................................................28
Section 10.05 Ability to Perform.....................................................28
Section 10.06 No Litigation Pending..................................................28
Section 10.07 No Consent Required....................................................28
Section 10.08 No Untrue Information..................................................29
Section 10.09 Reasonable Servicing Fee...............................................29
Section 10.10 Financial Statements...................................................29
Section 10.11 Conflict of Interest...................................................29
ARTICLE XI
DEFAULT........................................................................................29
Section 11.01 Events of Default......................................................29
Section 11.02 Waiver of Defaults.....................................................31
ARTICLE XII
MISCELLANEOUS PROVISIONS.......................................................................31
Section 12.01 Notices................................................................31
Section 12.02 Waivers................................................................31
Section 12.03 Entire Agreement; Amendment............................................32
Section 12.04 Execution; Binding Effect..............................................32
Section 12.05 Headings...............................................................32
Section 12.06 Applicable Law.........................................................32
Section 12.07 Relationship of Parties................................................32
Section 12.08 Severability of Provisions.............................................32
Section 12.09 Recordation of Assignments of Mortgage.................................32
Section 12.10 Exhibits...............................................................33
</TABLE>
EXHIBITS
EXHIBIT 1 FORM OF MONTHLY REMITTANCE ADVICE
EXHIBIT 2 FORM OF CUSTODIAL ACCOUNT CERTIFICATION
EXHIBIT 3 FORM OF CUSTODIAL ACCOUNT LETTER AGREEMENT
EXHIBIT 4 FORM OF ESCROW ACCOUNT CERTIFICATION
EXHIBIT 5 FORM OF ESCROW ACCOUNT LETTER AGREEMENT
EXHIBIT 6 FORM OF CONFIDENTIALITY AGREEMENT
iii
<PAGE> 5
SERVICING AGREEMENT
This Servicing Agreement (the "Servicing Agreement" or the "Agreement")
is entered into as of [________,] 1997, by and between D&N BANK (the "Seller"),
a federally chartered savings bank, and D&N CAPITAL CORPORATION, a Delaware
corporation (the "Purchaser").
WHEREAS, the Purchaser and the Seller entered into a Mortgage Loan
Purchase and Warranties Agreement dated as of [________,] 1997 (the "Purchase
Agreement") pursuant to which the Purchaser agreed to purchase from the Seller
certain conventional, commercial, adjustable rate first mortgage loans (the
"Mortgage Loans") to be delivered as whole loans, with the Seller retaining
servicing rights in connection with the purchase of such Mortgage Loans; and
WHEREAS, the Purchaser desires to have the Seller service the Mortgage
Loans, the Seller desires to service and administer the Mortgage Loans on behalf
of the Purchaser, and the parties desire to provide the terms and conditions of
such servicing by the Seller.
NOW, THEREFORE, in consideration of the mutual promises and agreements
set forth herein and for other good and valuable consideration, the receipt and
the sufficiency of which are hereby acknowledged, the parties hereto hereby
agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1. Definitions. All capitalized terms not otherwise defined
herein have the respective meanings set forth in the Purchase Agreement. The
following terms are defined as follows:
"Accepted Servicing Practices" means, with respect to any Mortgage
Loan, those mortgage servicing practices of prudent mortgage lending
institutions which service mortgage loans of the same type as such Mortgage Loan
in the jurisdiction where the related Mortgaged Property is located.
"Ancillary Income" means all late charges, escrow account benefits,
reinstatement fees, and similar types of fees arising from or in connection
with any Mortgage Loan to the extent not otherwise payable to the Mortgagor
under applicable law or pursuant to the terms of the related Mortgage Note.
"Bank" means D&N Bank.
"Best's" means Best's Key Rating Guide.
"BIF" means The Bank Insurance Fund, or any successor thereto.
1
<PAGE> 6
"Closing Date" means [_______,] 1997, or such other date as is mutually
agreed upon by the parties hereto.
"Condemnation Proceeds" means all awards or settlements in respect of a
Mortgaged Property, whether permanent or temporary, partial or entire, by
exercise of the power of eminent domain or condemnation, to the extent not
required to be released to a Mortgagor in accordance with the terms of the
related Mortgage Loan Documents.
"Custodial Account" means the separate account or accounts created and
maintained pursuant to Section 2.04.
"Cut-off Date" means [__________,] 1997.
"Due Period" means with respect to each Remittance Date, the period
commencing on the second day of the month preceding the month of the Remittance
Date and ending on the first day of the month of the Remittance Date.
"Errors and Omissions Insurance Policy" means an errors and omissions
insurance policy to be maintained by the Seller pursuant to Section 2.12.
"Escrow Account" means the separate account or accounts created and
maintained pursuant to Section 2.06.
"Escrow Payment" means, with respect to any Mortgage Loan, any payments
required to be escrowed by the Mortgagor with the mortgagee pursuant to the
Mortgage or any other document, including without limitation the amounts
constituting ground rents, taxes, assessments, water rates, sewer rents,
municipal charges, mortgage insurance premiums, fire and hazard insurance
premiums.
"Event of Default" means any one of the conditions or circumstances
enumerated in Section 11.01.
"FDIC" means The Federal Deposit Insurance Corporation, or any
successor thereto.
"Fidelity Bond" means a fidelity bond to be maintained by the Seller
pursuant to Section 2.12.
"Insurance Proceeds" means, with respect to each Mortgage Loan,
proceeds of insurance policies insuring the Mortgage Loan or the related
Mortgaged Property.
"Liquidation Proceeds" means cash received in connection with the
liquidation of a defaulted Mortgage Loan, whether through the sale or assignment
of such Mortgage Loan, trustee's sale, foreclosure sale or otherwise, or the
sale of the related Mortgaged Property if the Mortgaged Property is acquired in
satisfaction of the Mortgage Loan.
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"Monthly Remittance Advice" means the monthly remittance advice, in the
form of Exhibit A annexed hereto, to be provided to the Purchaser pursuant to
Section 3.02.
"Mortgage Impairment Insurance Policy" means a mortgage impairment or
blanket hazard insurance policy as described in Section 2.11.
"Nonrecoverable Advance" means any advance of principal and interest
previously made or proposed to be made in respect of a Mortgage Loan which, in
the good faith judgment of the Seller, will not or, in the case of a proposed
advance of principal and interest, would not, be ultimately recoverable from
related Insurance Proceeds, Liquidation Proceeds or otherwise. The determination
by the Seller that it has made a Nonrecoverable Advance or that any proposed
advance of principal and interest, if made, would constitute a Nonrecoverable
Advance, shall be evidenced by an Officers' Certificate delivered to the
Purchaser.
"Officer's Certificate" means a certificate signed by the Chairman of
the Board or the Vice Chairman of the Board or a President or a Vice President
and by the Treasurer or the Secretary or one of the Assistant Treasurers or
Assistant Secretaries of the Seller, and delivered to the Purchaser as required
by this Agreement.
"OTS" means Office of Thrift Supervision, or any successor thereto.
"Prime Rate" means the prime rate announced to be in effect from time
to time, as published as the average rate in The Wall Street Journal (Chicago
edition).
"Principal Prepayment" means any payment or other recovery of principal
on a Mortgage Loan which is received in advance of its scheduled due date,
including any prepayment penalty or premium thereon and which is not accompanied
by an amount of interest representing scheduled interest due on any date or
dates in any month or months subsequent to the month of prepayment.
"Purchase Agreement" means the Mortgage Loan Purchase and Warranties
Agreement between the Purchaser and the Seller related to the purchase of the
Mortgage Loans dated as of [_________], 1997.
"Qualified Depository" means a depository the accounts of which are
insured by the FDIC through the BIF or the SAIF.
"Qualified Insurer" means an insurance company duly qualified as such
under the laws of the states in which the Mortgaged Properties are located, duly
authorized and licensed in such states to transact the applicable insurance
business and to write the insurance provided, and in the two highest rating
categories by Best's with respect to hazard and flood insurance.
"Record Date" means the close of business of the last Business Day of
the month preceding the month of the related Remittance Date.
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"Remittance Date" means the 18th day (or if such 18th day is not a
Business Day, the first Business Day immediately following) of any month,
beginning with the first Remittance Date on [________] 18, 1997.
"REO Property" means a Mortgaged Property acquired by the Seller on
behalf of the Purchaser through foreclosure or by deed in lieu of foreclosure,
as described in Section 2.16.
"SAIF" means the Savings Association Insurance Fund, or any successor
thereto.
"Seller Employees" has the meaning set forth in Section 2.12.
"Servicing Advances" means all customary, reasonable and necessary "out
of pocket" costs and expenses (including reasonable attorneys' fees and
disbursements) incurred in the performance by the Seller of its servicing
obligations, including, but not limited to, the cost of (a) the preservation,
restoration and protection of the Mortgaged Property, (b) any enforcement or
judicial proceedings, including foreclosures, (c) the management and liquidation
of the Mortgaged Property if the Mortgaged Property is acquired in satisfaction
of the Mortgage and (d) compliance with the obligations under Section 2.08
(except with respect to any expenses incurred in connection with procuring or
transferring Tax Service Contracts, as provided therein).
"Servicing Agreement" means this agreement between the Purchaser and
the Seller for the servicing and administration of the Mortgage Loans.
"Servicing Fee" means, with respect to each Mortgage Loan, the amount
of the annual fee the Purchaser shall pay to the Seller, which shall, for a
period of one (1) full month, be equal to [one-twelfth] of the product of the
Servicing Fee Rate and (2) the Stated Principal Balance of such Mortgage Loan.
Such fee shall be payable monthly, computed on the basis of the same principal
amount and period in respect of which any related interest payment on a Mortgage
Loan is computed and shall be pro rated for any portion of a month during which
the Mortgage Loan is serviced by the Seller under this Agreement. The obligation
of the Purchaser to pay the Servicing Fee is limited to, and the Servicing Fee
is payable solely from, the interest portion (including recoveries with respect
to interest from Liquidation Proceeds, to the extent permitted by Section 4.03)
of such Monthly Payment collected by the Seller, or as otherwise provided under
Section 4.03.
"Servicing Fee Rate" means, with respect to each Mortgage Loan, the
rate specified in the Mortgage Loan Schedule with respect to such Mortgage Loan.
"Servicing File" means, with respect to each Mortgage Loan, the file
retained by the Seller consisting of originals of all documents in the Mortgage
File which are not delivered to the Purchaser or its designee and copies of the
Mortgage Loan Documents listed on Exhibit A to the Purchase Agreement.
"Servicing Officer" means any officer of the Seller involved in or
responsible for, the administration and servicing of the Mortgage Loans whose
name appears on a list of servicing
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officers furnished by the Seller to the Purchaser upon request, as such list may
from time to time be amended.
"Termination Fee" means the amount paid by the Purchaser to the Seller
in the event of the Seller's termination, without cause, as servicer. Such fee
shall equal the percentage amount set forth in Section 6.03 hereof of the then
current aggregate unpaid principal balance of the related Mortgage Loans.
ARTICLE II
SERVICING
SECTION 2.01 Seller to Act as Servicer. From and after the Closing
Date, the Seller, as an independent contractor, shall service and administer the
Mortgage Loans and shall have full power and authority, acting alone, to do any
and all things in connection with such servicing and administration which the
Seller may deem necessary or desirable, consistent with the terms of this
Agreement and with Accepted Servicing Practices.
Consistent with the terms of this Agreement, the Seller may waive,
modify or vary any term of any Mortgage Loan or consent to the postponement of
strict compliance with any such term or in any manner grant indulgence to any
Mortgagor if in the Seller's reasonable and prudent determination such waiver,
modification, postponement or indulgence is not materially adverse to the
Purchaser, provided, however, that unless the Seller has obtained the prior
written consent of the Purchaser, the Seller shall not permit any modification
with respect to any Mortgage Loan that would change the Mortgage Interest Rate,
defer or forgive the payment of principal or interest, reduce or increase the
outstanding principal balance (except for actual payments of principal) or
change the final maturity date on such Mortgage Loan. In the event of any such
modification which permits the deferral of interest or principal payments on any
Mortgage Loan, the Seller shall, on the Business Day immediately preceding the
Remittance Date in any month in which any such principal or interest payment has
been deferred, deposit in the Custodial Account from its own funds, in
accordance with Section 2.04, the difference between (a) such month's principal
and one (1) month's interest at the Mortgage Interest Rate on the unpaid
principal balance of such Mortgage Loan and (b) the amount paid by the
Mortgagor. The Seller shall be entitled to reimbursement for such advances to
the same extent as for all other advances made pursuant to Section 2.05. Without
limiting the generality of the foregoing, the Seller shall continue, and is
hereby authorized and empowered, to execute and deliver on behalf of itself and
the Purchaser, all instruments of satisfaction or cancellation, or of partial or
full release, discharge and all other comparable instruments, with respect to
the Mortgage Loans and with respect to the Mortgaged Properties. If reasonably
required by the Seller, the Purchaser shall furnish the Seller with any powers
of attorney and other documents necessary or appropriate to enable the Seller to
carry out its servicing and administrative duties under this Agreement.
In servicing and administering the Mortgage Loans, the Seller shall
employ procedures (including collection procedures) and exercise the same care
that it customarily employs and exercises in servicing and administering
mortgage loans for its own account, giving due
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consideration to Accepted Servicing Practices where such practices do not
conflict with the requirements of this Agreement, and the Purchaser's reliance
on the Seller. The Seller shall keep at its servicing office books and records
in which, subject to such reasonable regulations as it may prescribe, the Seller
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, Seller shall be under no obligation to deal with any
Person with respect to this Agreement or the Mortgage Loans unless the Seller
has been notified of such transfers as provided in this Section 2.01. The
Purchaser may sell and transfer, in whole or in part, the Mortgage Loans,
provided that no such sale and transfer shall be binding upon the Seller unless
such transferee shall agree in writing in the form of the Assignment and
Assumption Agreement attached to the Purchase Agreement as Exhibit G, to be
bound by the terms of this Agreement and the Purchase Agreement, and an executed
copy of the same shall have been delivered to the Seller. Upon receipt thereof,
the Seller shall mark its books and records to reflect the ownership of the
Mortgage Loans by such assignee, and the previous Purchaser shall be released
from its obligations hereunder. The Seller shall be required to remit all
amounts required to be remitted to the Purchaser hereunder to said transferee
commencing with the first Remittance Date falling after receipt of said copy of
the related Assignment and Assumption Agreement provided that the Seller
receives said copy no later than three (3) Business Days immediately prior to
the first day of the month of the related Remittance Date. This Agreement shall
be binding upon and inure to the benefit of the Purchaser and the Seller and
their permitted successors, assignees and designees. The Servicing File retained
by the Seller pursuant to this Agreement shall be appropriately marked and
identified in the Seller's computer system to clearly reflect the sale of the
related Mortgage Loan to the Purchaser. The Seller shall release from its
custody the contents of any Servicing File retained by it only in accordance
with this Agreement, except when such release is required in connection with a
repurchase of any such Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement. The Seller must have an internal quality control program that
verifies, on a regular basis, the existence and accuracy of the legal documents,
credit documents, property appraisals, and underwriting decisions. The program
must be capable of evaluating and monitoring the overall quality of its loan
production and servicing activities. The program is to ensure that the Mortgage
Loans are serviced in accordance with prudent mortgage banking practices and
accounting principles; guard against dishonest, fraudulent, or negligent acts;
and guard against errors and omissions by officers, employees, or other
authorized persons.
SECTION 2.02 Liquidation of Mortgage Loans. In the event that any
payment due under any Mortgage Loan and not postponed pursuant to Section 2.01
is not paid when the same becomes due and payable, or in the event the Mortgagor
fails to perform any other covenant or obligation under the Mortgage Loan and
such failure continues beyond any applicable grace period, the Seller shall take
such action as (1) the Seller would take under similar circumstances with
respect to a similar mortgage loan held for its own account for investment, (2)
shall be consistent with Accepted Servicing Practices and (3) the Seller shall
determine prudently to be in the best interest of Purchaser. In the event that
any payment due under any Mortgage Loan is not postponed pursuant to Section
2.01 and remains delinquent for a period of ninety (90) days or any other
default continues for a period of ninety (90) days beyond the expiration of any
grace or cure period (or such other period as is required by law in the
jurisdiction where the related Mortgaged Property is located), the Seller shall
commence foreclosure proceedings, provided that, prior to
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commencing foreclosure proceedings, the Seller shall notify the Purchaser in
writing of the Seller's intention to do so, and the Seller shall not commence
foreclosure proceedings if the Purchaser objects to such action within ten (10)
Business Days of receiving such notice or, if the provisions of the next two
paragraphs apply, in any event without the prior written consent of Purchaser.
In such connection, the Seller shall from its own funds make all necessary and
proper Servicing Advances, provided, however, that the Seller shall not be
required to expend its own funds in connection with any foreclosure or towards
the restoration or preservation of any Mortgaged Property, unless it shall
determine (a) that such preservation, restoration and/or foreclosure will
increase the proceeds of liquidation of the Mortgage Loan to Purchaser after
reimbursement to itself for such expenses and (b) that such expenses will be
recoverable by it either through Liquidation Proceeds (in respect of which it
shall have priority for purposes of withdrawals from the Custodial Account
pursuant to Section 2.05) or through Insurance Proceeds (in respect of which it
shall have similar priority). Notwithstanding anything to the contrary contained
herein, in connection with a foreclosure, in the event the Seller has reasonable
cause to believe that a Mortgaged Property is contaminated by hazardous or toxic
substances or wastes, or if the Purchaser otherwise requests an environmental
inspection or review of such Mortgaged Property to be conducted by a qualified
inspector, the Seller shall cause the Mortgaged Property to be so inspected at 7
the expense of the Purchaser. Upon completion of the inspection, the Seller
shall promptly provide the Purchaser with a written report of the environmental
inspection. After reviewing the environmental inspection report, the Purchaser
shall determine how the Seller shall proceed with respect to the Mortgaged
Property. In the event (a) the environmental inspection report indicates that
the Mortgaged Property is contaminated by hazardous or toxic substances or
wastes and (b) the Purchaser directs the Seller to proceed with foreclosure or
acceptance of a deed in lieu of foreclosure, the Seller shall be reimbursed for
all reasonable costs associated with such foreclosure or acceptance of a deed in
lieu of foreclosure and any related environmental clean up costs, as applicable,
from the related Liquidation Proceeds, or if the Liquidation Proceeds are
insufficient to fully reimburse the Seller, the Seller shall be entitled to be
reimbursed from amounts in the Custodial Account pursuant to Section 2.05 hereof
and to the extent amounts in the Custodial Account are insufficient to fully
reimburse the Seller, the Seller shall be entitled to be reimbursed by the
Purchaser for such deficiencies (upon presentation of evidence of such
deficiency). In the event the Purchaser directs the Seller not to proceed with
foreclosure or acceptance of a deed in lieu of foreclosure, the Seller shall be
reimbursed for all Servicing Advances made with respect to the related Mortgaged
Property from the Custodial Account pursuant to Section 2.05 hereof.
SECTION 2.03 Collection of Mortgage Loan Payments. Continuously from
the Closing Date the Seller shall proceed diligently to collect all payments due
under each of the Mortgage Loans when the same shall become due and payable and
shall take special care in ascertaining and estimating Escrow Payments and all
other charges that will become due and payable with respect to the Mortgage
Loans and each related Mortgaged Property, to the end that the installments
payable by the Mortgagors will be sufficient to pay such charges as and when
they become due and payable.
SECTION 2.04 Establishment of and Deposits to Custodial Account. The
Seller shall segregate and hold all funds collected and received pursuant to the
Mortgage Loans separate and
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apart from any of its own funds and general assets and shall establish and
maintain one or more Custodial Accounts, in the form of time deposit or demand
accounts, titled "D&N Bank in trust for Purchaser of Conventional Commercial
Mortgage Loans, and various Mortgagors". The Custodial Account shall be
established with a Qualified Depository acceptable to the Purchaser. Any funds
deposited in the Custodial Account shall at all times be fully insured to the
full extent permitted under applicable law; provided, however, that to the
extent the Custodial Account is established with the Corporate Trust Department
of the Seller, the Seller may maintain the Custodial Account as a single
account. Funds deposited in the Custodial Account may be drawn on by the Seller
in accordance with Section 2.05. The creation of any Custodial Account shall be
evidenced by a certification in the form of Exhibit 2 hereto, in the case of an
account established with the Seller, or by a letter agreement in the form of
Exhibit 3 hereto, in the case of an account held by a depository other than the
Seller. A copy of such certification or letter agreement shall be furnished to
the Purchaser and, upon request, to any subsequent Purchaser.
The Seller shall deposit in the Custodial Account within one Business
Day of receipt, and retain therein, the following collections received by the
Seller and payments made by the Seller after the Closing Date, other than
payments of principal and interest due on or before the Closing Date, or
received by the Seller prior to the Closing Date but allocable to a period
subsequent thereto:
(i) all payments on account of principal on the Mortgage Loans,
including all Principal Prepayments;
(ii) all payments on account of interest on the Mortgage;
(iii) all Liquidation Proceeds and any amount received with respect
to REO Property;
(iv) all Insurance Proceeds including amounts required to be
deposited pursuant to Section 2.10 (other than proceeds to be
held in the Escrow Account and applied to the restoration or
repair of the Mortgaged Property or released to the Mortgagor
in accordance with Section 2.14), and Section 2.11;
(v) all Condemnation Proceeds which are not applied to the
restoration or repair of the Mortgaged Property or released to
the Mortgagor in accordance with Section 2.14;
(vi) any amount required to be deposited in the Custodial Account
pursuant to Section 2.01, 2.09, 2.14, 2.16, 3.01, 3.03 or
4.02;
(vii) any amounts payable in connection with the repurchase of any
Mortgage Loan pursuant to Section 8.03 of the Purchase
Agreement; and
(viii) any amounts required to be deposited by the Seller pursuant to
Section 2.11 in connection with the deductible clause in any
blanket hazard insurance policy. The foregoing requirements
for deposit into the Custodial Account shall be exclusive, it
being understood and agreed that, without limiting the
generality of the
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foregoing, Ancillary Income need not be deposited by
the Seller into the Custodial Account. Any interest paid on
funds deposited in the Custodial Account by the depository
institution shall accrue to the benefit of the Seller and the
Seller shall be entitled to retain and withdraw such interest
from the Custodial Account pursuant to Section 2.05.
SECTION 2.05 Permitted Withdrawals From Custodial Account. Subject to
Section 2.16 hereof, the Seller shall, from time to time, withdraw funds from
the Custodial Account for the following purposes:
(i) to make payments to the Purchaser in the amounts and in the
manner provided for in Section 3.01;
(ii) to pay to itself the Servicing Fee;
(iii) to reimburse itself for advances of the Seller's funds made
pursuant to Section 3.03, the Seller's right to reimburse
itself pursuant to this subclause (iii) being limited to
amounts received on the related Mortgage Loan which represent
late payments of principal and/or interest in respect of which
any such advance was made, it being understood that, in the
case of any such reimbursement, the Seller's right thereto
shall be prior to the rights of Purchaser, except that, where
the Seller is required to repurchase a Mortgage Loan pursuant
to Section 8.03 of the Purchase Agreement or Section 4.02 of
this Agreement, respectively, the Seller's right to such
reimbursement shall be subsequent to the payment to the
Purchaser of the Repurchase Price pursuant to such sections
and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
(iv) to reimburse itself for unreimbursed Servicing Advances
(except to the extent reimbursed pursuant to Section 2.07),
any accrued but unpaid Servicing Fees and for unreimbursed
advances of Seller funds made pursuant to Sections 2.16, 2.16
or 3.03, the Seller's right to reimburse itself pursuant to
this subclause (iv) with respect to any Mortgage Loan being
limited to related Liquidation Proceeds, Condemnation
Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Seller from the Mortgagor or otherwise
relating to the Mortgage Loan, it being understood that, in
the case of any such reimbursement, the Seller's right thereto
shall be prior to the rights of the Purchaser except that,
where the Seller is required to repurchase a Mortgage Loan
pursuant to Section 8.03 of the Purchase Agreement or Section
4.02 of this Agreement, respectively, the Seller's right to
such reimbursement shall be subsequent to the payment to the
Purchaser of the Repurchase Price pursuant to such sections
and all other amounts required to be paid to the Purchaser
with respect to such Mortgage Loan;
(v) to pay itself any interest earned on funds deposited in the
Custodial Account (all such interest to be withdrawn monthly
not later than each Remittance Date); and
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(vi) to clear and terminate the Custodial Account upon the
termination of this Agreement. In the event that the Custodial
Account is interest bearing, on each Remittance Date, the
Seller shall withdraw all funds from the Custodial Account
except for those amounts which, pursuant to Section 3.01, the
Seller is not obligated to remit on such Remittance Date. The
Seller may use such withdrawn funds only for the purposes
described in this Section 2.05.
SECTION 2.06 Establishment of and Deposits to Escrow Account. The
Seller shall segregate and hold all funds collected and received pursuant to a
Mortgage Loan constituting Escrow Payments separate and apart from any of its
own funds and general assets and shall establish and maintain one or more Escrow
Accounts, in the form of time deposit or demand accounts. The Escrow Account or
Accounts shall be established with a Qualified Depositary, in a manner which
shall provide maximum available insurance thereunder. Funds deposited in the
Escrow Accounts may be drawn on by the Seller in accordance with Section 2.07.
The creation of any Escrow Account shall be evidenced by a certification in the
form of Exhibit 2 hereto, in the case of an account established with the Seller,
or by a letter agreement in the form of Exhibit 5 hereto, in the case of an
account held by a depository other than the Seller. A copy of such certification
shall be furnished to the Purchaser and, upon request, to any subsequent
Purchaser. The Seller shall deposit in the Escrow Account or Accounts within one
Business Day of receipt, and retain therein:
(i) all Escrow Payments collected on account of the Mortgage
Loans, for the purpose of effecting timely payment of any such
items as required under the terms of this Agreement; and
(ii) all amounts representing Insurance Proceeds or Condemnation
Proceeds which are to be applied to the restoration or repair
of any Mortgaged Property. The Seller shall make withdrawals
from the Escrow Account only to effect such payments as are
required under this Agreement, as set forth in Section 2.07.
The Seller shall be entitled to retain any interest paid on
funds deposited in the Escrow Account by the depository
institution, other than interest on escrowed funds required by
law to be paid to the Mortgagor. To the extent required by
law, the Seller shall pay from its own funds interest on
escrowed funds to the Mortgagor notwithstanding that the
Escrow Account may be noninterest bearing or that interest
paid thereon is insufficient for such purposes.
SECTION 2.07 Permitted Withdrawals From Escrow Account. Withdrawals
from each Escrow Account may be made by the Seller only:
(i) to effect timely payments of ground rents, taxes, assessments,
water rates, fire and hazard insurance premiums or other items
constituting Escrow Payments for the related Mortgage;
(ii) to reimburse the Seller for any Servicing Advance made by the
Seller pursuant to Section 2.08 with respect to a related
Mortgage Loan, but only from amounts
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received on the related Mortgage Loan which represent late
collections of Escrow Payments thereunder;
(iii) to refund to the related Mortgagor any funds found to be in
excess of the amounts required under the terms of the related
Mortgage Loan or applicable federal or state law or judicial
or administrative ruling;
(iv) for transfer to the Custodial Account and application to
reduce the principal balance of the Mortgage Loan in
accordance with the terms of the related Mortgage and Mortgage
Note;
(v) for application to restoration or repair of the related
Mortgaged Property in accordance with the procedures outlined
in Section 2.14;
(vi) to pay to the Seller, or any Mortgagor to the extent required
by law, any interest paid on the funds deposited in the Escrow
Account; and
(vii) to clear and terminate the Escrow Account on the termination
of this Agreement.
SECTION 2.08 Payment of Taxes, Insurance and Other Charges, Tax
Contracts. With respect to each Mortgage Loan, the Seller shall maintain
accurate records reflecting the status of ground rents, taxes, assessments,
water rates, sewer rents, and other charges, as applicable, which are or may
become a lien upon the Mortgaged Property and the status of fire and hazard
insurance coverage and shall obtain, from time to time, all bills for the
payment of such charges (including renewal premiums) and shall effect payment
thereof prior to the applicable penalty or termination date, employing for such
purpose deposits of the Mortgagor in the Escrow Account which shall have been
estimated and accumulated by the Seller in amounts sufficient for such purposes,
as allowed under the terms of the Mortgage. To the extent that a Mortgage does
not provide for Escrow Payments, the Seller shall determine that any such
payments relating to taxes or maintaining insurance policies are made by the
Mortgagor at the time they first become due. The Seller assumes full
responsibility for the timely payment of all such bills to the extent it has or
should have notice of such bills and shall effect timely payment of all such
charges irrespective of each Mortgagor's faithful performance in the payment of
same or the making of the Escrow Payments, and the Seller shall make advances
from its own funds to effect such payments, such advances to be reimbursable to
the same extent as Servicing Advances.
SECTION 2.09 Protection of Accounts. The Seller may transfer the
Custodial Account or the Escrow Account to a different Qualified Depository from
time to time. Such transfer shall be made only upon obtaining the consent of the
Purchaser, which consent shall not be withheld unreasonably. The Seller shall
bear any expenses, losses or damages sustained by the Purchaser because the
Custodial Account and/or the Escrow Account are not demand deposit accounts.
SECTION 2.10 Maintenance of Hazard Insurance. The Seller shall cause to
be maintained for each Mortgage Loan, hazard insurance such that all buildings
upon the Mortgaged Property are insured by a generally acceptable insurer rated
A:VI or better in the current Best's against loss
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by fire and hazards of extended coverage, in an amount which is at least equal
to the lesser of (i) the maximum insurable value of the improvements securing
such Mortgage Loan and (ii) the greater of (a) the outstanding principal balance
of the Mortgage Loan and (b) an amount such that the proceeds thereof shall be
sufficient to prevent the Mortgagor or the loss payee from becoming a
co-insurer. If required by the Flood Disaster Protection Act of 1973, as
amended, each Mortgage Loan is covered by a flood insurance policy meeting the
requirements of the current guidelines of the Federal Insurance Administration
in effect with a generally acceptable insurance carrier rated A:VI or better in
Best's in an amount representing coverage not less than the lesser of (i) the
outstanding principal balance of the related Mortgage Loan and (ii) the maximum
amount of insurance which is available under the Flood Disaster Protection Act
of 1973, as amended. If at any time during the term of the Mortgage Loan, the
Seller determines in accordance with applicable law that a Mortgaged Property is
located in a special flood hazard area and is not covered by flood insurance or
is covered in an amount less than the amount required by the Flood Disaster
Protection Act of 1973, as amended, the Seller shall notify the related
Mortgagor that the Mortgagor must obtain such flood insurance coverage, and if
said Mortgagor fails to obtain the required flood insurance coverage within
forty five (45) days after such notification, the Seller shall immediately
purchase the required flood insurance on the Mortgagor's behalf. The Seller
shall cause to be maintained on each Mortgaged Property such other or additional
insurance as may be required pursuant to such applicable laws and regulations as
shall at any time be in force and as shall require such additional insurance, or
pursuant to the requirements of any primary mortgage guaranty insurer. All
policies required hereunder shall name the Seller and its successors and assigns
as mortgagee and shall be endorsed with non-contributory standard Michigan
mortgagee clauses which shall provide for at least thirty (30) days' prior
written notice of any cancellation, reduction in amount or material change in
coverage. The Seller shall not interfere with the Mortgagor's freedom of choice
in selecting either his insurance carrier or agent, provided, however, that the
Seller shall not accept any such insurance policies from insurance companies
unless such companies are rated A:VI or better in Best's and are licensed to do
business in the jurisdiction in which the Mortgaged Property is located. The
Seller shall determine that such policies provide sufficient risk coverage and
amounts, that they insure the property owner, and that they properly describe
the property address. To the extent reasonably possible the Seller shall furnish
to the Mortgagor a formal notice of expiration of any such insurance in
sufficient time for the Mortgagor to arrange for renewal coverage by the
expiration date; provided, however, that in the event that no such notice is
furnished by the Seller, the Seller shall ensure that replacement insurance
policies are in place in the required coverages and the Seller shall be solely
liable for any losses in the event such coverage is not provided.
Pursuant to Section 2.04, any amounts collected by the Seller under any
such policies (other than amounts to be deposited in the Escrow Account and
applied to the restoration or repair of the related Mortgaged Property, or
property acquired in liquidation of the Mortgage Loan, or to be released to the
Mortgagor, in accordance with the Seller's normal servicing procedures as
specified in Section 2.14) shall be deposited in the Custodial Account subject
to withdrawal pursuant to Section 2.05.
SECTION 2.11 Maintenance of Mortgage Impairment Insurance. In the event
that the Seller shall obtain and maintain a blanket policy insuring against
losses arising from fire and
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hazards covered under extended coverage on all of the Mortgage Loans, then, to
the extent such policy provides coverage in an amount equal to the amount
required pursuant to Section 2.11 and otherwise complies with all other
requirements of Section 2.11, it shall conclusively be deemed to have satisfied
its obligations as set forth in Section 2.11. Any amounts collected by the
Seller under any such policy relating to a Mortgage Loan shall be deposited in
the Custodial Account subject to withdrawal pursuant to Section 2.05. Such
policy may contain a deductible clause, in which case, in the event that there
shall not have been maintained on the related Mortgaged Property a policy
complying with Section 2.11, and there shall have been a loss which would have
been covered by such policy, the Seller shall deposit in the Custodial Account
at the time of such loss the amount not otherwise payable under the blanket
policy because of such deductible clause, such amount to be deposited from the
Seller's funds, without reimbursement therefor. Upon request of the Purchaser,
the Seller shall cause to be delivered to the Purchaser a certified true copy of
such policy and a statement from the insurer thereunder that such policy shall
in no event be terminated or materially modified without thirty (30) days' prior
written notice to the Purchaser.
SECTION 2.12 Maintenance of Fidelity Bond and Errors and Omissions
Insurance. The Seller shall maintain with responsible companies, at its own
expense, a blanket Fidelity Bond and an Errors and Omissions Insurance Policy,
with broad coverage on all officers, employees or other persons acting in any
capacity requiring such persons to handle funds, money, documents or papers
relating to the Mortgage Loans ("Seller Employees"). Any such Fidelity Bond and
Errors and Omissions Insurance Policy shall be in the form of the Mortgage
Banker's Blanket Bond and shall protect and insure the Seller against losses,
including forgery, theft, embezzlement, fraud, errors and omissions and
negligent acts of such Seller Employees. Such Fidelity Bond and Errors and
Omissions Insurance Policy also shall protect and insure the Seller against
losses in connection with the release or satisfaction of a Mortgage Loan without
having obtained payment in full of the indebtedness secured thereby. No
provision of this Section 2.12 requiring such Fidelity Bond and Errors and
Omissions Insurance Policy shall diminish or relieve the Seller from its duties
and obligations as set forth in this Agreement. Upon the request of the
Purchaser, the Seller shall cause to be delivered to the Purchaser a certified
true copy of such Fidelity Bond and Errors and Omissions Insurance Policy and a
statement from the surety and the insurer that such Fidelity Bond and Errors and
Omissions Insurance Policy shall in no event be terminated or materially
modified without thirty (30) days' prior written notice to the Purchaser. In the
event that the surety or insurer charges the Seller a fee for providing such
evidence, the Purchaser shall reimburse the Seller for the reasonable expense
incurred by the Seller in furnishing such evidence.
SECTION 2.13 Inspections. The Seller shall inspect the Mortgaged
Property as often as deemed necessary by the Seller to assure itself that the
value of the Mortgaged Property is being preserved. In addition, if any Mortgage
Loan is more than sixty (60) days delinquent, the Seller immediately shall
inspect the Mortgaged Property and shall conduct subsequent inspections in
accordance with Accepted Servicing Practices or as may be required by the
primary mortgage guaranty insurer. The Seller shall keep a written report of
each such inspection.
SECTION 2.14 Restoration of Mortgaged Property. The Seller need not
obtain the approval of the Purchaser prior to releasing any Insurance Proceeds
or Condemnation Proceeds
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to the Mortgagor to be applied to the restoration or repair of the Mortgaged
Property if such release is in accordance with Accepted Servicing Practices and
the terms of this Agreement. At a minimum, the Seller shall comply with the
following conditions in connection with any such release of Insurance Proceeds
or Condemnation Proceeds:
(i) the Seller shall receive satisfactory independent verification
of completion of repairs and issuance of any required
approvals with respect thereto;
(ii) the Seller shall take all steps necessary to preserve the
priority of the lien of the Mortgage, including, but not
limited to requiring waivers with respect to mechanics' and
materialmen's liens;
(iii) the Seller shall verify that the Mortgage Loan is not in
default; and
(iv) pending repairs or restoration, the Seller shall place the
Insurance Proceeds or Condemnation Proceeds in the Escrow
Account.
If the Purchaser is named as an additional mortgagee, the Seller is
hereby empowered to endorse any loss draft issued in respect of such a claim in
the name of the Purchaser.
SECTION 2.15 Deteriorating Mortgage Loans. If, in the course of
carrying out its obligations under this Agreement, the Seller discovers that a
Mortgage Loan (or an interest therein) (i) is or has been, at any time during
the preceding twelve months, (a) classified, (b) in nonaccrual status or (c)
renegotiated due to the financial deterioration of the Mortgagor or (ii) has
been, more than once during the preceding twelve months, more than 30 days past
due in the payment of principal and interest, the Seller shall notify the
Purchaser as soon as possible and cooperate with the Purchaser in the
disposition of any such Mortgage Loan as soon as possible.
SECTION 2.16 Title, Management and Disposition of REO Property. In the
event that title to any Mortgaged Property is acquired in foreclosure or by deed
in lieu of foreclosure, the deed or certificate of sale shall be taken in the
name of the Purchaser, or in the event the Purchaser is not authorized or
permitted to hold title to real property in the state where the REO Property is
located, or would be adversely affected under the "doing business" or tax laws
of such state by so holding title, the deed or certificate of sale shall be
taken in the name of such Person or Persons as shall be consistent with an
Opinion of Counsel obtained by the Seller from any attorney duly licensed to
practice law in the state where the REO Property is located. The Person or
Persons holding such title other than the Purchaser shall acknowledge in writing
that such title is being held as nominee for the Purchaser.
The Seller shall manage, conserve, protect and operate each REO
Property for the Purchaser solely for the purpose of its prompt disposition and
sale. The Seller, either itself or through an agent selected by the Seller and
reasonably acceptable to the Purchaser, shall manage, conserve, protect and
operate the REO Property in the same manner that it manages, conserves, protects
and operates other foreclosed property for its own account, and in the same
manner that similar property in the same locality as the REO Property is
managed. The Seller shall attempt
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to sell the same (and may temporarily rent the same for a period not greater
than one (1) year, except as otherwise provided below) on such terms and
conditions as the Seller deems to be in the best interest of the Purchaser.
The Seller shall use its best efforts to dispose of the REO Property as
soon as possible and shall sell such REO Property in any event within one year
after title has been taken to such REO Property, unless the Seller determines,
and gives an appropriate notice to the Purchaser to such effect, that a longer
period is necessary for the orderly liquidation of such REO Property. If a
period longer than one (1) year is permitted under the foregoing sentence and is
necessary to sell any REO Property, the Seller shall report monthly to the
Purchaser as to the progress being made in selling such REO Property.
The Seller shall also maintain on each REO Property fire and hazard
insurance with extended coverage in an amount which is at least equal to the
maximum insurable value of the improvements which are a part of such property,
liability insurance and, to the extent required and available under the Flood
Disaster Protection Act of 1973, as amended, flood insurance in the amount
required above. The disposition of REO Property shall be carried out by the
Seller at such price, and upon such terms and conditions, as the Seller deems to
be in the best interests of the Purchaser. The proceeds of sale of the REO
Property shall be promptly deposited in the Custodial Account. As soon as
practical thereafter the expenses of such sale shall be paid and the Seller
shall reimburse itself pursuant to Section 2.05(iii) or 2.05(iv) hereof, as
applicable, for any related unreimbursed Servicing Advances, unpaid Servicing
Fees and unreimbursed advances made pursuant to this Section, and on the
Remittance Date immediately following the Due Period in which such sale proceeds
are received the net cash proceeds of such sale remaining in the Custodial
Account shall be distributed to the Purchaser; provided that such distribution
shall, in any event, be made within ninety (90) days from and after the closing
of the sale of such REO Property.
In addition to the Seller's obligations set forth in this Section 2.16,
the Seller shall deliver written notice to the Purchaser whenever title to any
Mortgaged Property is acquired in foreclosure or by deed in lieu of foreclosure
together with a copy of the drive-by appraisal of the related Mortgaged Property
obtained by the Seller on or prior to the date of such acquisition.
Notwithstanding anything to the contrary contained herein, the Purchaser may, at
the Purchaser's sole option, terminate the Seller as servicer of any such REO
Property without payment of any Termination Fee with respect thereto, provided
that (i) the Purchaser gives the Seller notice of such termination within ten
(10) Business Days of receipt of said written notice from the Seller which
termination shall be effective no more than fifteen (15) Business Days from and
after the date of said notice from the Purchaser and (ii) the Seller shall on
the date said termination takes effect be reimbursed by Purchaser for any
unreimbursed advances of the Seller's funds made pursuant to Section 3.02 and
any unreimbursed Servicing Advances in each case relating to the Mortgage Loan
underlying such REO Property. In the event of any such termination, the
provisions of Section 8.06 hereof shall apply to said termination and the
transfer of servicing responsibilities with respect to such REO Property to the
Purchaser or its designee.
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With respect to each REO Property, the Seller shall deposit all funds
collected and received in connection with the operation of the REO Property in
the Custodial Account. The Seller shall cause to be deposited on a daily basis
upon the receipt thereof in the Custodial Account all revenues received with
respect to the conservation and disposition of the related REO Property.
SECTION 2.17 Permitted Withdrawals with respect to REO Property. For so
long as the Seller is acting as servicer of any Mortgage Loan relating to any
REO Property, the Seller shall withdraw funds on deposit in the Custodial
Account with respect to each related REO Property necessary for the proper
operation, management and maintenance of the REO Property, including the cost of
maintaining any hazard insurance pursuant to Section 2.10 and the fees of any
managing agent acting on behalf of the Seller. The Seller shall make monthly
distributions on each Remittance Date to the Purchaser of the net cash flow from
the REO Property (which shall equal the revenues from such REO Property net of
the expenses described in Section 2.16 and of any reserves reasonably required
from time to time to be maintained to satisfy anticipated liabilities for such
expenses).
SECTION 2.18 Real Estate Owned Reports. For so long as the Seller is
acting as servicer of any Mortgage Loan relating to any REO Property, the Seller
shall furnish to the Purchaser on or before the 15th day of each month a
statement with respect to any REO Property covering the operation of such REO
Property for the previous month and the Seller's efforts in connection with the
sale of such REO Property and any rental of such REO Property incidental to the
sale thereof for the previous month. That statement shall be accompanied by such
other information as the Purchaser shall reasonably request.
SECTION 2.19 Liquidation Reports. For so long as the Seller is acting
as servicer of any Mortgage Loan relating to any REO Property, upon the
foreclosure sale of any Mortgaged Property or the acquisition thereof by the
Purchaser pursuant to a deed in lieu of foreclosure, the Seller shall submit to
the Purchaser a liquidation report with respect to such Mortgaged Property.
SECTION 2.20 Reports Of Foreclosures and Abandonments. For so long as
the Seller is acting as servicer of any Mortgage Loan relating to any REO
Property, following the foreclosure sale or abandonment of any Mortgaged
Property, the Seller shall report such foreclosure or abandonment as required
pursuant to Section 6050J of the Internal Revenue Code of 1986, as amended
("Code").
SECTION 2.21 Notification of Adjustments. With respect to each Variable
Rate Mortgage Loan, the Seller shall adjust the Mortgage Interest Rate on the
related Interest Rate Adjustment Date and shall adjust the Monthly Payment
accordingly in compliance with the requirements of applicable law and the
related Mortgage and Mortgage Note. If, pursuant to the terms of the Mortgage
Note, another index is selected for determining the Mortgage Interest Rate, the
same index will be used with respect to each Mortgage Note which requires a new
index to be selected, provided that such selection does not conflict with the
terms of the related Mortgage Note. The Seller shall execute and deliver any and
all necessary notices required under applicable law and the terms of the related
Mortgage Note and Mortgage regarding the Mortgage Interest Rate and the Monthly
Payment adjustments. The Seller shall promptly upon written request therefor,
deliver to the Purchaser such notifications and any additional applicable data
regarding
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such adjustments and the methods used to calculate and implement such
adjustments. Upon the discovery by the Seller or the Purchaser that the Seller
has failed to adjust a Mortgage Interest Rate or a Monthly Payment pursuant to
the terms of the related Mortgage Note and Mortgage, the Seller shall
immediately deposit in the Custodial Account from its own funds the amount of
any interest loss caused the Purchaser thereby.
SECTION 2.22 Notification of Maturity Date. With respect to each Fixed
Rate Mortgage Loan, the Purchaser shall execute and deliver to the Mortgagor any
and all necessary notices required under applicable law and the terms of the
related Mortgage Note and Mortgage regarding the maturity date if required under
applicable law.
ARTICLE III
PAYMENTS TO PURCHASER
SECTION 3.01 Remittances. On each Remittance Date the Seller shall
remit by wire transfer of immediately available funds to the Purchaser (a) all
amounts deposited in the Custodial Account as of the close of business on the
Determination Date, except Principal Prepayments received on or after the first
day of the month in which the Remittance Date occurs which shall be remitted to
the Purchaser on the next following Remittance Date; plus (b) an amount
representing compensating interest (up to a maximum amount equal to the
aggregate Servicing Fee for the Mortgage Loans held by the Purchaser with
respect to such Mortgage Loans) which, when added to all amounts allocable to
interest received in connection with such Principal Prepayment equals thirty
(30) days' interest at the Mortgage Interest Rate net of the Servicing Fee on
the amount of principal so prepaid (net of charges against or withdrawals from
the Custodial Account pursuant to Section 2.05), plus (c) all amounts, if any,
which the Servicer is obligated to distribute pursuant to Section 3.03 and minus
(d) any amounts attributable to Monthly Payments collected but due on a Due Date
or Dates subsequent to the first day of the month of the Remittance Date, which
amounts shall be remitted on the Remittance Date next succeeding the Due Period
for such amounts.
With respect to any Principal Prepayment in full, the Seller shall
remit such Principal Prepayment to the Purchaser within five (5) Business Days
of receipt of such Principal Prepayment by the Seller.
With respect to any remittance received by the Purchaser after the
second Business Day following the Business Day on which such payment was due,
the Seller shall pay to the Purchaser interest on any such late payment at an
annual rate equal to the Prime Rate, adjusted as of the date of each change,
plus one (1) percentage point, but in no event greater than the maximum amount
permitted by applicable law. Such interest shall be deposited in the Custodial
Account by the Seller on the date such late payment is made and shall cover the
period commencing with and including the day following such second Business Day
and ending with the Business Day on which such payment is made, exclusive of
such Business Day; provided, however, that in the event that the Seller remits
such amounts after 11:00 A.M. (Michigan time) on any day, such period shall
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include such day. Such interest shall be remitted along with the distribution
payable on the next succeeding Remittance Date. The payment by the Seller of any
such interest shall not be deemed an extension of time for payment or a waiver
of any Event of Default by the Seller.
SECTION 3.02 Statements to Purchaser. Not later than the twentieth day
of each month, the Seller shall furnish by modem and/or diskette to the
Purchaser or its designee a listing of the outstanding Mortgage Loans, including
with respect to each Mortgage Loan: the Mortgage Loan number, the actual
balance, the actual paid-through dates, the Mortgage Interest Rate and principal
and interest payment, and with respect to Variable Rate Mortgage Loans, the next
Interest Rate Adjustment Date, the Mortgage Interest Rate and the principal and
interest payment effective as of the next Interest Rate Adjustment Date (if
available), and shall furnish to the Purchaser manually a Monthly Remittance
Advice, with a trial balance report attached thereto, in the form of Exhibit 1
annexed hereto as to the preceding remittance and the period ending on the
preceding Determination Date. In addition, not more than sixty (60) days after
the end of each calendar year, the Seller shall furnish to each Person who was a
Purchaser at any time during such calendar year an annual statement in
accordance with the requirements of applicable federal income tax law as to the
aggregate of remittances for the applicable portion of such year.
Such obligation of the Seller shall be deemed to have been satisfied to
the extent that substantially comparable information shall be provided by the
Seller pursuant to any requirements of the Code as from time to time are in
force.
The Seller shall prepare and file, with respect to each Mortgage Loan,
any and all tax returns, information statements or other filings required to be
delivered to any governmental taxing authority or to the Purchaser pursuant to
any applicable law with respect to the Mortgage Loans and the transactions
contemplated hereby. In addition, the Seller shall provide the Purchaser with
such information concerning the Mortgage Loans as is necessary for the Purchaser
to prepare its federal income tax return as the Purchaser may reasonably request
from time to time.
SECTION 3.03 Advances by Seller. On the Business Day immediately
preceding each Remittance Date, the Seller shall deposit in the Custodial
Account from its own funds an amount equal to all Monthly Payments which were
due on the Mortgage Loans during the applicable Due Period and which were
delinquent at the close of business on the immediately preceding Determination
Date or which were deferred pursuant to Section 2.01, provided that the Seller
shall only be required to make such advances with respect to a Mortgage Loan
until such advances are, in the Seller's good faith determination as evidenced
by an Officer's Certificate of the Seller delivered to the Purchaser on the
Business Day next following the Determination Date on or prior to which said
determination is or was made, deemed to be a Nonrecoverable Advance. The
Seller's obligation to make such advances as to any Mortgage Loan will continue
through the earlier of (i) the disposition of such Mortgage Loan and (ii) the
date of foreclosure sale with respect to such Mortgage Loan. Except as otherwise
provided herein, the Seller shall be entitled to first priority reimbursement
pursuant to Section 2.05 hereof for principal and interest advances and for
servicing advances from recoveries from the related mortgagor or from all
Liquidation Proceeds and other payments or recoveries (including Insurance
Proceeds and Condemnation Proceeds) with respect to the related Mortgage Loan.
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ARTICLE IV
GENERAL SERVICING PROCEDURES
SECTION 4.01 Transfers of Mortgaged Property. The Seller shall be
required to enforce any "due-on-sale" provision contained in any Mortgage or
Mortgage Note and to deny assumption by the person to whom the Mortgaged
Property has been or is about to be sold whether by absolute conveyance or by
contract of sale, whether or not the Mortgagor remains liable on the Mortgage
and the Mortgage Note. When the Mortgaged Property has been conveyed by the
Mortgagor, the Seller shall, to the extent it has knowledge of such conveyance,
exercise its rights to accelerate the maturity of such Mortgage Loan under the
"due-on-sale" clause applicable thereto.
If the Seller reasonably believes it is unable under applicable law to
enforce such "due-on-sale" clause, the Seller, in the Purchaser's name, shall,
to the extent permitted by applicable law, enter into (i) an assumption and
modification agreement with the person to whom such property has been conveyed,
pursuant to which such person becomes liable under the Mortgage Note and the
original Mortgagor remains liable thereon or (ii) in the event the Seller is
unable under applicable law to require that the original Mortgagor remain liable
under the Mortgage Note, a substitution of liability agreement with the
purchaser of the Mortgaged Property pursuant to which the original Mortgagor is
released from liability and the purchaser of the Mortgaged Property is
substituted as Mortgagor and becomes liable under the Mortgage Note. In
connection with any such assumption, neither the Mortgage Interest Rate borne by
the related Mortgage Note, the term of the Mortgage Loan nor the outstanding
principal amount of the Mortgage Loan shall be changed.
To the extent that any Mortgage Loan is assumable, the Seller shall
inquire diligently into the creditworthiness of the proposed transferee, and
shall use the underwriting criteria for approving the credit of the proposed
transferee which are used by the Seller with respect to underwriting mortgage
loans of the same type as the Mortgage Loans. If the credit of the proposed
transferee does not meet such underwriting criteria, the Seller diligently
shall, to the extent permitted by the Mortgage or the Mortgage Note and by
applicable law, accelerate the maturity of the Mortgage Loan.
SECTION 4.02 Satisfaction of Mortgages and Release of Mortgage Files.
Upon the payment in full of any Mortgage Loan, or the receipt by the Seller of a
notification that payment in full will be escrowed in a manner customary for
such purposes, the Seller shall notify the Purchaser in the Monthly Remittance
Advice as provided in Section 3.02, and may request the release of any Mortgage
Loan Documents from the Purchaser in accordance with this Section 4.02 hereof.
The Seller shall obtain discharge of the related Mortgage Loan as of record
within any related time limit required by applicable law.
If the Seller satisfies or releases a Mortgage without first having
obtained payment in full of the indebtedness secured by the Mortgage or should
the Seller otherwise prejudice any rights
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the Purchaser may have under the mortgage instruments, upon written demand of
the Purchaser, the Seller shall repurchase the related Mortgage Loan at the
Repurchase Price by deposit thereof in the Custodial Account within two (2)
Business Days of receipt of such demand by the Purchaser. Upon such repurchase,
all funds maintained in the Escrow Account with respect to such repurchased
Mortgage Loan shall be transferred to the Seller. The Seller shall maintain the
Fidelity Bond and Errors and Omissions Insurance Policy as provided for in
Section 2.12 insuring the Seller against any loss it may sustain with respect to
any Mortgage Loan not satisfied in accordance with the procedures set forth
herein.
SECTION 4.03 Servicing Compensation. As consideration for servicing the
Mortgage Loans hereunder, the Seller shall withdraw the Servicing Fee with
respect to each Mortgage Loan from the Custodial Account pursuant to Section
2.05 hereof. Such Servicing Fee shall be payable monthly, computed on the basis
of the same principal amount and period in respect of which any related interest
payment on a Mortgage Loan is computed. The Servicing Fee shall be pro-rated
when servicing is for less than one month. The obligation of the Purchaser to
pay, and the Seller's right to withdraw, the Servicing Fee is limited to, and
the Servicing Fee is payable solely from, the interest portion (including
recoveries with respect to interest from Liquidation Proceeds, to the extent
permitted by Section 2.05), of such Monthly Payment collected by the Seller, or
as otherwise provided under Section 2.05.
Additional servicing compensation in the form of Ancillary Income shall
be retained by the Seller. The Seller shall be required to pay all expenses
incurred by it in connection with its servicing activities hereunder and shall
not be entitled to reimbursement thereof except as specifically provided for
herein.
SECTION 4.04 Annual Statement as to Compliance. The Seller shall
deliver to the Purchaser, on or before March 31 each year beginning with March
31, 1998, an Officer's Certificate, stating that (i) a review of the activities
of the Seller during the preceding calendar year and of performance under this
Agreement has been made under such officer's supervision, and (ii) the Seller
has complied in all material respects with the provisions of Article II and
Article IV, and (iii) to the best of such officer's knowledge, based on such
review, the Seller has fulfilled all its obligations under this Agreement
throughout such year or part thereof, or, if there has been a default in the
fulfillment of any such obligation, specifying each such default known to such
officer and the nature and status thereof and the action being taken by the
Seller to cure such default.
SECTION 4.05 Annual Independent Public Accountants' Servicing Report.
On or before March 31 of each year, beginning with the first March 31 that
occurs at least six months after the Closing Date, the Seller at its expense
shall cause a firm of independent public accountants (who may also render other
services to the Seller, or any affiliate thereof) which is a member of the
American Institute of Certified Public Accountants to furnish a statement to the
Purchaser to the effect that such firm has, as part of their examination of the
financial statements of the Seller performed tests embracing the records and
documents relating to mortgage loans serviced by the Seller in accordance with
the requirements of the Uniform Single Audit Program for Mortgage
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Bankers and that their examination disclosed no exceptions that, in their
opinion were material, relating to mortgage loans serviced by the Seller.
SECTION 4.06 Right to Examine Seller Records. The Purchaser, upon
reasonable notice, shall have the right to examine and audit any and all of the
books, records, or other information of the Seller, whether held by the Seller
or by another on its behalf, with respect to or concerning this Agreement or the
Mortgage Loans, during business hours or at such other times as may be
reasonable under applicable circumstances, upon reasonable advance notice.
ARTICLE V
SELLER TO COOPERATE
SECTION 5.01 Provision of Information. During the term of this
Agreement, the Seller shall furnish to the Purchaser such periodic, special, or
other reports or information, whether or not provided for herein, as shall be
necessary, reasonable, or appropriate with respect to the Purchaser or the
purposes of this Agreement. All such reports or information shall be provided by
and in accordance with all reasonable instructions and directions which the
Purchaser may give.
The Seller shall execute and deliver all such instruments and take all
such action as the Purchaser may reasonably request from time to time, in order
to effectuate the purposes and to carry out the terms of this Agreement.
SECTION 5.02 Financial Statements; Servicing Facilities. In connection
with disposition of Mortgage Loans, the Purchaser may make available to a
prospective purchaser audited financial statements of the Seller for the most
recently completed two (2) fiscal years for which such statements are available,
as well as a Consolidated Statement of Condition at the end of the last two (2)
fiscal years covered by any Consolidated Statement of Operations. If it has not
already done so, the Seller shall furnish promptly to the Purchaser or a
prospective purchaser copies of the statements specified above; provided,
however, that prior to furnishing such statements or information to any
prospective purchaser, the Seller may require such prospective purchaser to
execute a confidentiality agreement in form reasonably satisfactory to it.
The Seller shall make available to the Purchaser or any prospective
Purchaser a knowledgeable financial or accounting officer for the purpose of
answering questions with respect to recent developments affecting the Seller or
the financial statements of the Seller, and to permit any prospective purchaser
to inspect the Seller's servicing facilities for the purpose of satisfying such
prospective purchaser that the Seller has the ability to service the Mortgage
Loans as provided in this Agreement.
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ARTICLE VI
TERMINATION
SECTION 6.01 Damages. The Purchaser shall have the right at any time to
seek and recover from the Seller any damages or losses suffered by it as a
result of any failure by the Seller to observe or perform any duties,
obligations, covenants or agreements herein contained.
SECTION 6.02 Termination. The respective obligations and
responsibilities of the Seller shall terminate upon: (i) the later of the final
payment or other liquidation (or any advance with respect thereto) of the last
Mortgage Loan serviced by the Seller or the disposition of all REO Property
serviced by the Seller and the remittance of all funds due hereunder; or (ii) by
mutual consent of the Seller and the Purchaser in writing, unless earlier
terminated pursuant to this Agreement.
SECTION 6.03 Termination Without Cause. The Purchaser may, at its sole
option, upon not less than thirty (30) days' prior written notice to the Seller
terminate any rights the Seller may have hereunder with respect to any or all of
the Mortgage Loans, without cause, upon written notice, provided that the Seller
shall have an additional period of not more than sixty (60) days from and after
the date of said notice from the Purchaser within which to effect the related
transfer of servicing. Any such notice of termination shall be in writing and
delivered to the Seller as provided in Section 12.01 of this Agreement. In the
event of such termination, the Seller shall be entitled to a Termination Fee,
equal to [1.50]% of the then current aggregate unpaid principal balance of the
related Mortgage Loans; provided, however, that the successor servicer is not an
Affiliate of the Seller.
ARTICLE VII
BOOKS AND RECORDS
SECTION 7.01 Possession of Servicing Files. The contents of each
Servicing File are and shall be held in trust by the Seller for the benefit of
the Purchaser as the owner thereof. The Seller shall maintain in the Servicing
File a copy of the contents of each Mortgage File and the originals of the
documents in each Mortgage File not delivered to the Purchaser. The possession
of the Servicing File by the Seller is at the will of the Purchaser for the sole
purpose of servicing the related Mortgage Loan, pursuant to this Agreement, and
such retention and possession by the Seller is in its capacity as Seller only
and at the election of the Purchaser. The Seller shall release its custody of
the contents of any Servicing File only in accordance with written instructions
from the Purchaser or other termination of the Seller with respect to the
related Mortgage Loans, unless such release is required as incidental to the
Seller's servicing of the Mortgage Loans pursuant to this Agreement, or is in
connection with a repurchase of any Mortgage Loan pursuant to Section 8.03 of
the Purchase Agreement or Section 4.02 of this Agreement. The Seller shall be
responsible for maintaining, and shall maintain, a complete set of books and
records for each Mortgage Loan which shall be marked clearly to reflect the
ownership of each Mortgage Loan by the Purchaser. In particular, the Seller
shall maintain in its possession, available for inspection by
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the Purchaser or its designee during normal business hours, and shall deliver to
the Purchaser or its designee upon reasonable notice, evidence of compliance
with all federal, state and local laws, rules and regulations, including but not
limited to documentation as to the method used in determining the applicability
of the provisions of the Flood Disaster Protection Act of 1973, as amended, to
the Mortgaged Property, documentation evidencing insurance coverage and periodic
inspection reports as required by Section 2.13. To the extent that original
documents are not required for purposes of realization of Liquidation Proceeds
or Insurance Proceeds, documents maintained by the Seller may be in the form of
microfilm or microfiche.
The Seller shall keep at its servicing office books and records in
which, subject to such reasonable regulations as it may prescribe, the Seller
shall note transfers of Mortgage Loans. No transfer of a Mortgage Loan may be
made unless such transfer is in compliance with the terms hereof. For the
purposes of this Agreement, the Seller shall be under no obligation to deal with
any person with respect to this Agreement or the Mortgage Loans unless the books
and records show such person as the owner of the Mortgage Loan. The Purchaser
may, subject to the terms of this Agreement, sell or transfer one or more of the
Mortgage Loans. The Purchaser also shall advise the Seller of the transfer. Upon
receipt of notice of the transfer, the Seller shall mark its books and records
to reflect the ownership of the Mortgage Loans of such assignee, and shall
release the Purchaser from its obligations hereunder with respect to the
Mortgage Loans sold or transferred.
ARTICLE VIII
INDEMNIFICATION AND ASSIGNMENT
SECTION 8.01 Indemnification. The Seller agrees to indemnify and hold
the Purchaser harmless from any liability, claim, loss or damage (including,
without limitation, any reasonable legal fees, judgments or expenses relating to
such liability, claim, loss or damage) to the Purchaser directly or indirectly
resulting from the Seller's failure to observe and perform any or all of
Seller's duties, obligations, covenants, agreements, warranties or
representations contained in this Agreement or in the Purchase Agreement or the
Seller's failure to comply with all applicable requirements with respect to the
transfer of Servicing Rights as set forth herein. The Seller shall notify the
Purchaser as soon as reasonably possible if a claim is made by a third party
with respect to this Agreement.
SECTION 8.02 Limitation on Liability of Seller and Others. Neither the
Seller nor any of the directors, officers, employees or agents of the Seller
shall be under any liability to the Purchaser for any action taken or for
refraining from the taking of any action in good faith pursuant to this
Agreement, or for errors in judgment, provided, however, that this provision
shall not protect the Seller or any such person against any breach of warranties
or representations made herein, or failure to perform its obligations in
material compliance with any standard of care set forth in this Agreement, or
any liability which would otherwise be imposed by reason of any breach of the
terms and conditions of this Agreement. The Seller and any director, officer,
employee or agent of the Seller may rely in good faith on any document of any
kind prima facie
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properly executed and submitted by any Person with respect to any matter arising
hereunder. The Seller shall not be under any obligation to appear in, prosecute
or defend any legal action which is not incidental to its duties to service the
Mortgage Loans in accordance with this Agreement and which in its opinion may
involve it in any expense or liability, provided, however, that the Seller may,
with the prior written consent of the Purchaser, undertake any such action which
it may deem necessary or desirable in respect to this Agreement and the rights
and duties of the parties hereto. In such event, the Seller shall be entitled to
reimbursement from the Purchaser of the reasonable legal expenses and costs of
such action.
SECTION 8.03 Limitation on Registration and Assignment by Seller. The
Purchaser has entered into this Agreement with the Seller in reliance upon the
independent status of the Seller, and the representations as to the adequacy of
its servicing facilities, plant, personnel, records and procedures, its
integrity, reputation and financial standing, and the continuance thereof.
Nonetheless, the Seller may subcontract all or a portion of its servicing
obligations under this Agreement to one or more of its affiliates. However, if
none of its affiliates is engaged in the business of servicing mortgage loans,
the Seller may subcontract all or a portion of its obligations under this
Agreement to an unrelated third party subject to approval of a majority of the
Independent Directors. Any delegation of such rights or duties shall not release
the Seller from its obligations hereunder and the Seller shall remain
responsible hereunder for all acts and omissions of any delegee as if such acts
or omissions were those of the Seller and (b) any such assignee or designee
shall satisfy the requirements for a successor or surviving Person set forth in
Section 8.05 and Section 8.06 hereof. The Seller shall notify the Purchaser in
writing at least 30 days prior to selling or otherwise disposing of all or
substantially all of its assets and receipt of such notice shall entitle the
Purchaser to terminate this Agreement except as set forth in Section 8.06
hereof.
The Seller shall not resign from the obligations and duties hereby
imposed on it except by mutual consent of the Seller and the Purchaser or upon
the determination that its duties hereunder are no longer permissible under
applicable law and such incapacity cannot be cured by the Seller. Any such
determination permitting the resignation of the Seller shall be evidenced by an
Opinion of Counsel to such effect delivered to the Purchaser which Opinion of
Counsel shall be in form and substance acceptable to the Purchaser. No such
resignation shall become effective until a successor shall have assumed the
Seller's responsibilities and obligations hereunder in the manner provided in
Section 8.06.
Without in any way limiting the generality of this Section 8.03, in the
event that the Seller either shall assign this Agreement or the servicing
responsibilities hereunder or delegate its duties hereunder or any portion
thereof without satisfying the requirements set forth herein, then the Purchaser
shall have the right to terminate this Agreement as set forth in Section 6.03,
without any payment of any penalty or damages and without any liability
whatsoever to the Seller (other than with respect to accrued but unpaid
Servicing Fees and Servicing Advances remaining unpaid) or any third party.
SECTION 8.04 Assignment by Purchaser. The Purchaser shall have the
right, without the consent of the Seller, to assign, in whole or in part, its
interest under this Agreement with
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respect to some or all of the Mortgage Loans, and designate any person to
exercise any rights of the Purchaser hereunder, by executing an Assignment and
Assumption Agreement substantially in the form of Exhibit G to the Purchase
Agreement and the assignee or designee shall accede to the rights and
obligations hereunder of the Purchaser with respect to such Mortgage Loans. All
references to the Purchaser in this Agreement shall be deemed to include its
assignee or designee. Notwithstanding the foregoing, at any one time there shall
not be more than fifteen (15) separate Purchasers under this Agreement.
SECTION 8.05 Merger or Consolidation of the Seller. The Seller will
keep in full effect its existence, rights and franchises as a corporation under
the laws of the state of its incorporation except as permitted herein, and will
obtain and preserve its qualification to do business as a foreign corporation in
each jurisdiction in which such qualification is or shall be necessary to
protect the validity and enforceability of this Agreement, or any of the
Mortgage Loans and to perform its duties under this Agreement.
Any Person into which the Seller may be merged or consolidated, or any
corporation resulting from any merger, conversion or consolidation to which the
Seller shall be a party, or any Person succeeding to the business of the Seller,
shall be the successor of the Seller hereunder, without the execution or filing
of any paper or any further act on the part of any of the parties hereto,
anything herein to the contrary notwithstanding; provided, however, that the
successor or surviving Person shall be an institution whose deposits are insured
by FDIC or a company whose business includes the origination and servicing of
mortgage loans and shall satisfy the requirements of Section 8.06 with respect
to the qualifications of a successor to the Seller.
SECTION 8.06 Successor to the Seller. Prior to termination of Seller's
responsibilities and duties under this Agreement pursuant to Sections 2.16,
6.03, 8.03 or 11.01, the Purchaser shall (i) succeed to and assume all of the
Seller's responsibilities, rights, duties and obligations under this Agreement,
or (ii) appoint a successor having a tangible net worth of not less than
$30,000,000 and which shall succeed to all rights and assume all of the
responsibilities, duties and liabilities of the Seller under this Agreement
prior to the termination of Seller's responsibilities, duties and liabilities
under this Agreement. In connection with such appointment and assumption, the
Purchaser may make such arrangements for the compensation of such successor out
of payments on Mortgage Loans as it and such successor shall agree. In the event
that the Seller's duties, responsibilities and liabilities under this Agreement
should be terminated pursuant to the aforementioned sections, the Seller shall
discharge such duties and responsibilities during the period from the date it
acquires knowledge of such termination until the effective date thereof with the
same degree of diligence and prudence which it is obligated to exercise under
this Agreement, and shall take no action whatsoever that might impair or
prejudice the rights or financial condition of its successor. The resignation or
removal of Seller pursuant to the aforementioned Sections shall not become
effective until a successor shall be appointed pursuant to Article X hereof this
Section and shall in no event relieve the Seller of the representations,
warranties and covenants made pursuant to and the remedies available to the
Purchaser with respect thereto, it being understood and agreed that the
provisions of such Article X shall be applicable to the Seller notwithstanding
any such resignation or termination of the Seller, or the termination of this
Agreement.
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Any successor appointed as provided herein shall execute, acknowledge
and deliver to the Seller and to the Purchaser, an instrument accepting such
appointment, whereupon such successor shall become fully vested with all the
rights, powers, duties, responsibilities, obligations and liabilities of the
Seller, with like effect as if originally named as a party to this Agreement.
Any termination of this Agreement pursuant to Section 2.16, 6.03, 8.03 or 11.01
shall not affect any claims that the Purchaser may have against the Seller
arising prior to any such termination or resignation.
The Seller shall timely deliver to the successor the funds in the
Custodial Account and the Escrow Account and the Mortgage Files and related
documents and statements held by it hereunder and the Seller shall account for
all funds. The Seller shall execute and deliver such instruments and do such
other things all as may reasonably be required to more fully and definitely vest
and confirm in the successor all such rights, powers, duties, responsibilities,
obligations and liabilities of the Seller. The successor shall make arrangements
as it may deem appropriate to reimburse the Seller for amounts the Seller
actually expended pursuant to this Agreement which the successor is entitled to
retain hereunder and which would otherwise have been recovered by the Seller
pursuant to this Agreement but for the appointment of the successor servicer.
Upon a successor's acceptance of appointment as such, the Seller shall
notify by mail the Purchaser of such appointment.
ARTICLE IX
REPRESENTATIONS, WARRANTIES AND COVENANTS OF PURCHASER
As of the Closing Date, the Purchaser warrants and represents to, and
covenants and agrees with, the Seller as follows:
SECTION 9.01 Due Organization and Authority. The Purchaser is a
corporation duly organized, validly existing and in good standing under the laws
of the state of Delaware. The Purchaser has the full corporate power and
authority to execute and deliver this Agreement and to perform in accordance
herewith; the execution, delivery and performance of this Agreement by the
Purchaser and the consummation of the transactions contemplated hereby have been
duly and validly authorized; this Agreement evidences the valid, binding and
enforceable obligation of the Purchaser; and all requisite corporate action has
been taken by the Purchaser to make this Agreement valid and binding upon the
Purchaser in accordance with its terms.
SECTION 9.02 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Purchaser's charter or by-laws or any legal
restriction or any agreement or instrument to which the Purchaser is now a party
or by which it is bound, or constitute a default or result in an acceleration
under any of the foregoing, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Purchaser or its property is
subject.
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SECTION 9.03 Ability to Perform. The Purchaser does not believe, nor
does it have any reason or cause to believe, that it cannot perform each and
every covenant made by it in this Agreement.
SECTION 9.04 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Purchaser, before
any court, administrative agency or other tribunal asserting the invalidity of
this Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Purchaser, or in
any material impairment of the right or ability of the Purchaser to carry on its
business substantially as now conducted, or in any material liability on the
part of the Purchaser, or which would draw into question the validity of this
Agreement or of any action taken or to be taken in connection with the
obligations of the Purchaser contemplated herein.
SECTION 9.05 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance by the Purchaser of, or compliance by the
Purchaser with, this Agreement as evidenced by the consummation of the
transactions contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date.
SECTION 9.06 Assistance. To the extent reasonably possible, the
Purchaser shall cooperate with and assist the Seller as requested by the Seller,
in carrying out Seller's covenants, agreements, duties and responsibilities
under the Purchase Agreement and in connection therewith shall execute and
deliver all such papers, documents and instruments as nay be necessary and
appropriate in furtherance thereof.
ARTICLE X
REPRESENTATIONS AND WARRANTIES OF SELLER
As of the Closing Date, the Seller warrants and represents to, and
covenants and agrees with, the Purchaser as follows:
SECTION 10.01 Due Organization and Authority. The Seller is a federally
chartered savings bank duly organized and validly exisiting under the laws of
the United States and is licensed, qualified and in good standing in each state
where a Mortgaged Property is located if the laws of such state require
licensing or qualification in order to conduct business of the type conducted by
the Seller, and in any event the Seller is in compliance with the laws of any
such state to the extent necessary to ensure the enforceability of the related
Mortgage Loan in accordance with the terms of this Agreement; the Seller has the
full corporate power and authority to execute and deliver this Agreement and to
perform in accordance herewith; the execution, delivery and performance of this
Agreement (including all instruments of transfer to be delivered pursuant to
this Agreement) by the Seller and the consummation of the transactions
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contemplated hereby have been duly and validly authorized; this Agreement
evidences the valid, legal, binding and enforceable obligation of the Seller
subject to bankruptcy laws and other similar laws of general application
affecting rights of creditors and subject to the application of the rules of
equity, including those respecting the availability of specific performance,
none of which will materially interfere with the realization of the benefits
provided thereunder, regardless of whether such enforcement is sought in a
proceeding in equity or at law; and all requisite corporate action has been
taken by the Seller to make this Agreement valid and binding upon the Seller in
accordance with its terms.
SECTION 10.02 Ordinary Course of Business. The consummation of the
transactions contemplated by this Agreement are in the ordinary course of
business of the Seller.
SECTION 10.03 No Conflicts. Neither the execution and delivery of this
Agreement, nor the fulfillment of or compliance with the terms and conditions of
this Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Seller's charter or by-laws or any legal
restriction or any agreement or instrument to which the Seller is now a party or
by which it is bound, or constitute a default or result in an acceleration under
any of the foregoing, or result in the violation of any law, rule, regulation,
order, judgment or decree to which the Seller or its property is subject, or
impair the ability of the Purchaser to realize on the Mortgage Loans, or impair
the value of the Mortgage Loans, or impair the ability of the Purchaser to
realize the full amount of any mortgage insurance benefits accruing pursuant to
this Agreement.
SECTION 10.04 Ability to Service. The Seller is duly qualified,
licensed, registered and otherwise authorized under all applicable federal,
state and local laws and regulations, meets the minimum capital requirements set
forth by OTS, and is in good standing to enforce, originate, sell mortgage
loans, and service mortgage loans in the jurisdiction wherein the Mortgaged
Properties are located.
SECTION 10.05 Ability to Perform. The Seller does not believe, nor does
it have any reason to believe, that it cannot perform each and every covenant
contained in this Agreement.
SECTION 10.06 No Litigation Pending. There is no action, suit,
proceeding or investigation pending or threatened against the Seller, before any
court, administrative agency or other tribunal asserting the invalidity of this
Agreement, seeking to prevent the consummation of any of the transactions
contemplated by this Agreement or which, either in any one instance or in the
aggregate, may result in any material adverse change in the business,
operations, financial condition, properties or assets of the Seller, or in any
material impairment of the right or ability of the Seller to carry on its
business substantially as now conducted, or in any material liability on the
part of the Seller, or which would draw into question the validity of this
Agreement or the Mortgage Loans or of any action taken or to be taken in
connection with the obligations of the Seller contemplated herein, or which
would be likely to impair materially the ability of the Seller to perform under
the terms of this Agreement.
SECTION 10.07 No Consent Required. No consent, approval, authorization
or order of any court or governmental agency or body is required for the
execution, delivery and performance
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by the Seller of or compliance by the Seller with this Agreement or the
servicing of the Mortgage Loans as evidenced by the consummation of the
transactions contemplated by this Agreement, or if required, such approval has
been obtained prior to the Closing Date.
SECTION 10.08 No Untrue Information. Neither this Agreement nor any
statement, tape, diskette, form, report or other document furnished or to be
furnished pursuant to this Agreement or in connection with the transactions
contemplated hereby contains any untrue statement of fact or omits to state a
fact necessary to make the statements contained therein not misleading.
SECTION 10.09 Reasonable Servicing Fee. The Seller acknowledges and
agrees that the Servicing Fee represents reasonable compensation for performing
such services and that the entire Servicing Fee shall be treated by the Seller,
for accounting and tax purposes, as compensation for the servicing and
administration of the Mortgage Loans pursuant to this Agreement.
SECTION 10.10 Financial Statements. The Servicer has delivered to the
Purchaser financial statements as to its last two complete fiscal years. All
such financial statements fairly present the pertinent results of operations and
changes in financial position for each of such periods and the financial
position at the end of each such period of the Servicer and its subsidiaries and
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved, except as set forth in the
notes thereto. There has been no change in the business, operations, financial
condition, properties or assets of the Servicer since the date of the Servicer's
financial statements that would have a material adverse effect on its ability to
perform its obligations under this Agreement.
SECTION 10.11 Conflict of Interest. The Seller agrees that it shall
service the Mortgage Loans hereunder solely with a view toward the interests of
the Purchaser, and without regard to the interests of the Seller or its other
affiliates.
ARTICLE XI
DEFAULT
SECTION 11.01 Events of Default. The following shall constitute an
Event of Default under this Agreement on the part of the Seller:
(a) any failure by the Seller to remit to the Purchaser any
payment required to be made under the terms of this Agreement
which continues unremedied for a period of five (5) Business
Days after the date upon which written notice of such failure,
requiring the same to be remedied, shall have been given to
the Seller by the Purchaser; or
(b) the failure by the Seller duly to observe or perform in any
material respect any other of the covenants or agreements on
the part of the Seller set forth in this
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Agreement which continues unremedied for a period of thirty
(30) days (except that such number of days shall be fifteen
(15) in the case of a failure to pay any premium for any
insurance policy required to be maintained under this
Agreement) after the date on which written notice of such
failure, requiring the same to be remedied, shall have been
given to the Seller by the Purchaser; or
(c) a decree or order of a court or agency or supervisory
authority having jurisdiction for the appointment of a
conservator or receiver or liquidator in any insolvency,
bankruptcy, readjustment of debt, marshaling of assets and
liabilities or similar proceedings, or for the winding-up or
liquidation of its affairs, shall have been entered against
the Seller and such decree or order shall have remained in
force undischarged or unstayed for a period of sixty (60)
days; or
(d) the Seller shall consent to the appointment of a conservator
or receiver or liquidator in any insolvency, bankruptcy,
readjustment of debt, marshaling of assets and liabilities or
similar proceedings of or relating to the Seller or of or
relating to all or substantially all of its property; or
(e) the Seller shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations; or
(f) the Seller, without the consent of the Purchaser, attempts to
assign this Agreement or the servicing responsibilities
hereunder or to delegate any substantial part of its duties
hereunder or any portion thereof; or
(g) the Seller fails to maintain its license to do business or
service commercial mortgage loans in any jurisdiction where
the Mortgaged Properties are located and such failure results
in a material adverse effect on the Mortgage Loans, the
servicing of the Mortgage Loans, or the Purchaser's rights
with respect to the Mortgage Loans.
In each and every such case, so long as an Event of Default shall not
have been remedied, in addition to whatsoever rights the Purchaser may have at
law or equity to damages, including injunctive relief and specific performance,
the Purchaser, by notice in writing to the Seller, may terminate without
compensation or reimbursement (other than Servicing Fees previously earned but
remaining unpaid and Servicing Advances remaining unreimbursed) all the rights
and obligations of the Seller under this Agreement and in and to the Mortgage
Loans and the proceeds thereof.
Upon receipt by the Seller of such written notice, all authority and
power of the Seller under this Agreement, whether with respect to the Mortgage
Loans or otherwise, shall pass to and be vested in the successor appointed
pursuant to Section 8.06. Upon written request from the Purchaser, the Seller
shall prepare, execute and deliver any and all documents and other
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instruments reasonably requested by the Purchaser, place in such successor's
possession all Mortgage Files (to the extent not properly delivered to the
Purchaser by the Seller previously), and do or accomplish all other acts or
things necessary or appropriate to effect the purposes of such notice of
termination, whether to complete the transfer and endorsement or assignment of
the Mortgage Loans and related documents, or otherwise, at the Seller's sole
expense. The Seller agrees to reasonably cooperate with the Purchaser and such
successor in effecting the termination of the Seller's responsibilities and
rights hereunder, including, without limitation, the transfer to such successor
for administration by it of all cash amounts which shall at the time be credited
by the Seller to the Custodial Account or Escrow Account or thereafter received
with respect to the Mortgage Loans.
SECTION 11.02 Waiver of Defaults. The Purchaser may waive any default
by the Seller in the performance of its obligations hereunder and its
consequences. Upon any such waiver of a past default, such default shall cease
to exist, and any Event of Default arising therefrom shall be deemed to have
been remedied for every purpose of this Agreement. No such waiver shall extend
to any subsequent or other default or impair any right consequent thereon except
to the extent expressly so waived.
ARTICLE XII
MISCELLANEOUS PROVISIONS
SECTION 12.01 Notices. All notices, requests, demands and other
communications which are required or permitted to be given under this Agreement
shall be in writing and shall be deemed to have been duly given upon the
delivery or mailing thereof, as the case may be, sent by registered or certified
mail, return receipt requested:
(a) If to Purchaser to:
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
(b) If to Seller to:
D&N Bank
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
SECTION 12.02 Waivers. Either the Seller or the Purchaser may upon
consent of all parties, by written notice to the others:
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(a) Waive compliance with any of the terms, conditions or
covenants required to be complied with by the others
hereunder; and
(b) Waive or modify performance of any of the obligations of the
others hereunder.
The waiver by any party hereto of a breach of any provision of this
Agreement shall not operate or be construed as a waiver of any other subsequent
breach.
SECTION 12.03 Entire Agreement; Amendment. This Agreement and the
Purchase Agreement constitute the entire agreement between the parties with
respect to servicing of the Mortgage Loans. This Agreement may be amended and
any provision hereof waived, but, only in writing signed by the party against
whom such enforcement is sought.
SECTION 12.04 Execution; Binding Effect. This Agreement may be executed
in one or more counterparts and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed to be an
original; such counterparts, together, shall constitute one and the same
agreement. Subject to Sections 8.03 and 8.04, this Agreement shall inure to the
benefit of and be binding upon the Seller and the Purchaser and their respective
successors and assigns.
SECTION 12.05 Headings. Headings of the Articles and Sections in this
Agreement are for reference purposes only and shall not be deemed to have any
substantive effect.
SECTION 12.06 Applicable Law. This Agreement shall be construed in
accordance with the laws of the State of Michigan and the obligations, rights
and remedies hereunder shall be determined in accordance with the substantive
laws of the State of Michigan (without regard to conflicts of laws principles),
except to the extent preempted by Federal law.
SECTION 12.07 Relationship of Parties. Nothing herein contained shall
be deemed or construed to create a partnership or joint venture between the
parties. The duties and responsibilities of the Seller shall be rendered by it
as an independent contractor and not as an agent of the Purchaser. The Seller
shall have full control of all of its acts, doings, proceedings, relating to or
requisite in connection with the discharge of its duties and responsibilities
under this Agreement.
SECTION 12.08 Severability of Provisions. If any one or more of the
covenants, agreements, provisions or terms of this Agreement shall be held
invalid for any reason whatsoever, then such covenants, agreements, provisions
or terms shall be deemed severable from the remaining covenants, agreements,
provisions or terms of this Agreement and shall in no way affect the validity or
enforceability of the other provisions of this Agreement.
SECTION 12.09 Recordation of Assignments of Mortgage. To the extent
permitted by applicable law, each of the Assignments of Mortgage is subject to
recordation in all appropriate public offices for real property records in all
the counties or other comparable jurisdictions in which any or all of the
Mortgaged Properties are situated, and in any other appropriate public
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recording office or elsewhere, such recordation to be effected by the Purchaser
or the Purchaser's designee, but in any event, at the Servicer's expense for a
single recordation relating to each Assignment of Mortgage in the event
recordation is either necessary under applicable law or requested by the
Purchaser at its sole option.
SECTION 12.10 Exhibits. The exhibits to this Agreement are hereby
incorporated and made a part hereof and are integral parts of this Agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement under seal
as of the date and year first above written.
D&N CAPITAL CORPORATION
(the Purchaser)
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
D&N BANK
(the Seller)
By:_____________________________________________
Name:___________________________________________
Title:__________________________________________
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EXHIBIT 1
MONTHLY REMITTANCE ADVICE
<PAGE> 40
EXHIBIT 2
CUSTODIAL ACCOUNT CERTIFICATION
___________, 1997
_________________ hereby certifies that it has established the account
described below as a Custodial Account pursuant to Section 2.04 of the Servicing
Agreement, dated as of _________, 1997.
Title of Account: "D&N Bank, in trust for Purchaser of Commercial Mortgage
Loans, and various Mortgagors."
Account Number: ________________________
Address of office or branch of the Seller at which Account is
maintained:
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
D&N BANK
By:________________________________
Name:______________________________
Title:_____________________________
<PAGE> 41
EXHIBIT 3
CUSTODIAL ACCOUNT LETTER AGREEMENT
_____________, 1997
To: ____________________ ____________________ ____________________ (the
"Depository"). As Seller under the Servicing Agreement, dated as of ______,
1997,(the "Agreement"), we hereby authorize and request you to establish an
account, as a Custodial Account pursuant to Section 2.04 of the Agreement, to be
designated as D&N Bank, in trust for Purchaser of Commercial Mortgage Loans and
various Mortgagors." All deposits in the account shall be subject to withdrawal
therefrom by order signed by the Seller. You may refuse any deposit which would
result in violation of the requirement that the account be fully insured as
described below. This letter is submitted to you in duplicate. Please execute
and return one original to us.
D&N BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number, at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
------------------------------------------
Depository
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE> 42
EXHIBIT 4
ESCROW ACCOUNT CERTIFICATION
_____________, 1997
_____________________________ hereby certifies that it has established the
account described below as an Escrow Account pursuant to Section 2.06 of the
Servicing Agreement, dated as of ________, 1997, Conventional Commercial
Mortgage Loans. Title of Account: "D&N Bank in trust for Purchaser of Commercial
Mortgage Loans and various Mortgagors."
Account Number: _____________________________
Address of office or branch of the Seller at which Account is
maintained:
------------------------------
------------------------------
------------------------------
------------------------------
------------------------------
D&N BANK
By:__________________________________
Name:________________________________
Title:_______________________________
<PAGE> 43
EXHIBIT 5
ESCROW ACCOUNT LETTER AGREEMENT
______________, 1997
To: _________________ ____________________ ____________________ (the
"Depository"). As Seller under the Servicing Agreement, dated as of
____________, 1997, Conventional Commercial Mortgage Loans (the "Agreement"), we
hereby authorize and request you to establish an account, as an Escrow Account
pursuant to Section 2.06 of the Agreement, to be designated as "D&N Bank in
trust for the Purchasers of Commercial Loans and various Mortgagors." All
deposits in the account shall be subject to withdrawal therefrom by order signed
by the Seller. You may refuse any deposit which would result in violation of the
requirement that the account be fully insured as described below. This letter is
submitted to you in duplicate. Please execute and return one original to us.
D&N BANK
By:_______________________________________
Name:_____________________________________
Title:____________________________________
Date:____________________________
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number, at the office of
the Depository indicated above, and agrees to honor withdrawals on such account
as provided above. The full amount deposited at any time in the account will be
insured by the Federal Deposit Insurance Corporation through the Bank Insurance
Fund ("BIF") or the Savings Association Insurance Fund ("SAIF").
------------------------------------------
Depository
By:_______________________________________
Name:_____________________________________
Title:____________________________________
<PAGE> 1
EXHIBIT 10(e)
ADVISORY AGREEMENT
THIS AGREEMENT is made this [__] day of [________], 1997 between D&N
CAPITAL CORPORATION, a Delaware corporation (the "Company"), and D&N BANK, a
federally chartered savings bank (the "Advisor"). Capitalized terms used herein
shall have the meanings set forth in Section 1 of this Agreement.
WHEREAS, the Company intends to qualify as a "real estate investment
trust" ("REIT") under the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, the Company desires to avail itself of the experience and
assistance of the Advisor and to have the Advisor undertake, on the Company's
behalf, the duties and responsibilities hereinafter set forth, subject to the
control and supervision of the Board of Directors of the Company (the "Board of
Directors") as provided for herein; and
WHEREAS, the Advisor desires to render such services for the Company
subject to the control and supervision of the Board of Directors, on the terms
and conditions hereinafter set forth.
NOW THEREFORE, the parties hereto agree as follows:
SECTION 1. Definitions. As used herein, the following terms shall have
the respective meanings set forth below:
"Advisor" has the meaning set forth in the forepart of this Agreement.
"Advisor Termination Date" means the date on which this Agreement
terminates.
"Agreement" means this Advisory Agreement, as amended, modified and
supplemented from time to time.
"Board of Directors" has the meaning set forth in the forepart of this
Agreement.
"Code" has the meaning set forth in the forepart of this Agreement.
"Company" has the meaning set forth in the forepart of this Agreement.
"Gross Mortgage Assets" means for any month the weighted average book
value of the real estate mortgage assets held by the Company, before reserves
for depreciation or bad debts or other similar noncash reserves, computed at the
end of such month.
"Independent Directors" means the members of the Board of Directors of
the Company who are either (i) not current directors, officers or employees of
the Company (except as set forth in (iii) below), D&N Financial Corporation,
the Advisor or any affiliate of the Advisor; (ii) owners of not more than one
percent of the outstanding common stock of D&N Financial Corporation; or (iii)
persons elected by the holders of the preferred stock of the Company.
<PAGE> 2
"Operating Expenses" for any period means all of the operating expenses
of the Company (with the exception of those expenses to be borne by the Advisor
in accordance with Section 4 hereof), including without limitation the
following:
(a) interest, taxes and other expenses incurred in connection with
the mortgage assets of the Company;
(b) expenses related to the officers, directors and employees of
the Company, including without limitation any fees or expenses
of the directors;
(c) fees and expenses payable to accountants, appraisers,
auditors, consultants, attorneys, collection and paying agents
and all other Persons who contract with or are retained by the
Company or by the Advisor on behalf of the Company;
(d) legal and other expenses incurred in connection with advice
concerning, obtaining or maintaining the Company's status as a
REIT, the determination of the Company's taxable income, any
formal or informal administrative action or legal proceedings
which involve a challenge to the REIT status of the Company or
any claim that the activities of the Company, any member of
the Board of Directors or any officer were improper;
(e) expenses relating to communications and reports to
stockholders of the Company, including without limitation the
costs of preparing, printing, duplicating and mailing the
certificates for the stock of the Company, proxy solicitation
materials and reports to stockholders, and the costs of
arranging meetings of stockholders;
(f) the costs of insurance described in Section 2 hereof,
including directors and officers liability insurance covering
the directors and officers of the Company;
(g) expenses relating to the acquisition, disposition and
ownership of mortgage assets, including without limitation and
to the extent not paid by others, legal fees and other
expenses for professional services and fees;
(h) expenses connected with the payments of dividends or interest
or distributions in cash or any other form made or caused to
be made by the Board of Directors to the stockholders of the
Company;
(i) expenses connected with any office or office facilities
maintained by the Company separate from the office of the
Advisor, including without limitation rent, telephone,
utilities, office furniture and equipment and machinery; and
(j) other miscellaneous expenses of the Company which are not
expenses of the Advisor under Section 4.
2
<PAGE> 3
"Person" means and includes individuals, corporations, limited
partnerships, general partnerships, joint stock companies or associations,
limited liability companies, joint ventures, associations, consortia, companies,
trusts, banks, savings institutions, trust companies, land trusts, common law
trusts, business trusts or other entities, governments and agencies and
political subdivisions thereof.
"REIT" has the meaning set forth in the forepart of this Agreement.
SECTION 2. Duties of Advisor. The Advisor shall consult with the Board
of Directors and the officers of the Company and shall, at the request of the
Board of Directors or the officers of the Company, furnish advice and
recommendations with respect to all aspects of the business and affairs of the
Company. Subject to the control and discretion and at the request of the Board
of Directors, the Advisor shall:
(a) administer the day-to-day operations and affairs of the
Company, including without limitation the performance or
supervision of the functions described in this Section 2;
(b) monitor the credit quality of the mortgage loans and other
real estate mortgage assets held by the Company;
(c) advise the Company with respect to the acquisition,
management, financing, disposition of the Company's mortgage
loans and other real estate mortgage assets;
(d) represent the Company in its day-to-day dealings with Persons
with whom the Company interacts, including without limitation
stockholders of the Company, transfer agent, consultants,
accountants, attorneys, servicers of the Company's mortgage
loans, custodians, insurers and banks;
(e) establish and provide necessary services for the Company,
including executive, administrative, accounting, stockholder
relations, secretarial, recordkeeping, copying, telephone,
mailing and distribution facilities;
(f) provide the Company with office space, conference room
facilities, office equipment and personnel necessary for the
services to be performed by the Advisor hereunder;
(g) arrange, schedule and coordinate the regular and special
matters of the Board of Directors required for the conduct of
the affairs of the Company or for timely action on any matters
the Company is required to act upon and implement all
decisions of the Board of Directors, unless otherwise
instructed, with regard to the Company and its assets;
(h) maintain communications and relations with the stockholders of
the Company, including, but not limited to, responding to
inquiries, proxy solicitations, providing
3
<PAGE> 4
reports to stockholders and arranging and coordinating all
meetings of stockholders;
(i) arrange for the investment and management of any short-term
investments of the Company;
(j) arrange for the services of third parties to collect and
distribute funds of the Company and to perform such functions
as the Board of Directors shall from time to time require;
(k) monitor and supervise the performance of all parties who have
contracts to perform services for the Company, provided that
the Advisor shall have no duty to assume the obligations or
guarantee the performance of such parties under such
contracts;
(l) establish and maintain such bank accounts in the name of the
Company as may be required by the Company and approved by the
Board of Directors and ensure that all funds collected by the
Advisor in the name or on behalf of the Company shall be held
in trust and shall not be commingled with the Advisor's own
funds or accounts;
(m) make payment on behalf of the Company of all Operating
Expenses;
(n) arrange for the execution and delivery of such documents and
instruments by the officers of the Company as may be required
in order to perform the functions herein described and to take
any other required action;
(o) arrange for insurance for the Company including liability
insurance, errors and omissions policies and officers and
directors policies which shall cover and insure the Company,
members of the Board of Directors and the officers of the
Company in amounts and with deductibles and insurers approved
by the Board of Directors;
(p) maintain proper books and records of the Company's affairs and
furnish or cause to be furnished to the Board of Directors
such periodic reports and accounting information as may be
required from time to time by the Board of Directors,
including, but not limited to quarterly reports of all income
and expenses of and distribution of the Company;
(q) consult and work with legal counsel for the Company in
implementing Company decisions and undertaking measures
consistent with all pertinent Federal, state and local laws
and rules or regulations of governmental or quasi-governmental
agencies, including, but not limited to, Federal and state
securities laws, the Code, as it relates to the Company's
qualification as a REIT, and the regulations promulgated under
each of the foregoing;
4
<PAGE> 5
(r) consult and work with accountants for the Company in
connection with the preparation of financial statements,
annual reports and tax returns;
(s) arrange for an annual audit of the books and records of the
Company by the accounting firm designated for such purposes by
the Board of Directors;
(t) prepare and distribute in consultation with the accountants
for the Company, annual reports to stockholders which will
contain audited financial statements;
(u) furnish reports to the Board of Directors and provide
research, economical and statistical data in connection with
the Company's investments; and
(v) as reasonably requested by the Company, make reports to the
Company of its performance of the foregoing services and
furnish advice and recommendations with respect to other
aspects of the business of the Company.
SECTION 3. Compensation. The Company shall pay to the Advisor, for
services rendered by the Advisor hereunder, a management fee payable monthly in
arrears in an amount equal to $10,416.67.
SECTION 4. Expenses of the Advisor.
(a) Without regard to the compensation received pursuant to
Section 3, the Advisor will bear the following expenses:
(i) employment expenses of the personnel employed by the
Advisor, including without limitation salaries,
wages, payroll taxes and the cost of employee benefit
plans; and
(ii) rent, telephone equipment, utilities, office
furniture and equipment and machinery and other
office expenses of the Advisor incurred in connection
with the maintenance of any office facility of the
Advisor.
(b) The Company shall reimburse the Advisor within 30 days of a
written request by the Advisor, for any Operating Expenses
paid or incurred by the Advisor on behalf of the Company.
SECTION 5. Records. The Advisor shall maintain appropriate books of
account and records relating to services performed hereunder, and such books of
account an records shall be accessible for inspection by the Board of Directors
or representatives of the Company at all times.
SECTION 6. REIT Qualification and Compliance. The Advisor shall consult
and work with the Company's legal and tax counsel in maintaining the Company's
qualification as a REIT. Notwithstanding any other provisions of this Agreement
to the contrary, the Advisor shall refrain from any action which, in its
reasonable judgment or in the judgment of the Board of Directors
5
<PAGE> 6
(of which the Advisor has received written notice), would adversely affect the
qualification of the Company as a REIT or which would violate any law, rule or
regulation of any governmental body or agency having jurisdiction over the
Company or its securities, or which would otherwise not be permitted by the
certificate of incorporation or by-laws of the Company. Furthermore, the Advisor
shall take any action which, in its judgment or the judgment of the Board of
Directors (of which the Advisor has received written notice), may be necessary
to maintain the qualification of the Company as a REIT or prevent the violation
of any law or regulation of any governmental body or agency having jurisdiction
over the Company or its securities.
SECTION 7. Term; Termination. This Agreement shall be in full force and
effect for a term beginning on the date hereof with an initial term of five
years, and will be renewed automatically for additional five year periods unless
the Company delivers a notice of nonrenewal to the Advisor not less than 90 days
prior to the expiration of the initial term of this Agreement or 90 days prior
to the expiration of any renewal term. Notwithstanding the foregoing, at any
time after the initial term, the Company may terminate this Agreement at any
time upon 90 days' prior notice.
SECTION 8. Other Activities of the Advisor.
(a) Nothing herein contained shall prevent the Advisor, an
affiliate of the Advisor or an officer, a director, employee
or stockholder of the Advisor from engaging in any activity,
including without limitation originating, purchasing and
managing mortgage loans and other real estate assets,
rendering of services and investment advice with respect to
real estate investment opportunities to any other Person
(including other REITs) and managing other investments
(including the investments of the Advisor and its affiliates).
(b) Directors, officers, stockholders, employees and agents of the
Advisor or of the affiliates of the Advisor may serve as
directors, officers, employees or agents of the Company but
shall receive no compensation (other than reimbursement for
expenses) from the Company for such service.
SECTION 9. Binding Effect; Assignment. This Agreement shall inure to
the benefit of and shall be binding upon the parties hereto and their respective
successors and assigns. Neither party may assign this Agreement or any of its
respective rights hereunder (other than an assignment to a successor
organization which acquires substantially all of the property of such party or,
in the case of the Advisor, to an affiliate of the Advisor) without the prior
written consent of the other party to this Agreement.
SECTION 10. Subcontracting. The Advisor may at any time subcontract all
or a portion of its obligations under this Agreement to any affiliate of the
Advisor without the consent of the Company or if no affiliate of the Advisor is
engaged in the business of managing mortgage assets to an unaffiliated third
party with the approval of a majority of the Board of Directors as well as a
majority of the Independent Directors. Notwithstanding the foregoing, the
Advisor will not, in
6
<PAGE> 7
connection with subcontracting any of its obligations under this Agreement, be
relieved or discharged in any respect from its obligations under this Agreement.
SECTION 11. Liability and Indemnity of the Advisor. The Advisor assumes
no responsibilities under this Agreement other than to perform the services
called for hereunder in good faith. Neither the Advisor nor any of its
affiliates, stockholders, directors, officers or employees will have any
liability to the Company, or stockholders of the Company, or others except by
reason of acts or omissions constituting gross negligence or willful breach of
any of its material obligations under this agreement. The Company shall
indemnify and reimburse (if necessary) the Advisor, its stockholders, directors,
officers, employees and agents for any and all expenses (including without
limitation attorneys' fees), losses, damages, liabilities, demands and charges
of any nature whatsoever in respect of or arising from any acts or omissions by
the Advisor pursuant to this Agreement, provided that the conduct against which
the claim is made was determined by such person, in good faith, to be in the
best interest of the Company and was not the result of gross negligence by such
person or willful breach of any of such person's material obligations by such
person. The Advisor agrees that any such indemnification is recoverable only
from the assets of the Company and not from the stockholders.
SECTION 12. Action Upon Notice of Non-Renewal or Termination. Forthwith
upon giving of notice of non-renewal of this Agreement by the Company or of
termination of this Agreement by the Company, the Advisor shall not be entitled
to compensation after the Advisor Termination Date for further services under
this Agreement but shall be paid all compensation accruing to the Advisor
Termination Date and shall be reimbursed for all expenses of the Company paid or
incurred by the Advisor as of the Advisor Termination Date which are
reimbursable by the Company under this Agreement. The Advisor shall promptly
after the Advisor Termination Date:
(i) deliver to the Company all assets and documents of
the Company then in the custody of the Advisor; and
(ii) cooperate with the Company and take all reasonable
steps requested to assist the Board of Directors in
making an orderly transfer of the administrative
functions of the Company.
SECTION 13. No Joint Venture or Partnership. Nothing in this Agreement
shall be deemed to create a partnership or joint venture between the parties,
whether for purposes of taxation or otherwise.
SECTION 14. Notices. Unless expressly provided otherwise herein, all
notices, request, demands and other communications required or permitted under
this Agreement shall be in writing and shall be made by hand delivery, certified
mail, overnight courier service, telex or telecopier.
Any notice shall be duly addressed to the parties as follows:
7
<PAGE> 8
If to the Company:
D&N Capital Corporation
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
If to the Advisor:
D&N Bank
400 Quincy Street
Hancock, Michigan 49930
Attention: Corporate Secretary
Either party may alter the address to which communications or copies
are to be sent by giving notice of such change of address in conformity with the
provisions of this Section 14 for the giving of notice.
SECTION 15. Severability. If any term or provision of this Agreement or
the application thereof with respect to any Person or circumstance shall, to any
extent, be invalid or unenforceable, the remainder of this Agreement, or the
application of that term or provision to persons or circumstances other than
those as to which it is held invalid or unenforceable, shall not be affected
thereby, and each term and provision of this Agreement shall be valid and be
enforced to the fullest extent permitted by law.
SECTION 16. Governing Law. This Agreement and all questions relating to
its validity, interpretation, performance and enforcement shall be governed by
and construed, interpreted and enforced in accordance with the laws of the State
of Michigan.
SECTION 17. Amendments. This Agreement shall not be amended changed,
modified, terminated or discharged in whole or in part except by an instrument
in writing signed by both parties hereto or their respective successors or
assigns, or otherwise as provided herein.
SECTION 18. Headings. The section headings herein have been inserted
for convenience of reference only and shall not be construed to affect the
meaning, construction or effect of this Agreement.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers thereunto duly authorized as of the day and year
first above written.
D&N CAPITAL CORPORATION
By: __________________________________________
Name:
Title:
D&N BANK
By: __________________________________________
Name:
Title:
9
<PAGE> 1
EXHIBIT 23(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion in the Prospectus constituting part
of this Registration Statement on Form S-11 of our report dated April 7, 1997
relating to the balance sheet of D&N Capital Corporation as of April 4, 1997,
which appears in such Prospectus. We also consent to the reference to us under
the heading "Experts" in such Prospectus.
Coopers & Lybrand L.L.P.
Detroit, Michigan
April 28, 1997
<PAGE> 1
EXHIBIT 23(b)
CONSENT OF TAX ADVISORS
We consent to the inclusion of our opinion on the ability of D&N
Capital Corporation to qualify as a real estate investment trust for federal
income tax purposes, dated March 31, 1997, as an exhibit to this Registration
Statement on Form S-11 and to the reference of our firm under the heading
"Certain Legal Matters" in the Prospectus included in this Form S-11. In giving
this Consent, we do not admit that we are within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933, as amended,
or the rules and regulations of the Securities and Exchange Commission
thereunder.
Coopers & Lybrand L.L.P.
Detroit, Michigan
April 28, 1997
<PAGE> 1
EXHIBIT 23(d)
CONSENT OF COUNSEL
We consent to the use of our firm under the heading "Certain Legal
Matters" in the Prospectus included in this Form S-11. In giving this consent,
we do not admit that we are within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the
rules and regulations of the Securities and Exchange Commission thereunder.
HONIGMAN MILLER SCHWARTZ & COHN
Detroit, Michigan
April 18, 1997
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that the undersigned, in his or her
capacity as an officer or director of D&N CAPITAL CORPORATION, a Delaware
corporation (the "Corporation"), hereby constitutes and appoints, KENNETH R.
JANSON, DANIEL D. GREENLEE and PETER L. LEMMER, and each of them severally, his
or her true and lawful attorneys-in-fact and agents, with full power to act
with or without the others and with full power of substitution and
resubstitution for and on behalf of him or her and in his or her name, place
and stead, in any and all capacities, to perform any and all acts and do all
things and to execute any and all instruments which said attorneys-in-fact and
agents and each of them may deem necessary or desirable to enable the
Corporation to comply with the Securities and Exchange Act of 1933, as amended
(the "Act"), and any rules, regulations and requirements of the Securities and
Exchange Commission (the "SEC") thereunder in connection with the filing of the
accompanying registration statement under the Act for the registration of
shares of Noncumualtive Exchangeable Series A Preferred Stock, ("Preferred
Stock"), of the Corporation on Form S-11 or such other Form or Forms as are
then appropriate for the registration of Preferred Stock of the Corporation
including without limiting the generality of the foregoing, power and authority
to sign such registration statement, and any and all amendments, including
post-effective amendments, supplements and exhibits thereto (collectively, the
"Registration Statement") to be filed with the SEC, and to sign any and all
instruments or documents to be filed as a part of or in connection with such
Registration Statement, whether such instruments or documents are filed before
or after the effective date of such Registration Statement, to file such
Registration Statement so signed, together with any and all instruments or
documents to be filed as a part of or in connection with such Registration
Statement, with the SEC, and to appear before the SEC in connection with
such Registration Statement, with the SEC, and to appear before the SEC in
connection with any matter relating thereto, hereby granting to such
attorneys-in-fact and agents, and each of them, full power to do and perform
any and all acts and things requisite and necessary to be done in connection
therewith as the undersigned might or could do in person, and hereby ratifying
and confirming all that said attorneys-in-fact and agents and each of them may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has executed this Power of Attorney as
of April 28, 1997
/s/ Kenneth R. Janson /s/ Daniel D. Greenlee
- -------------------------------------- --------------------------------
Kenneth R. Janson, President, Director Daniel D. Greenlee, Treasurer
/s/ Peter L. Lemmer /s/ Richard E. West
- -------------------------------------- --------------------------------
Peter L. Lemmer, Secretary Richard E. West, Vice President,
Director
/s/ George J. Butvilas
- -------------------------------------- --------------------------------
George J. Butvilas, Director William J. McGarry, Director
- -------------------------------------- --------------------------------
James Bogan, Director
