<PAGE>
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
------------
For the fiscal year ended December 31, 1998
Commission file no. 0-22861
------------
FIRST INTERNATIONAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 06-1151731
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
280 Trumbull Street
Hartford, CT 06103
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (860) 727-0700
------------
Securities Registered Pursuant to Section 12(b) of the Act:
(Title of each class)
Common Stock, par value $.10 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
or Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ___
As of March 12, 1999, the aggregate market value of the voting stock held by
non-affiliates of the Registrant, based on the closing price of the common stock
as reported by the Nasdaq Stock Market of $11.875 was approximately $59,542,782.
As of March 12, 1999, the Registrant had 7,957,587 shares of Common Stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Part II, items 5, 6, 7, 7A and 8 are incorporated by reference to First
International Bancorp's, Inc. 1998 Annual Report to Shareholders which is
included as an exhibit hereto.
Part III, items 10, 11, 12 and 13 are incorporated by reference to First
International Bancorp, Inc.'s definitive proxy statement to stockholders which
will be filed with the Securities and Exchange Commission no later than 120 days
after December 31, 1998.
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PART 1 Page No.
ITEM 1. BUSINESS 1
ITEM 2. PROPERTIES 24
ITEM 3. LEGAL PROCEEDINGS 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS 25
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS 26
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS 26
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES 26
ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 26
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 26
ITEM 11. EXECUTIVE COMPENSATION 26
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 26
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND
REPORTS ON FORM 8-K 27
<PAGE>
PART 1
ITEM 1: BUSINESS
General
Overview
First International Bancorp, Inc., a Delaware corporation, is a one bank holding
company incorporated in 1985 and regulated by the Board of Governors of the
Federal Reserve System. Its principal asset and subsidiary is First
International Bank, N.A. (the "Bank"), a national banking association
established in 1955 and regulated by the Office of the Comptroller of the
Currency (the "OCC"). In 1998, the Bank established three special purpose
subsidiaries to facilitate loan securitizations and sales to a commercial paper
conduit. The Bank changed its name from First National Bank of New England on
February 1, 1999 to more closely reflect the markets it serves.
In September 1997, the Company completed an underwritten public offering whereby
1,955,000 shares of common stock were issued for net proceeds of $23.8 million.
On March 26, 1999, the Company sold its last retail branch and its checking,
savings and money market accounts. The Company retained its certificates of
deposit and continues to offer certificates of deposit to retail and brokered
depositors. (See "Changes in Funding Sources" for further discussion of the
funding sources to be used by the Company.)
The Company specializes in providing credit, trade and financial solutions to
small and medium size manufacturing companies located in the United States and
in international emerging markets. The Company serves its target market by
offering flexible and attractive terms to borrowers and manages its credit risk
through the combined utilization of commercial loan guarantee programs made
available by three U. S. federal agencies: the U. S. Small Business
Administration (the "SBA"), the U. S. Department of Agriculture (the "USDA"),
and the Export-Import Bank of the U. S. ("Ex-Im Bank"), as well as through the
use of private credit insurance policies.
For the federal fiscal year ending September 30, 1998, the Company was the
country's largest Ex-Im Bank lender measured by number of transactions; the
second largest USDA Business and Industry lender measured by dollar volume; and
the tenth largest SBA 7(a) lender measured by dollar volume (and the largest in
New England). The Company maintains preferred status for government guaranteed
lending programs in several jurisdictions.
1
<PAGE>
Changes in Funding Sources
During 1998 and the first quarter of 1999, the Company entered into transactions
that effected changes in the manner in which the Company obtains funding for its
lending business. Such transactions included:
. the sale of the Company's last branch, including checking, savings and
money market accounts totaling approximately $150 million;
. establishment of a warehouse loan facility, pursuant to which up to $75
million is available to the Company (based upon the contractual advance
rates against the qualifying principal balance of the loans pledged to
secure the facility);
. a commitment for a second warehouse loan facility pursuant to which up to
$50 million would be available to the Company (based upon the contractual
advance rates against the qualifying principal balance of the loans pledged
to secure the facility; the pledged loans will consist of the unguaranteed
portion of loans guaranteed by the SBA); this facility is subject to SBA
approval and satisfactory negotiation of final terms with all parties.
. establishment of a commercial paper conduit facility, pursuant to which the
Company has the right to sell commercial revolving lines of credit and
other qualifying loans during the term of the facility. The Company will be
required to retain ownership of subordinated interests in the loans sold to
provide a credit enhancement to the purchaser in varying percentages
depending on the type of loan sold. The Company sold loans totaling
approximately $21 million in December 1998 under this facility;
. a securitization transaction completed in June 1998 pursuant to which the
Company received approximately $24 million from a sale of the unguaranteed
portions of loans originated by the Company that were guaranteed in part by
the SBA; and
. a securitization transaction in December 1998 pursuant to which the Company
received approximately $55 million from a sale of other commercial loans
originated by the Company.
Following the sale of the Company's checking, savings and money market accounts,
the Company expects to obtain funding for its operations from retail and
brokered certificates of deposits, warehouse lines of credit, the sale of loans
on a loan-by-loan basis, private placement securitizations and from the sale of
loans to a commercial paper conduit.
Loan Originations
Management believes that the specialized market knowledge and experience of the
Company's lending officers, combined with a broad range of commercial and
international financing products, enable the Company to satisfy the needs of its
small and medium size manufacturing clients. Brand recognition for the Company
is maintained by incorporating the servicemark
2
<PAGE>
Financing Manufacturers Worldwide(R) in its logos. The Company's domestic and
international lending relationships generally range from $150,000 to $2.5
million.
The Company's Commercial business units underwrite lines of credit, term loans,
industrial mortgages and trade financing for businesses located in the
Northeast, Mid-atlantic, and Midwest regions of the United States. Commercial
lenders operate from the Company's Hartford, Connecticut headquarters, as well
as from regional representative offices located in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Pittsburgh and
Philadelphia, Pennsylvania; Rochester, New York; Washington D.C.; Detroit,
Michigan; and Cleveland, Ohio. The Company plans to continue its U. S. expansion
in 1999 by opening additional representative offices. The Company's domestic
loan officers are trained to understand the specific financial needs of small
and medium size manufacturers, and to use government guaranteed and other
commercial loan products to respond to those needs. Domestic loan officers
participate in industrial trade organizations representing the Company's target
market and conduct other marketing activities to reach potential borrowers.
The Company's International business units underwrite Ex-Im Bank guaranteed and
insured and private sector insured short and medium term loans to small and
medium size manufacturers located in various international emerging markets. The
International business units also underwrite Ex-Im Bank guaranteed revolving
lines of credit to U.S. manufacturers and in 1998, began offering privately
insured loans to U.S. importers of foreign-made goods. See "International
Banking Services and Products." International lending activities support trade
flows between the United States and emerging markets. The Company's
International business units operate from its Hartford, Connecticut headquarters
and are assisted in their efforts by contractual international marketing
representatives, or "master agents", many of whom are actively involved in
providing financial, accounting, consulting and/or engineering services to
manufacturers in their home countries. Contractual marketing arrangements have
been established with professionals in Argentina, Brazil, Central America,
India, Indonesia, Korea, Mexico, Philippines, Poland, South Africa, Turkey and
West Africa. The Company began lending internationally in 1994 and has increased
these loan originations from $397,000 in 1994 to $1.8 million in 1995, $13.6
million in 1996, $60.9 million in 1997 and $110.4 million in 1998.
Underwriting
The Company's underwriting activities are initiated from each of its lending
offices and supported and approved at the Hartford, Connecticut headquarters.
Commercial lending officers analyze the creditworthiness of proposed borrowers
and evaluate each borrower's financial statements, credit reports, business
plans and other data to determine if the credit and proposed collateral satisfy
the Company's specific lending standards and policies. All credit memoranda are
reviewed by an independent credit officer and may require additional approval
depending on the particular circumstances of the financing package. Domestic and
international loans undergo a substantially identical approval process.
3
<PAGE>
Loan Sales and Securitizations
The Company seeks to achieve high returns while meeting the growing credit needs
of its target market by selling a portion of its commercial and international
loans on a non-recourse, servicing-retained basis. A separate Capital Markets
business unit was established in 1996 to sell loans (or the unguaranteed
portions of loans), including domestic and international loans, that lack
federal guarantees. The Capital Markets business unit directs its resources
toward identifying non-government guaranteed secondary loan markets to generate
non-interest income and as a further means of mitigating credit risk, leveraging
capital and replenishing liquidity.
In 1998, the Company began securitizing and selling certain whole loans and the
unguaranteed portions of certain government guaranteed loans that it originates,
and selling commercial revolving lines of credit to a commercial paper conduit.
In such securitization and commercial paper transactions, the Company sells a
pool of loans to a trust, which in turn issues certificates representing
beneficial ownership interests in the trust or which issues notes and sells such
securities through private placement transactions. In order to provide credit
enhancement for the certificates or notes, the Company will generally retain
subordinated certificates or notes and establish a cash reserve account. The
Company also records an interest-only strip in connection with the transactions.
For all securitizations and sales, the Company is the servicer of the underlying
loans. In 1998 the Bank established three special purpose subsidiaries to
facilitate completion of these transactions.
Business Strategy
The Company's strategy is to serve small and medium size manufacturers through
the following key activities:
Domestic Loan Origination Activities. Commercial business units currently
operate from the Hartford, Connecticut headquarters, as well as from regional
loan production or "representative" offices located in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Pittsburgh and Philadelphia,
Pennsylvania; Morristown, New Jersey; Rochester, New York; Washington D.C.;
Detroit, Michigan and Cleveland, Ohio. The Company intends to continue to expand
into new markets by opening additional representative offices as marketing
diligence is completed.
Financing Trade with International Emerging Markets. The International business
units operating from the Hartford, Connecticut headquarters are assisted in
their efforts abroad by contractual relationships with international master
agents in Argentina, Brazil, Central America, India, Indonesia, Korea, Mexico,
Philippines, Poland, South Africa, Turkey and West Africa. The master agents are
actively involved in providing professional financial services to small and
medium size manufacturers in their home countries. The Company also provides
working capital to U.S. manufacturers who export to, and in 1998 the Company
began financing U.S. imports from, international emerging markets.
4
<PAGE>
Lending Activities and Policies
The Company's distribution of domestic and international commercial loan
originations are detailed below:
<TABLE>
<CAPTION>
For the Years Ended
------------------------------------------
December 31, 1998 December 31, 1997
------------------- -------------------
Loan Originations Principal Percentage Principal Percentage
--------- ---------- --------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Domestic:
SBA loans.......................................... $122,178 31% $100,382 33%
USDA loans......................................... 45,162 12% 30,404 10%
Other commercial loans............................. 113,888 29% 84,975 28%
-------- -------- -------- --------
Total domestic banking............................ 281,228 72% 215,761 71%
International:
Ex-Im working capital lines........................ 37,276 10% 30,347 10%
Ex-Im medium term loans............................ 48,248 12% 60,852 19%
Other international loans.......................... 24,925 6% -- --
-------- -------- -------- --------
Total international banking....................... 110,449 28% 91,199 29%
-------- -------- -------- --------
Total commercial loan originations................ $391,677 100% $306,960 100%
======== ======== ======== ========
</TABLE>
Marketing
Domestic Lending
The Company originates domestic loans through its 53 commercial loan officers in
eleven offices who seek to establish long-term relationships with their clients.
The Company believes it is uniquely positioned to serve its domestic market
through an ability to provide clients with a flexible combination of lines of
credit, term loans and mortgages for industrial property and trade financing.
The Company generally utilizes the SBA, USDA Ex-Im Bank and/or privately insured
loan guarantee and insurance programs as a part of a financing package in light
of an applicant's particular situation. The Company's participation in these
programs enables it to provide clients with longer loan terms than are typically
available to small and medium size manufacturers.
Commercial loan officers are responsible for marketing, underwriting, servicing,
monitoring and collecting payments on their portfolio of loans. The Company
believes that this broad range of responsibilities enables the commercial loan
officers to establish strong working relationships with both existing and
prospective clients and promotes strong client service and prudent loan
portfolio management. Commercial loan officers are encouraged to keep apprised
of market conditions through frequent contact with clients and potential
borrowers, to develop specific knowledge of their clients' businesses, and to
offer flexible structuring of loan products. In consultation with the borrower,
a commercial loan officer will evaluate the financing needs of the business and
then recommend the best way to structure the lending transaction to fit the
client's unique needs.
5
<PAGE>
The marketing efforts by commercial loan officers include participation in trade
associations serving the needs of small and medium size manufacturers;
contacting accountants, attorneys and other professionals known by the Company
to have contact with businesses in need of financing; personal visits; direct
mail solicitations; and referrals from existing clients. Since the target client
of both domestic and international loan officers is often the same, there is an
active cross-selling effort between these two areas.
Marketing Agreements
In addition to the marketing efforts of the Bank's domestic lending officers,
the Bank is seeking to market its domestic loan products through marketing
agreements with various trade and cooperative associations. In 1998, the Bank
entered into such agreements ("Marketing Agreements") with the National Rural
Utilities Cooperative Finance Corporation, and with various regional chapters of
the National Tooling & Machining Association. The Marketing Agreements provide,
among other things, for the applicable trade or cooperative association to
develop and implement a marketing plan pursuant to which the Bank has
implemented an expedited and streamlined credit application and approval process
for association members who desire commercial term loans from the Bank. The Bank
retains the sole discretion as to the credit standards to be applied and as to
whether to make any particular loan. The Marketing Agreements further provide
for the Bank to pay quarterly and annual compensation to such trade and
cooperative associations based upon the amount of loans made by the Bank to the
members of the associations.
International Lending
The Company has four international loan officers in the Trade Finance business
unit who target U.S. exporters eligible for trade financing programs, including
those supported by Ex-Im Bank. These loan officers market pre-export working
capital lines of credit. This International business unit has also recently
begun targeting U. S. buyers of goods from certain international emerging
markets. As with the domestic lending relationships, the Trade Finance business
unit is responsible for marketing, underwriting, servicing, monitoring and
collecting its portfolio of loans.
The Company has twelve international loan officers in its Americas and
Asia/Africa/Europe business units who target foreign purchasers of U. S. goods
eligible for short and medium term financing supported by Ex-Im Bank guarantees
and private sector insurance. These International business units are also
responsible for marketing, underwriting, servicing, monitoring and collecting
payments on their portfolios of loans.
Internationally, the Company has established contractual marketing relationships
with professional firms in twelve emerging markets who, in the course of
conducting their primary business, have frequent contact with local
manufacturers who require financing to purchase U.S. goods or are manufacturing
goods for export to the U. S. Prior to entering into relationships with these
"Master Agents," the Company conducts due diligence, including visiting the
prospective
6
<PAGE>
representative and conducting local diligence concerning their business
reputation and legal status. The Company also requires that each Master Agent be
trained on the Company's products and services at the Hartford, Connecticut
headquarters. Each Master Agent markets, on behalf of the Company, Ex-Im Bank
guaranteed and insured short and medium terms loans and privately insured export
loans in its respective market. Once the Master Agent develops a lead with a
potential borrower, it directs the prospect to a U.S.-based loan officer who
completes the application process. The Master Agent receives a negotiated fee
when a loan referral made to the Company has been underwritten and closed. The
Master Agent assists the loan officer in obtaining certain information from the
applicant and in responding to inquiries of the applicant, but does not have any
direct underwriting responsibilities. All decisions with respect to referrals of
Master Agents are made by the Company, which retains full control over
international loan originations.
Marketing efforts include visits to and direct mail solicitation of, U.S.-based
exporters of capital goods, direct mail solicitation of foreign-based
manufacturers and industrial trade organizations and in-country marketing by the
Company's network of Master Agents. The Company also entered into a contractual
strategic marketing alliance with Panalpina, Inc., a leading international
freight forwarding company to provide access to additional trade finance
opportunities.
Domestic Lending Services and Products
Loan Products and the Origination Process
The commercial loans originated by the Company include industrial mortgage loans
(i.e., loans to businesses collateralized by industrial real property),
equipment term loans and revolving lines of credit to manufacturers, wholesalers
and distributors, many of which are exporters. The typical commercial borrower
is a privately owned and operated company with annual sales of $2 million to $25
million, employing 10-175 workers, which has been in business for at least three
years. A number of the Company's borrowers have a proprietary product line,
export their products and/or have a geographically diverse client base. The
Company is typically the borrower's primary lender and provides loans which are
collateralized by assets of the borrower.
The Company originates loans to a variety of industries; however, based upon its
loss experience and economic forecasts, the Company may decide to de-emphasize
industries from time to time.
The interest rates accruing on the Company's commercial loans are typically
Prime-based, changing monthly or quarterly when the Prime Rate changes. The
Company also makes fixed rate loans from time to time. The Company originates
certain loans for sale through loan purchase programs pre-established with
investors. The term of a loan depends upon whether the loan is guaranteed or is
underwritten for a loan purchase program. Government guarantee programs give
clients access to longer term financing and slower amortization than otherwise
available. A government guaranteed mortgage loan has a maximum term and
amortization of up to 30 years, while the term and amortization of an
unguaranteed mortgage loan typically does not exceed 15 years. Equipment loans
are underwritten to correspond to the useful life of the
7
<PAGE>
equipment and generally range from 5-15 years. SBA guaranteed working capital
term loans range from 7-10 years, while unguaranteed working capital revolving
lines of credit have one-year terms. Medium term loans are generally fully
amortizing.
The primary collateral sought by the Company for commercial loans consists of
liens which are generally first liens, on owner-occupied industrial real estate,
equipment, inventory and/or accounts receivable, although additional collateral
may include junior liens on residential properties. The Company generally
requests the personal guarantee of the principals of a business because the
Company believes this induces the guarantor to facilitate repayment of the loan.
In striving to meet the credit needs of its clients, the Company utilizes
government guarantee loan programs which allow it to offer longer-term loans
while mitigating the credit risk to the Company through the government
guarantee. The two government guarantee loan programs utilized by the Company's
Commercial business units to provide financing to its niche market are discussed
below.
SBA Guaranteed Loan Originations
The Company utilizes the SBA's 7(a) loan program for eligible borrowers. The
Company has Preferred Lender status in nineteen SBA "districts." Preferred
Lender status allows the Bank to approve loans on behalf of the SBA, with the
national SBA processing center's concurrence that the applicant meets the SBA
eligibility requirements. The SBA generally completes its eligibility review
within 24 hours of submission. The Company has Certified Lender status in twenty
districts. Certified Lender status entitles the Bank to 72-hour turnaround from
local SBA district offices for approval of loan applications.
The SBA's 7(a) loan program provides for a guarantee equal to 75% of the
principal balance, up to a maximum guarantee of $750,000 per borrower.
The Company makes SBA loans to businesses which qualify under agency regulations
as a "small business." The primary operative SBA eligibility criterion are
privately-owned manufacturers employing fewer than 500 workers. Loans may
generally be used for the acquisition or refinancing of plant and equipment,
working capital and debt consolidation.
In the event of default, the SBA and Company share in any collections or
collateral on a pari passu basis. For example, if a loan carries a 75%
guarantee, the SBA receives 75% of all collections while the Company receives
25% of such amounts, beginning with the initial recovery. The SBA also
reimburses the Company's collection costs on a similar basis.
If the SBA establishes that any resulting loss is attributable to a failure by
the Company to comply with SBA policies and procedures in connection with the
origination, documentation or funding of a loan, the SBA may decline to pay the
guaranteed amount, or if the guaranty has already been paid, may seek recovery
of funds from the Company. With respect to guaranteed SBA loan participations
which have been sold, the SBA will first honor its guarantee and then
8
<PAGE>
seek compensation from the Company in the event that a loss is deemed to be
attributable to such failure to comply with SBA policies and procedures.
USDA Guaranteed Loan Originations
The Company utilizes the Business and Industry Program ("B&I Program") of the
USDA when applicable based on an applicant's geographical location and other
characteristics. The B&I Program provides for 80% guarantees on loans with
principal balances up to $5 million and 70% guarantees on loans with principal
balances up to $10 million and, therefore, enables the Company to provide
financing to borrowers with greater needs than those eligible for SBA loans and
non-guaranteed commercial loans from the Company, due to legal lending limit
constraints. The stated purpose of this program is to support industry,
employment and general economic and environmental conditions in rural
communities, which are defined as towns with fewer than 50,000 inhabitants. Such
loans may be utilized for acquisition, improvement or refinancing of plant,
equipment, working capital and debt consolidation.
Loans to be guaranteed under the B&I Program are submitted to the USDA district
office and, depending on that office's loan authority, may be required to be
forwarded to the national USDA for approval. The USDA approved the Company as a
Certified Lender in 1997, making it one of the first USDA Certified Lenders
nationally. As a Certified Lender, the Company is recognized as a "Subject
Matter Expert" and is able to reserve funds, which facilitates the processing of
USDA loans.
The guarantee of the USDA also provides for pari passu recovery of collection
proceeds, and for recourse to the Company similar to that discussed above for
SBA loans in the event the Company is found to have been negligent in the
origination, documentation or funding of USDA loans.
Domestic Underwriting
For the Company's domestic underwriting process, the Company's staff seeks to:
(i) analyze borrowers' credit profiles; (ii) assess the collateral underlying a
loan; (iii) assure compliance with eligibility requirements for inclusion under
any applicable guarantee programs; and (iv) obtain or provide appropriate
documentation for the transaction.
Domestic lending officers receive and assemble initial applications, analyze the
creditworthiness of proposed borrowers, prepare credit memoranda, and aided by
staff, prepare any required government guarantee loan application forms and
conduct credit and trade reference checks. In the course of analyzing the
creditworthiness of prospective borrowers, commercial lending officers evaluate
each applicant's and any guarantors' financial statements, credit reports,
appraisals and other information regarding the value of collateral the
experience, strength and continuity of the borrower's management business plans
and other data to determine if the credit and collateral satisfy the Company's
standards and compliance with any applicable government guaranteed loan program
requirements. Such standards may include debt service coverage ratios, or other
financial ratios, reasonableness of the borrower's projections (when submitted),
the
9
<PAGE>
experience, strength and continuity of the borrower's management, the financial
condition of individual guarantors, the value of collateral, and compliance with
government guarantee loan program requirements. The originating officer performs
on-site inspections to determine the condition of a borrower's facility, the
manner in which business is being conducted, the condition and maintenance of
assets, the existence of environmental issues, and other market conditions.
Originating lending officers have no authority to approve a loan on their own.
Subject to approval by the Credit Policy Officer, the business manager of each
commercial business unit and the Company's Division Executives have lending
authority in accordance with their experience. Any loans above this lending
authority must be approved by the Loan Committee of the Bank's Board of
Directors. All loans to a borrower and its affiliates are aggregated to
determine whether they are within an individual's lending authority.
Upon initial approval by a business manager, the credit memorandum must be
approved by the Credit Policy Officer, who reports to the Chief Credit Officer.
The Credit Policy Officer reviews the memorandum and supporting file for
compliance with internal Company policy as well as applicable government
guarantee requirements. If additional approvals are required, the credit
memorandum is forwarded to the appropriate parties as noted above. If the
financing package includes a government guaranteed loan, the application is
forwarded to the applicable government agency as required.
The Company performs a credit analysis on all applications, considering the type
and value of the assets collateralizing a loan, the characteristics of the
borrower, the borrower's industry, and the anticipated debt service ratio. The
Company generally requires that a borrower's most recently completed fiscal year
financial statements demonstrate historical debt service coverage ratio of at
least 1.25 to 1. If requested funding is for plant or line of business
expansions, consideration may also be given to projected results and, therefore,
certain loans may be granted when historical debt service coverage is less than
1.25 to 1.
Real property taken as primary collateral for a loan is valued by an independent
appraiser in accordance with federal banking regulations, and the appraisal is
then subject to an internal review in accordance with such regulations.
Equipment serving as primary collateral for a loan is generally valued by an
independent equipment appraiser. The Company will generally obtain a Phase I
environmental report completed in accordance with the standards of the American
Society for Testing and Materials on any commercial real property to be
mortgaged. Additional environmental reporting and remediation are required prior
to closing if environmental issues either exist or are suspected.
The Company's standard underwriting criteria details the maximum advance rates
which are utilized for each type of collateral. Commercial property is generally
given a collateral value for underwriting purposes equal to 80% of the appraised
value; finished goods and raw material are generally valued at 50% of book
value; trade accounts receivable under 90 days are generally valued at 75% of
book value.
10
<PAGE>
Although the maximum prescribed collateral values are generally utilized in the
Company's analyses, there may be instances where the maximum values are reduced
or, due to the borrower's situation, special consideration may be given to
applications exceeding the general standards. Proposed exceptions to the
Company's loan policy are reviewed by the approving officers and Loan Committee,
when applicable. Decisions to approve such loans are made on a case-by-case
basis and depends upon the overall creditworthiness of the applicant. The
overall trends in underwriting exceptions are monitored by the Chief Credit
Officer and the Company's Loan Committee.
International Lending Services and Products
The Company's International Lending business units underwrite revolving lines of
credit to U.S. manufacturers, short and medium term loans to foreign buyers of
U.S. goods, short term loans to U.S. buyers of foreign goods, and letters of
credit issued in connection with such facilities.
The International lending business units include the following:
<TABLE>
<CAPTION>
Business Units/Territory Products Used Description
- ------------------------ ------------- ------------
<S> <C> <C>
Trade Finance (principally the Working capital line of credit; 90% One year revolving line of credit
Northeast, Mid-atlantic and Midwest) Ex-Im guaranteed; indexed to U.S. to U.S. manufacturers
Prime, variable daily; U.S. dollar collateralized by export accounts
denomination receivable and inventory
90-360 day U.S. import term loan; Financing of accounts receivable
discount note; 95% privately insured due from U.S. manufacturer
purchasing goods from international
emerging markets; unsecured
Americas (principally Argentina, Short and medium term loan; 100% 1- to 5-year term loans to foreign
Brazil, Central America, Mexico) guaranteed by Ex-Im Bank or privately purchasers of qualified U.S. made
insured (generally 95%); indexed to inventory and equipment; unsecured
Asia/Africa/Europe (principally 6-month LIBOR, variable semi-annually; or secured by equipment
India, Indonesia, Korea, Philippines, U.S. dollar denominated
Poland, South Africa, Turkey and West
Africa)
</TABLE>
Ex-Im Bank is an independent agency of the U.S. whose mission is to facilitate
export financing of U.S. goods and services by neutralizing the effect of export
credit subsidies from other governments and absorbing credit risks that the
private sector will not accept. The Company
11
<PAGE>
utilizes the Ex-Im Bank's loan guarantee and insurance programs designed to
support small and medium size U.S. exporters. In 1997 the Company received Ex-Im
Bank's annual "Small Business Bank of the Year" award.
International Lending - United States
Export Working Capital and U.S. Import Loan Products and the Origination Process
The typical U.S. client for the Company's international products is a U.S.-based
manufacturer with sales of $2 million to $25 million and export financing needs.
The Trade Finance business unit handles these clients, which comprise the same
target profile as for the Company's domestic loan officers.
The one-year revolving Ex-Im Bank working capital lines of credit are indexed to
WSJ Prime and adjust daily. The primary collateral for these loans includes
export-related accounts receivable and inventory. The accounts receivable are
generally insured under an Ex-Im Bank insurance policy, private export credit
insurance or an acceptable letter of credit. Open accounts receivable may
qualify as collateral if approved in advance by the Company and Ex-Im Bank.
Borrowers must submit borrowing base certificates to the Company to evidence the
availability of acceptable collateral when an advance is requested, and monthly
thereafter.
The Company is one of approximately twelve lenders in the U.S. with "AA Level
Delegated Authority" status with respect to Ex-Im Bank's working capital loan
guarantee program and, therefore, has authority to approve working capital lines
up to $5 million per borrower, up to an aggregate portfolio of $75 million
without prior Ex-Im Bank approval.
In the event of a loan default, the Company and Ex-Im Bank share in all loan
recovery proceeds on a pari passu basis in accordance with the 90%
guaranteed/10% unguaranteed ratio. The Company also has the responsibility to
ensure that loans are underwritten, documented and funded in accordance with
Ex-Im Bank polices and procedures in order to avoid loss of the guarantee.
The loans made by the Company to finance the purchase by U.S. manufacturers of
goods from international emerging markets are unsecured loans which are
discounted at origination to yield a market rate. The Company has obtained a
credit risk policy from a private sector insurance company to insure loans made
under this program. In the event of a loan default, the insurance company will
pay the Company, subject to certain deductibles, 95% of the principal balance,
plus accrued interest. The Company has the responsibility to ensure that loans
are underwritten, documented and funded in accordance with the insurance policy
in order to avoid loss of the insurance.
12
<PAGE>
International Lending - Emerging Markets
Short and Medium Term Loan Products and the Origination Process
Emerging market-based clients of the Company's Americas and Asia/Africa/Europe
business units are typically small and medium size manufacturers requiring
financing to purchase equipment, components and raw materials from the U.S.
The Company primarily uses Ex-Im Bank guarantee and insurance programs to
mitigate its credit risk to the borrower. In 1998, as an alternative to the
Ex-Im Bank product, the Company obtained a credit risk insurance policy for
short and medium term loans to manufacturers in certain international emerging
markets from a private sector insurance company. The underwriting criteria are
substantially the same under both the Ex-Im Bank and privately insured programs,
although Ex-Im Bank imposes U.S. content measurements.
The Ex-Im Bank guarantee or insurance provides a 100% cover on the medium term
loans and generally a 95% cover on the short-term loans. The private sector
insurance policy generally insures 95% of the short and medium term loans. With
the private sector insurance policy, the Company has discretionary credit
approval authority for loans up to $750,000 which meet the underlying criteria
of the private sector insurance policy. The Company tends to utilize the
insurance policy for smaller dollar requests to facilitate approval time.
Medium term loans are generally 3-5 years in term, and finance the acquisition
of qualified U.S.-made capital goods. The Ex-Im Bank program allows the
financing of up to the lower of 85% of purchase price or 100% of U.S. content.
Certain other U.S. content and product requirements must also be met. The loans
range in size from $150,000 to $10 million and are U.S. dollar-denominated.
Although the purchase of the equipment is being financed, the Ex-Im Bank loans
are unsecured; the Company relies on the borrower's cash flow and the 100% Ex-Im
Bank guarantee or Ex-Im insurance. The Company does obtain a security interest
in the equipment being underwritten pursuant to the private sector insurance
policy.
International lending officers are responsible for marketing, underwriting,
servicing, monitoring and collecting their portfolios of loans. Because the
medium term loans are fully amortizing with semi-annual payments, there is less
post-closing analysis required for performing loans than for other types of
loans made by the Company.
In the event of default, Ex-Im Bank handles the liquidation of Ex-Im guaranteed
medium term loans and pays the Company 100% of the principal balance, plus
accrued interest. See "Delinquency and Collection Activities."
International Lending Underwriting
International lending officers receive and assemble initial applications,
analyze the creditworthiness of proposed borrowers, prepare memoranda, and aided
by staff prepare the required Ex-Im Bank and private sector insurance loan
application forms and conduct credit and
13
<PAGE>
trade reference checks. For short and medium term loans, in-country Master
Agents, where applicable, aid in the transaction by obtaining required financial
or operational data from borrowers and generally assist in the loan origination
and closing process.
The Company's international lending officers will often visit the prospective
U.S. borrower's place of business and perform on-site inspections. The Company
will generally instruct its in-country Master Agents to make such inspections of
foreign borrowers. Although certain of the international loans are unsecured,
site inspections are conducted in most cases because such information is helpful
in assessing a borrower's operations.
The approval process is substantially similar to that followed by the commercial
lending officers. The Credit Policy Officer reviews the memorandum and
supporting file for compliance with internal Company policies as well as
applicable Ex-Im Bank or private insurer program parameters. As with the
domestic lending, exceptions to the Company's and Ex-Im Bank's loan policies are
entertained on a case-by-case basis by the approving loan officers, and
acceptance of exceptions depends upon the overall creditworthiness of the
applicant.
Working capital lines of credit are collateralized by export-related inventory
and accounts receivable less than 90 days old; such collateral has maximum
prescribed collateral values of 75% and 90%, respectively. As is the case with
respect to domestic loans, the collateral value required to support a loan is
based on the borrower's individual circumstances, and applications exceeding the
Company's general standards may receive special consideration.
For short and medium term loans, debt service coverage and operating history are
reviewed in the underwriting process. The lending officer also considers the
availability to the borrower of U.S. dollars and other "hard" currency revenue
sources from sales to the U.S. and other stable currency markets.
While most working capital lines of credit are within the Company's "AA
Delegated Authority", applications which do not comply with and/or are above the
Company's authority, and all Ex-Im Bank short and medium term loans, require
Ex-Im Bank approval. U.S. import loans in excess of $500,000, and short and
medium term loans in excess of $750,000, require approval from the private
sector insurance company if they are to carry such insurance.
Capital Markets and Loan Servicing
Capital Markets Activities
The Capital Markets business unit was established in July 1996 to assume
responsibility for the non-recourse, servicing-retained sale of SBA, USDA and
Ex-Im Bank government guaranteed loans and to identify markets for the sale of
non-guaranteed mortgage, term and revolving loans on a non-recourse,
servicing-retained basis. In 1998, the Capital Markets business unit completed
the two securitizations of the unguaranteed portions of SBA loans and certain
whole commercial loans and a sale of revolving lines of credit to a commercial
paper conduit. Such
14
<PAGE>
capital markets activities allow the Company to leverage capital, replenish
liquidity, mitigate the risk of balance sheet exposure to any single borrower,
and reduce reliance on government guaranteed loan programs for revenue.
The guaranteed portions of SBA and USDA loans are generally sold during the
quarter of origination on a single loan basis to established brokers. Brokers
generally pool the SBA guaranteed portions. USDA loans are individually sold.
The guaranteed portions of the Ex-Im Bank loans and lines of credit are sold to
various parties, including Private Funding Export Funding Corporation ("PEFCO").
PEFCO is a private corporation established with the support of the United States
Treasury and Ex-Im Bank to assist in financing exports of U.S. goods and
services by making direct loans to foreign importers of U.S. made goods, and to
provide liquidity support for private sector lending utilizing Ex-Im Bank
programs. The Company is a 1% shareholder and one of among approximately 50
PEFCO shareholders, with a common stock investment of $599,000 at December 31,
1998.
SBA and USDA regulations permit the Company to sell a portion of the
unguaranteed amount of loans originated under their respective programs. In
accordance with SBA and USDA regulations, the Company is required to retain a 5%
interest in the unguaranteed portion of the loan when some of the unguaranteed
portion is sold on a loan-by-loan basis. SBA regulations require that the
Company hold retained interests in the unguaranteed portion of securitized loans
equal to 10% of the transaction. Upon the sale of such unguaranteed portions,
the Company shares in the payment stream and collateral on a pari passu basis
with all (guaranteed and unguaranteed) investors, beginning with the initial
recovery.
In 1998 the Company completed commercial loan securitization transactions and
sales to a commercial paper conduit involving the issuance of $113.3 million of
senior and subordinated securities. Approximately 56% of the $117.1 million
loans included in the securitizations were originated in 1998. In connection
with the SBA Loan Backed Series 1998-1, completed in June 1998, a $24.2 million
Class A certificate, rated AA by Moody's Investor Services, Inc. was sold in a
private placement. A $2.7 million Class B certificate, rated BBB by Moody's
Investor Services, Inc. is held by the Company. In connection with the Business
Loan Trust 1998-A backed by commercial term loan securitization and completed in
December 1998, a $55 million senior note, rated AAA by Duff and Phelps Credit
Rating Co. and Aaa by Moody's Investor Services, Inc. was sold in a private
placement. A $3.2 million A rated note, a $3.2 million BBB rated note and a $3.1
million unrated note are held by the Company from this securitization. A $21.4
million sale to an asset-backed commercial paper conduit facility also occurred
in December. The Company holds a $3.8 million subordinated interest to the
senior $21.4 million loans sold in the commercial paper sale.
The Capital Markets business unit has developed a list of potential buyers of
non-guaranteed mortgage loans, term loans and revolving lines of credit and
devotes substantial resources to the identification of such buyers. A primary
objective in the negotiation and sale of such loans is the Company's retention
of sole responsibility for borrower contact. Investors meet with borrowers only
in rare circumstances, and generally rely on the Company to prudently service
and monitor
15
<PAGE>
lending relationships. The Company believes that this is important to maintain
client relationships and also reflects investor confidence in its servicing
ability and reputation.
Loan Servicing Activities
At December 31, 1998, the total loan portfolio managed by the Company was $779.1
million as compared to $573.5 million at December 31, 1997.
The Company services substantially all of the loans it originates, whether
securitized, sold to investors or held in portfolio. Servicing includes
collecting payments from borrowers and remitting applicable payments and
required reports to any investors; accounting for principal, interest and any
real estate taxes or other escrow receipts and payments; contacting delinquent
borrowers; supervising foreclosures; and liquidating collateral when required.
Other than tasks performed by the assigned lending officers, loan servicing
functions are centralized in the Hartford, Connecticut headquarters.
The Company receives servicing fees on loans serviced for others in varying
amounts, as determined under the particular terms of the sale. Management
believes that servicing most loans originated enhances the Company's
relationship with borrowers. This contact allows the Company to continue to
offer its loan and deposit products to clients who may need additional
financing. Further, such arrangements provide an additional and profitable
revenue stream that is less cyclical than the business of originating and
selling loans.
After a loan is closed, the Loan Servicing business unit reviews the loan files
to confirm that loans were originated in accordance with any applicable
government guarantee program guidelines and Company policies. Thereafter, the
loan officers and the Loan Review business unit conduct periodic reviews of the
borrower's financial condition.
Delinquency and Collection Activities
The assigned loan officer retains responsibility for routine collection of his
or her portfolio. The Company attempts to collect all loans on a 30-day basis,
leaving very few loans past due 30 days or more at any month end. An officer's
initial collection efforts generally begin when an account is 15 days past due.
At 20 days past due, a reminder notice is sent to the borrower and the officer
again attempts to contact the borrower to determine the reason for the
delinquency and if the account will be brought current.
If a borrower is unable to make a payment within 30 days of the due date as of
month-end, and has not made acceptable alternative arrangements with the
Company, the officer issues a past due letter requiring the borrower to make the
required payment within 10 business days by certified or cashiers check. If
payment is not remitted on time, the account is transferred to the Company's
Asset Recovery business unit for consideration of additional collection
procedures, including issuance of a demand letter and possible liquidation of
collateral.
16
<PAGE>
The Asset Recovery business unit is responsible for contacting the borrower and
analyzing its current and projected financial condition, the reasons leading to
the delinquency and the value of the collateral available to the Company. The
Asset Recovery Officer then proposes a workout plan to the Chief Credit Officer
and other involved members of senior management. The Asset Recovery business
unit will also provide any required notices and generally seek to comply with
applicable government guarantee program or investor requirements.
If a modification of loan terms or other acceptable workout cannot be achieved
within a reasonable time frame, the Company will liquidate the collateral
securing the loan. The Company prefers not to take title to real property or
equipment unless required to facilitate the collection process. The Company
solicits assistance from the principals of the delinquent borrower to effect the
liquidation of any property, with title remaining in the borrower's name,
thereby avoiding a lengthy foreclosure or repossession process and exposure to
the Company regarding environmental or other liability issues. The Company has
generally found principals of borrowers to be cooperative in assisting the
Company to liquidate collateral efficiently. The Company follows the same
general workout procedures for substantially all of the loans serviced.
If a loan carries an SBA guarantee, the responsible SBA District Office will be
notified of the delinquency and will be presented with a liquidation plan within
60-90 days of such delinquency. Unless the SBA objects, the Company will carry
out the terms of the liquidation plan. As a Preferred Lender, the Bank has
responsibility and authority over liquidation procedures on all SBA guaranteed
loans serviced. Any loss after liquidation of collateral is allocated pro rata
between the guaranteed and unguaranteed portions of an SBA Loan. After an SBA
loan becomes 60-90 days past due, the SBA, at the Company's request, will
repurchase the guaranteed portion of the principal balance of the loan at par
from the secondary market investor, together with accrued interest covering a
period of up to 120 days.
USDA procedures require that the Company file a liquidation plan when it is
believed action should be taken on a delinquent loan, which is generally when
the loan is 60-90 days delinquent. The USDA has 30 days to review the plan. The
Company will then execute the approved plan or work with the USDA to arrive at a
mutually acceptable plan. Any loss after liquidation of collateral is allocated
pro rata between the guaranteed and unguaranteed portions of the USDA loan. The
holder of the guaranteed portion may request that the USDA repurchase the
guaranteed portion at any time, or the Company will request repayment on such
holder's behalf when liquidation is complete. The USDA does not impose any
restrictions on the number of days for which interest will be paid on the
guaranteed portions.
The liquidation of delinquent working capital and medium term Ex-Im Bank loans
is handled by Ex-Im Bank. The Company may submit a claim for repurchase at any
time between 30 and 120 days after a delinquency occurs, but at no time may such
claim be made more than 150 days after the delinquency. Ex-Im Bank will make
payment under its guarantee within 30 days after acceptance of the Company's
request.
In the event of default on a private sector insured loan, the Company handles
the liquidation of the loan during a 150 day waiting period. At the end of the
waiting period, subject to certain
17
<PAGE>
deductibles being satisfied, the private sector insurance company pays the
Company 95% of the principal balance, plus accrued interest. At that time the
insurance company assumes the liquidation of the loan.
The Company retains responsibility for the proper documentation and servicing of
all loans serviced for others, and may incur losses related to such loans if it
is found to be negligent by a guaranteeing agency, insurer or investor in
carrying out these duties.
Unguaranteed and uninsured loans or unguaranteed and uninsured portions of loans
held by investors are subject to negotiated servicing agreements, which in some
cases, provide investors with the option of assuming responsibility for all
collection efforts after a loan becomes 60-90 days delinquent. If the Company is
contractually responsible for collection efforts, the servicing agreements
generally require that the investor pre-approve liquidation actions.
Credit Risk Management
The Chief Credit Officer has primary responsibility for credit risk management,
ensuring the appropriateness of underwriting criteria and application thereof,
the implementation of RISCOPE/sm/, (the Company's proprietary commercial risk
assessment model), and the independent analyses of loans by the Loan Review
business unit.
The Credit Policy Officer, who reports to the Chief Credit Officer, reviews all
credit memoranda for compliance with the requirements of government guarantee
programs and Company credit policies. If, based on particular facts and
circumstances, policy exceptions are proposed by lending officers, the Credit
Policy Officer will ensure that all appropriate policy exceptions are documented
and approved by the authorized party. The Chief Credit Officer periodically
evaluates the nature and trends of such exceptions, reporting them quarterly to
the Board of Directors' Loan Committee.
The Bank "risk rates" its loan portfolio by monitoring changes in the financial
condition of borrowers, assessing overall economic trends, and assigning
numerical rating to individual loans. The Company applies a nine tiered risk
rating system. The rating system, in conjunction with other available
quantitative and qualitative data, is utilized to assist management in its
quarterly evaluation of the adequacy of the Allowance for Loan Losses.
The assigned lending officer has primary responsibility for risk ratings, and
such officer's decisions are periodically reviewed by the Loan Review business
unit. Risk ratings are based on the borrower's operating cash flow, industry,
product line, earnings, assets, liability, management experience, debt capacity,
and prior credit history with the Company.
The Company has developed a proprietary risk analysis model, RISCOPE/sm/, used
in the initial underwriting, post-closing loan monitoring and rating process by
lending officers and the Loan Review business unit. RISCOPE/sm/ assists the
Company in quantifying the credit risk of commercial clients. The model takes
into account quantitative and qualitative factors and was
18
<PAGE>
designed to analyze the Company's primary client base: small and medium size
manufacturers. Additionally, the model helps management identify weaknesses in
credits earlier than might otherwise be done if payment default were their only
manifestation.
The Loan Review business unit reviews the loan portfolio to evaluate the
appropriateness of officer risk ratings and overall trends in the portfolio.
Loan Review results are reported to the Loan Committee of the Board quarterly.
Private Banking
Historically, the Company's Private Banking business unit provided funding for
the Company by managing its deposit base, which consisted of demand deposits,
money market accounts and time certificates of deposits, by targeting the
commercial depository accounts of small and medium size manufacturers, as well
as the personal accounts of their principals, and by offering a full array of
financial products. Subsequent to the sale of the Company's checking, savings
and money market accounts, the Private Banking business unit will continue to
solicit retail certificates of deposit.
The Company has entered into a contractual agreement with CIGNA Financial
Services, Inc. with respect to providing investment, brokerage and cash
management services. The Company's Private Banking business unit has not yet
introduced these services as legal and regulatory diligence is currently
underway. Once introduced, all investment services will be supported by CIGNA
Financial Services' registered representatives.
Competition
The Company competes for clients with other commercial and savings banks,
finance companies, mutual funds, insurance companies, brokerage and investment
banking firms and certain other nonfinancial institutions, many of whom are able
to devote far greater resources than the Company to market, underwrite and
service loans to the same client base. The Company competes by emphasizing its
expertise and knowledge of its clients' businesses, commitment to service,
flexibility in structuring financial transactions, and strong relationships.
Through the combined utilization of government guaranteed loan programs, the
Company is able to provide flexible longer-term financing than would otherwise
be available to borrowers.
Regulation and Supervision
Holding Company Regulation
The Company is registered as a bank holding company and regulated and subject to
periodic examination by the Federal Reserve Bank ("FRB") under the Bank Holding
Company Act ("BHCA").
19
<PAGE>
Pursuant to FRB regulations, the Company is limited to the business of owning,
managing or controlling banks and engaging in certain other bank-related
activities, including those activities that the FRB determines from time to time
to be closely related to banking. The BHCA requires, among other things, the
prior approval of the FRB if a bank holding company proposes to (i) acquire all
or substantially all of the assets of a bank, (ii) acquire direct or indirect
ownership or control of more than 5% of the outstanding voting stock of any bank
(unless it already owns a majority of such bank's voting shares) or (iii) merge
or consolidate with any other bank holding company.
As a bank holding company, the Company is required by the FRB to act as a source
of financial strength and to take measures to preserve and protect the Bank. As
a result, the Company may be required to inject capital in the Bank if such a
need arises. The FRB may charge a bank holding company such as the Company with
unsafe and unsound practices for failure to commit resources to a subsidiary
bank when required.
To be considered regulatory capital, loans from the Company to the Bank must be
on terms subordinate in right of payment to deposits and to most other
indebtedness of the Bank.
The FRB, OCC and Federal Deposit Insurance Corporation (the "FDIC") collectively
have extensive enforcement authority over bank holding companies and national
banks in the United States. This enforcement authority, initiated generally for
violations of law and unsafe and unsound practices, includes, among other
things, the ability to assess civil money penalties, to initiate injunctive
actions and to terminate deposit insurance in extreme cases.
The bank regulatory agencies' enforcement authority was substantially enhanced
by the Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). FIRREA significantly increased the amount of civil money penalties
and expanded the grounds for imposing such penalties. Also, under FIRREA, should
a Bank failure result in a loss to the FDIC, any other FDIC-insured subsidiaries
of the Company could be required to compensate the FDIC for the estimated amount
of the loss. Additionally, pursuant to FDICIA, the Company in the future could
have the potential obligation to guarantee the capital restoration plans of any
undercapitalized FDIC-insured subsidiaries it may control.
Interstate Banking
As of September 29, 1995, the Riegle-Neal Interstate Banking and Branching
Efficiency Act of 1994 (the "RNA") permitted adequately capitalized and managed
bank holding companies to acquire control of banks in any state. Additionally,
beginning on June 1, 1997, the RNA enabled banks to branch across state lines,
although individual states are authorized to permit interstate branches earlier
or to elect to opt out entirely.
20
<PAGE>
Regulation of the Bank
General
The Bank, as an FDIC-insured national bank, is subject to regulation primarily
by the OCC, and secondarily by the FDIC. As a national bank, the Bank is a
member of the Federal Reserve System and its operations are subject to certain
FRB regulations. Various other federal and state consumer laws and regulations
also affect the operations of the Bank.
As a national bank, the Bank may be able to engage in certain activities
approved by the OCC which the FRB would not necessarily approve for the Company.
The OCC has been particularly aggressive in recent years in allowing national
banks to undertake an ever-increasing range of securities and insurance
activities. Along these lines, pursuant to certain revisions of the OCC's
regulations pertaining to banking activities effective on December 31, 1996,
national banks are permitted on a case-by-case basis to operate subsidiaries
engaging in activities not permissible for the Bank itself. Although the revised
regulations do not authorize any specific new activities, it is expected that
national banks, if eligible and if they obtain the approval of the OCC, will use
these regulations to expand further into the insurance and securities
businesses.
The revised OCC regulations contain "fire walls" intended to protect a national
bank from the risks taken by a subsidiary, including imposing a 10% cap on the
amount of bank capital that may be invested in a new subsidiary, as well as
requirements that extensions of credit to an operating subsidiary be
fully-collateralized and that transactions between the bank and subsidiary be
conducted at arm's-length. The parent national bank's exposure to any losses the
subsidiary may incur are limited to the bank's equity investment in the
subsidiary. Parent national banks are required to be well-capitalized both
before and after an investment is made.
Since OCC approval is required on a case-by-case basis for an eligible bank to
engage in activities not permissible for the bank to conduct directly, the
effect of these revised regulations on the operations of national banks is
unclear. Further, it is expected that Congress will consider new banking
legislation in the near future addressing these revisions.
As a national bank, the Bank may ordinarily lend up to 15% of its capital on an
unsecured basis to any one borrower, and may lend up to an additional 10% of its
capital to that same borrower on a fully secured basis involving readily liquid
collateral having an established market value as determined by reliable and
continuously available price quotations, and equal at least to the amount
borrowed. In addition, there are various other circumstances in which the Bank
may lend in excess of such limits, including authority to lend up to 35% of
capital and surplus when the loan is secured by documents of title to readily
marketable staples, unlimited authority if loans are guaranteed by a U.S.
government agency, and certain other exceptions relevant to international trade
finance.
Federal law also imposes additional restrictions on the Bank with respect to
loans and credit to certain related parties and transactions with the Company's
principal stockholders, officers, directors and affiliates. Extensions of credit
to such persons (i) must be made on substantially
21
<PAGE>
the same terms (including interest rates and collateral) as, and follow credit
underwriting procedures not less stringent than, those prevailing for comparable
transactions with members of the general public, and (ii) must not involve more
than the normal risk of repayment or present other unfavorable features.
Capital Adequacy
The federal bank regulatory authorities have adopted risk-based capital
guidelines to which the Bank is subject. The guidelines establish a systematic
framework that makes regulatory capital requirements more sensitive to
differences in risk profile among banking organizations, takes off-balance sheet
exposures into explicit account in assessing capital adequacy, and minimizes
disincentives to holding liquid, low-risk assets. These risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
financial instruments into four weighting categories, with higher levels of
capital required for the categories perceived as representing greater risk.
Under these guidelines, a banking organization's capital is divided into two
tiers. The first tier ("Tier 1") includes common equity, perpetual preferred
stock (excluding auction rate, money market or remarketable issues) and minority
interests held by others in a consolidated subsidiary, less goodwill and any
disallowed intangibles. Supplementary ("Tier 2") capital includes, among other
items, cumulative and limited-life preferred stock, mandatory convertible
securities, subordinated debt and the allowance for loan and lease losses,
subject to certain limitations and less required deductions as provided by
regulation.
Banking organizations are required to maintain a risk-based capital ratio of
total capital (Tier 1 plus Tier 2) to risk-weighted assets of 8%, of which at
least 4% must be Tier 1 capital. Federal bank regulatory authorities may,
however, set higher capital requirements when a banking organization's
particular circumstances warrant. As a general matter, banking organizations are
expected to maintain capital ratios well above the regulatory minimums.
In addition, federal bank regulatory authorities have established guidelines for
a minimum leverage ratio (Tier 1 capital to average total assets). These
guidelines provide for a minimum leverage ratio of 3% for banking organizations
that meet certain specified criteria, including excellent asset quality, high
liquidity, low interest rate exposure and the highest regulatory rating. Banking
organizations not meeting these criteria or which are experiencing or
anticipating significant growth are required to maintain a leverage ratio which
exceeds the 3% minimum by a least 100 to 200 basis points. The risk based
capital and leverage ratios of the Bank as of December 31, 1998 and December 31,
1997 are set forth in Note 7 to the Company's Consolidated Financial Statements.
Failure to meet applicable capital guidelines could subject a bank or bank
holding company to a variety of enforcement remedies available to the federal
bank regulatory authorities, including limitation on the ability to pay
dividends, the issuance of a capital directive to increase capital and, in the
case of a bank, the termination of deposit insurance by the FDIC or (in severe
cases) the appointment of a conservator or receiver.
22
<PAGE>
Dividends
The Bank is subject to legal limitations on the frequency and amount of
dividends that can be paid to the Company. The OCC, in general, also has the
power to prohibit the payment of dividends by the Bank which would otherwise be
permitted under applicable regulations if the OCC determines that such dividends
would constitute an unsafe or unsound practice.
OCC approval is required for the payment of dividends by the Bank in any
calendar year if the total of all dividends declared by the Bank in that year
exceeds the current year's net income combined with the retained net income of
the two preceding years. "Retained net income" means the net income of a
specified period less any common or preferred stock dividends declared for that
period. Moreover, no dividends may be paid by a national bank in excess of its
undivided profits account. In addition, the FRB and the FDIC have issued policy
statements which provide that, as a general matter, insured banks and bank
holding companies may pay dividends only out of current operating earnings.
There are also statutory limits on other transfers of funds to the Company and
any other future non-banking subsidiaries of the Company by the Bank, whether in
the form of loans or other extensions of credit, investments or asset purchases.
Such transfers by the Bank generally are limited in amount to 10% of the Bank's
capital and surplus to the Company and any such future subsidiary of the
Company, or 20% in the aggregate to the Company and all such subsidiaries.
Furthermore, such loans and extensions of credit are required to be fully
collateralized in specified amounts depending on the nature of the collateral
involved.
FDICIA
FDICIA was enacted on December 19, 1991. It substantially revised the bank
regulatory and funding provisions of the Federal Deposit Insurance Act and made
significant revisions to other federal banking statutes.
A central feature of FDICIA is the requirement that the federal banking agencies
take "prompt corrective action" with respect to depository institutions that do
not meet minimum capital requirements. Pursuant to FDICIA, the federal bank
regulatory authorities have adopted regulations setting forth a five-tiered
system for measuring the capital adequacy of the depository institutions they
supervise. Under these regulations, a depository institution is classified in
one of the following capital categories: "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized" and
"critically undercapitalized." Based on the Bank's current regulatory capital
position, management believes that the Bank is "well capitalized."
FDICIA generally prohibits the Bank from making any capital distribution
(including payment of a cash dividend) or paying any management fees to the
Company if the Bank would thereafter be undercapitalized. Undercapitalized
depository institutions are subject to growth limitations and are required to
submit a capital restoration plan acceptable to federal banking agencies. If a
23
<PAGE>
depository institution fails to submit an acceptable plan, it is treated as if
it is "significantly undercapitalized."
Significantly undercapitalized depository institutions may be subject to a
number of other requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, reduce total assets,
and stop accepting deposits from correspondent banks. Critically
undercapitalized institutions are subject to the appointment of a receiver or
conservator, generally within 90 days of the date of such institution is
determined to be critically undercapitalized.
Community Reinvestment Act
The Federal Community Reinvestment Act (the "CRA") requires the OCC to evaluate
the Bank's performance in helping to meet the credit needs of the community. The
Bank defines its CRA marketplace as Hartford County. This definition is not
intended to restrict the availability of credit services throughout the Bank's
general service area, but represents a special commitment the Bank has made to
provide lending and depository services to the community. As a part of the CRA
program, the Bank is subject to periodic examinations by the OCC and maintains
comprehensive records of its CRA activities for this purpose. Following its most
recent examination in March 1998, the Bank received a rating of "Satisfactory."
The Bank is specifically interested in making financing available to small and
medium size manufacturers in its defined lending area. The Bank evaluates credit
applications without regard to race, color, religion, national origin, gender,
marital status or age, and does not discriminate against any loan applicant
whose income may come entirely or in part from any public assistance program, or
against any applicant who has exercised in good faith any right under the
Consumer Protection Act. The Company maintains preferred status with the SBA,
USDA and Ex-Im Bank which enables it to provide access to credit products that
might otherwise be unavailable.
ITEM 2. PROPERTIES
The Company leases approximately 50,000 square feet in Hartford, Connecticut to
house its headquarters and lending and support staff. The Company maintains
leased space for representative offices in Boston and Springfield,
Massachusetts; Providence, Rhode Island; Morristown, New Jersey; Rochester, New
York; Philadelphia and Pittsburgh, Pennsylvania; Washington, D.C.; Detroit,
Michigan; and Cleveland, Ohio. The Company's leases generally provide for two
five-year renewal options and options on additional space. Management believes
that its existing facilities are adequate for their present and proposed uses
and that suitable facilities will be available on reasonable terms for any
additional space required.
24
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is involved in any legal proceedings except for
routine litigation incidental to the business of banking, none of which is
expected to have a material adverse effect on the Company's financial position,
results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of 1998 to a vote of
security holders through solicitation of proxies or otherwise.
25
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information required by this item may be found on the inside back cover of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Information required by this item may be found on page 4 of the Company's 1998
Annual Report to Shareholders, which is incorporated by reference and is filed
as Exhibit 13.1 hereto.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Information required by this item may be found on pages 5 through 20 of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by this item may be found on pages 16 through 18 of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information required by this item may be found on pages 21 through 43 of the
Company's 1998 Annual Report to Shareholders, which is incorporated by reference
and is filed as Exhibit 13.1 hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEMS 10 - 13
Information required by these items may be found in the Company's Proxy
Statement which is incorporated by reference.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
A. The following documents are filed as a part of this report:
1. Financial Statements set forth on pages 21 through 43 of the 1998
Annual Report to Shareholders which is filed herewith as Exhibit 13.1.
(i) Report of Independent Accountants
(ii) Consolidated Balance Sheets as of December 31, 1998 and 1997
(iii) Consolidated Statements of Income for the Years Ended December
31, 1998, 1997 and 1996
(iv) Consolidated Statements of Changes in Stockholders' Equity for
the Years Ended December 31, 1998, 1997 and 1996
(v) Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1997 and 1996
2. Financial Schedules:
None required.
3. Exhibits:
Exhibit
Number Description
------ -----------
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.*
3.2 Amended and Restated By-laws of the Registrant.*
10.1 Employment Agreement among Registrant, First National Bank
of New England and Brett N. Silvers dated April 15, 1994;
as amended by Letter Agreement dated July 3, 1997.*
10.2 Promissory Note of Brett N. Silvers, payable to the
Registrant, dated June 30, 1994, as amended.*
10.3 Stock Pledge Agreement, dated June 30, 1994, between the
Registrant and Brett N. Silvers, as amended.*
10.4 Amended and Restated 1996 Stock Option Plan.*
10.5 1994 Incentive Stock Option Plan, as amended.*
10.6 401(k) Plan.*
10.7 Lease between Cambridge One Commercial Plaza, LLC and the
Bank dated June 1, 1997.*
10.8 First Amendment of Lease between Cambridge One Commercial
Plaza, LLC and the Bank dated November 30, 1998.
27
<PAGE>
10.9 Second Amendment of Lease between Cambridge One Commercial
Plaza, LLC and the Bank dated as of March 26, 1999.
10.10 Employment Agreement between the Bank and Leslie A.
Galbraith dated August 25, 1997.*
10.11 Employment Agreement Amendment between the Bank and Leslie A.
Galbraith dated December 2, 1998.
10.12 Revolving Commercial Loan Warehouse and Security Agreement
among Prudential Securities Credit Corporation, First
National Bank of New England and First International
Bancorp, Inc., dated as of December 4, 1998.
10.13 Loan Purchase and Servicing Agreement among FNBNE Funding
Corp., First National Bank of New England, First Union
National Bank, Variable Funding Capital Corporation, First
Union Capital Markets, a division of Wheat First Securities,
Inc. and Marine Midland Bank, dated as of December 23, 1998.
10.14 Pooling and Servicing Agreement between Marine Midland Bank
and First National Bank of New England, dated as of May 31,
1998.
10.15 Sale and Servicing Agreement between FNBNE Business Loan
Trust 1998-A and First National Bank of New England, dated
as of December 1, 1998.
13.1 1998 Annual Report to Shareholders.
21.1 Subsidiaries of Registrant.
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule for the Year Ended December 31, 1998.
99 Agreement for Purchase and Sale of Assets and Assumption of
Liabilities between First National Bank of New England and
Hudson United Bank, dated as of December 31, 1998.**
* Denotes an exhibit which has previously been filed as an exhibit to
the Company's Registration Statement on Form S-1, Commission File No. 333-31339.
** Denotes an exhibit which has previously been filed as an exhibit to
the Company's Report on Form 8-K, Commission File No. 0-22861.
B. Reports on Form 8-K.
The Company did not file any Current Reports on Form 8-K during the quarter
ended December 31, 1998.
The Company did file a Report on Form 8-K dated January 8, 1999 to report
the signing of the Agreement for Purchase and Sale of Assets and Assumption of
Liabilities between First National Bank of New England (now known as First
International Bank, N.A.) and Hudson United Bank, dated December 31, 1998.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 29, 1999
First International Bancorp, Inc.
By: /s/ Brett N. Silvers
-----------------------------
Brett N. Silvers
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Brett N. Silvers
- -------------------------
Brett N. Silvers Chief Executive Officer March 29, 1999
/s/ Michael R. Carter
- -------------------------
Michael R. Carter Director March 29, 1999
/s/ Arnold L. Chase
- -------------------------
Arnold L. Chase Director March 29, 1999
/s/ Cheryl A. Chase
- -------------------------
Cheryl A. Chase Director March 29, 1999
/s/ Frank P. Longobardi
- -------------------------
Frank P. Longobardi Director March 29, 1999
/s/ Leslie A. Galbraith
- -------------------------
Leslie A. Galbraith Executive Vice President, March 29, 1999
Secretary and Treasurer
29
<PAGE>
EXHIBIT 10.8
FIRST AMENDMENT OF LEASE
------------------------
The Parties agree to the following effective as of the date of this
instrument:
SECTION I. THE PARTIES.
- --------- -----------
1.1 CAMBRIDGE ONE COMMERCIAL PLAZA, LLC, a Connecticut limited
liability company with a place of business in care of Cambridge Realty Partners,
LLC, 280 Trumbull Street, Hartford, Connecticut 06103, is hereinafter referred
to as "LANDLORD".
1.2 FIRST NATIONAL BANK OF NEW ENGLAND, a national banking association
with a place of business at One Commercial Plaza, Hartford, Connecticut 06103,
is hereinafter referred to as "TENANT".
SECTION II. THE LEASE.
- ---------- ---------
Landlord and Tenant entered into a Lease Agreement dated as of June 1,
1997, for premises in the building known as One Commercial Plaza and located at
280 Trumbull Street, Hartford, Connecticut. The Lease Agreement is referred to
herein as the "LEASE". All terms defined in the Lease shall have the same
meaning in this instrument unless redefined in this instrument.
SECTION III. AMENDMENTS TO THE LEASE.
- ----------- -----------------------
3.1 AMENDMENT TO SECTION 1.2 OF THE LEASE.
-------------------------------------
The following is hereby added to Section 1.2 of the Lease at the end
thereof:
In addition, from and after the Expansion C Commencement Date
(defined below), the Premises shall also include the premises set
forth below:
Expansion Space C 14,813 rentable square feet on the third floor.
The foregoing corresponds to the hatched area shown on Exhibit B-7
-----------
attached hereto and hereby made a part of this Lease. Such space is
hereinafter referred to as "Expansion Space C".
Exhibit B-7 attached to this Amendment is hereby incorporated into and made part
- -----------
of the Lease.
3.2 AMENDMENT TO SECTION 2.2 OF THE LEASE.
-------------------------------------
The following is hereby added to Section 2.2 of the Lease at the end
thereof:
Landlord hereby leases to Tenant, and Tenant accepts from
Landlord, Expansion Space C effective on the Expansion Space C
Commencement Date, as such term is hereinafter defined.
<PAGE>
With respect to Expansion Space C, Tenant may give Landlord
written notice at any time prior to October 15, 1999, that it has
elected to add Expansion Space C to the Premises effective on any date
prior to November 1, 1999, but not sooner than fifteen (15) days after
such notice. Effective on the date specified in such notice, Expansion
Space C shall be added to the Premises and considered part thereof. If
Tenant does not give such notice specifying a date prior to November
1, 1999, then automatically effective on November 1, 1999 (the earlier
of the date so specified or November 1, 1999, the "EXPANSION SPACE C
COMMENCEMENT DATE"), without notice or writing of any kind, Expansion
Space C shall be added to the Premises and considered part thereof.
Upon the earlier of (i) November 1, 1999, or (ii) the date that is
sixty (60) days after the Expansion Space C Commencement Date, the
Base Rent shall increase by the amount of Base Rent attributable to
Expansion Space C specified in Article 3 hereof, and additional rent
shall increase to reflect the increase in Tenant[_]s Share
attributable to Expansion Space C as specified in Article 4 hereof.
Notwithstanding anything to the contrary herein, however, the parties
acknowledge and agree that (i) [_]Base Operating Expenses[_] in
respect of Expansion Space C shall mean and refer to Operating
Expenses for calendar year 1998, (ii) "Base Taxes" in respect of
Expansion Space C shall mean and refer to Taxes payable by Landlord
with respect to the Property for the 1998 tax year, and (iii) "Base
Electric Expenses" in respect of Expansion Space C shall mean and
refer to Electric Expenses for calendar year 1998.
3.3 AMENDMENT TO SECTION 3.2 OF THE LEASE.
-------------------------------------
The following is hereby added to Section 3.2 of the Lease at the end
thereof:
Upon the earlier of (i) November 1, 1999, or (ii) the date that
is sixty (60) days after the Expansion Space C Commencement Date, the
annual Base Rent shall increase by Two Hundred Eighty-one Thousand
Four Hundred Forty-seven and 50/100 Dollars ($281,447.00), and each
monthly installment of Base Rent shall increase by Twenty-three
Thousand Four Hundred Fifty-three and 92/100 Dollars ($23,453.92).
3.4 AMENDMENT TO SECTION 4.3 OF THE LEASE.
-------------------------------------
The following is hereby added to Section 4.3 of the Lease at the end
thereof:
Upon the earlier of (i) November 1, 1999, or (ii) the date that
is sixty (60) days after the Expansion Space C Commencement Date,
Tenant[_]s Share shall increase by 2.199 percent, and each monthly
installment of additional rent shall increase accordingly.
-2-
<PAGE>
3.5 AMENDMENT TO SECTION 6.1 OF THE LEASE.
-------------------------------------
The following is hereby added to Section 6.1 of the Lease at the end
thereof:
Tenant has inspected Expansion Space C and accepts it in its "as
is" condition. Landlord and Tenant shall sign a Work Letter Agreement
in the form attached hereto as Exhibit D-1 (the "EXPANSION
-----------
SPACE C WORK LETTER"). Tenant shall perform Tenant's Work, as defined
in the Expansion Space C Work Letter, in accordance with the terms of
the Expansion Space C Work Letter and the terms of this Section 6 of
the Lease.
Exhibit D-1 attached to this Amendment is hereby incorporated into and made part
- -----------
of the Lease.
3.6 AMENDMENT TO SECTION 24 OF THE LEASE.
------------------------------------
Section 24 of the Lease is hereby amended to delete the address of the
Landlord to which notices shall be sent and to substitute the following
therefor:
Cambridge One Commercial Plaza, LLC
c/o Cambridge Realty Partners, LLC
280 Trumbull Street
Hartford, CT 06103
Attention: Mark R. Stone
SECTION VI. BROKERS.
- ---------- -------
Each party covenants, warrants and represents that it has not dealt with
any real estate broker or salesman in the finding, negotiation or execution of
this instrument. Each party agrees to indemnify and hold the other party
harmless against any and all claims for any brokerage commissions and/or any
finder's fee and all costs, expenses and liabilities in connection therewith,
including without limitation, attorneys' fees, court costs and expenses, arising
out of any dealings or negotiations the indemnifying party had with any broker
and/or finder in the finding, negotiation or execution of this instrument.
SECTION V. GENERAL CLAUSES.
- --------- ---------------
5.1 Except as modified by this instrument, Landlord and Tenant ratify
and confirm the terms of this Lease.
5.2 Terms defined in the Lease shall have the same meaning in this
instrument as in the Lease unless redefined in this instrument.
5.3 The Lease and this instrument are binding on Landlord and Tenant
and their respective heirs, successors and assigns.
5.4 Tenant's obligation to pay amounts due and owing prior to
termination or expiration of the Lease shall survive such termination or
expiration.
-3-
<PAGE>
5.5 The word "includes" means "includes without limitation". The word
"include" means "include without limitation". The word "any" means "any and
all". The word "until" means "unless and until".
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
November 30, 1998.
Witnessed by: LANDLORD:
CAMBRIDGE ONE COMMERCIAL PLAZA, LLC
By: One Commercial Management, LLC,
Its Managing Member
By: Levstone Commercial Management Corp.,
Its Managing Member
- ---------------------- By: /s/ Mark R. Stone
--------------------------------
- ---------------------- Name: Mark R. Stone
Title: Vice President
TENANT:
FIRST NATIONAL BANK OF NEW ENGLAND
By: /s/ Leslie Galbraith
- ---------------------- -------------------------------
Name: Leslie Galbraith
- ---------------------- Title: Executive Vice President
-4-
<PAGE>
EXHIBIT B-7
EXPANSION SPACE C
<PAGE>
EXHIBIT D-1
------------
EXPANSION SPACE C WORK LETTER AGREEMENT
This Expansion Space C Work Letter Agreement (the "WORK LETTER") is entered
into by CAMBRIDGE ONE COMMERCIAL PLAZA, LLC, a Connecticut limited liability
company with a place of business in care of Cambridge Realty Partners, LLC, 280
Trumbull Street, Hartford, Connecticut 06103 (hereinafter referred to as
"LANDLORD"), and FIRST NATIONAL BANK OF NEW ENGLAND, a national banking
association with a place of business at One Commercial Plaza, Hartford,
Connecticut 06103 (hereinafter referred to as "TENANT") in connection with a
certain First Amendment to Lease dated as of November ___, 1998, with respect to
space at the building sometimes known as One Commercial Plaza and located at 280
Trumbull, Hartford Connecticut (the "LEASE").
Landlord and Tenant agree as follows:
1. Plans. All design and architectural services and mechanical plans
-----
required for work in the Premises shall be prepared by Tenant at Tenant's sole
cost and expense and shall be subject to Landlord's prior review and approval,
which approval shall not be unreasonably withheld or delayed. Tenant
acknowledges that approvals withheld or delayed because of action or inaction of
any mortgagee are reasonably withheld or delayed.
2. Tenant's Work. Tenant accepts Expansion Space C in "as is"
-------------
condition.
2.01 Tenant shall, prior to doing any construction work in Expansion
Space C, submit to Landlord for Landlord's review and approval final and
complete dimensional and detailed plans and drawings of partition layouts,
including openings, ceiling and lighting layouts, and any and all other
information as may be necessary to complete Expansion Space C, with a completion
schedule for the same (all such plans are hereinafter referred to as "TENANT'S
PLANS"), which Tenant's Plans shall be prepared at Tenant's sole cost and
expense. Tenant shall provide to Landlord and any Superior Mortgagee, as defined
in the Lease, a certificate that the work contemplated by Tenant[_]s Plans
complies with all laws, permits, and governmental approvals.
2.02 Following Landlord's approval of Tenant's Plans, but not
earlier than the Expansion C Commencement Date, Tenant shall proceed to improve
and equip Expansion Space C in accordance with Tenant's Plans ("TENANT'S WORK").
2.03 As a contribution toward the cost of improving and equipping
Expansion Space C in accordance with Tenant's Plans, Landlord agrees, subject to
the conditions set forth in this Section 2.03, to pay Tenant, at the time and in
the manner hereinafter specified, an amount equal to the lesser of (i)
$177,756.00 ($12.00 per rentable square foot) or (ii) the amount of the total
actual costs incurred by Tenant for the labor and materials furnished or
supplied by or on behalf of Tenant in completing Tenant's Work as shown on the
final version of Tenant's Plans. Landlord's obligation to pay such amount for
Expansion Space C is subject to the requirement that each of the following
conditions, circumstances, or events shall first exist or occur:
(i) Tenant shall have completed, or caused the completion of, all
of Tenant's Work;
<PAGE>
(ii) a certificate of occupancy for the Expansion Space C shall
have been issued by the appropriate governmental official and
a copy thereof shall be delivered to Landlord by Tenant;
(iii) the Lease shall be in full force and effect;
(iv) Tenant shall be occupying the Expansion Space C under the
Lease, without default thereunder;
(v) Tenant shall have delivered to Landlord "as built" plans of
Expansion Space C, certified by a registered architect or
engineer to be substantially correct;
(vi) Tenant shall have delivered to Landlord full and complete lien
waivers of all persons or entities having lien rights with
respect to Expansion Space C by reason of all labor and
materials furnished or supplied in connection with Tenant's
Work; and
(vii) Tenant shall have delivered to Landlord and the City of
Hartford, Department of Licenses and Inspections ("L&I"), a
certified statement of actual costs as required by the
Municipal Code of the City of Hartford then in effect,
indicating that Tenant's Work has been duly performed and
completed, setting forth the total actual costs for all labor
and materials furnished or supplied to Tenant in connection
with Tenant's Work, which statement shall be accompanied by
evidence of all expenditures for labor and materials furnished
or supplied to Tenant, including, but not limited to,
receipted bills, cancelled checks, and any other items
Landlord may request, together with a statement from L&I that
it has accepted and approved the statement of actual costs
submitted to it.
To the extent feasible under the terms of Landlord[_]s financing facility,
Landlord shall make reasonable efforts to pay the aforesaid amount to Tenant in
cash promptly, but in no event later than thirty (30) days after Tenant shall
have satisfied all of the above conditions. To the extent not so feasible,
Landlord may issue to Tenant a credit against Base Rent during the two (2)
months of the Lease term which immediately follow the month in which Tenant has
satisfied all of the conditions set forth above, with any balance paid in cash
within such 30-day period.
3. Tenant's Expense. Any materials or work described in the final
----------------
version of Tenant's Plans is included in Tenant's Work. Tenant's Work shall be
performed and completed at Tenant's sole cost and expense, subject only to the
contribution provided for in Section 2.03.
4. Special Work.
------------
(a) If upon receiving the final version of Tenant's Plans or any
changes of final version of Tenant's Plans, it is Landlord's reasonable opinion
that the work called for in Tenant's Plans includes Special Work (as such term
is hereinafter defined), Landlord shall promptly notify Tenant thereof. Tenant
shall revise Tenant's Plans to eliminate the need for such Special Work.
-2-
<PAGE>
(b) The term "SPECIAL WORK" shall mean (i) work that would require
changes to the Building or (ii) work that would require Landlord to expend funds
to prepare the Premises for the performance of Tenant's Work.
5. Use of Landlord's Services and Equipment. In the event Tenant, its
----------------------------------------
servants, agents and independent contractors shall utilize any services of
Landlord's personnel or shall utilize any equipment, machinery or other items
which are the property of Landlord, in connection with Tenant's improvements to,
or alterations of the Premises, Tenant shall pay Landlord for such services or
equipment and machinery use, an amount equal to the market value of such
services of equipment and machinery use.
6. Right of Set-Off. In the event Tenant shall be or become indebted
----------------
to Landlord pursuant to the provisions of this Work Letter, Landlord may deduct
and set-off the amount of such indebtedness against the sum due Tenant pursuant
to Section 2.03 of this Exhibit D-1. Any sum due Landlord from Tenant under the
provisions of this Exhibit D-1 in excess of the sum due Tenant from Landlord
pursuant to Section 2.03 of this Exhibit D-1, shall be deemed additional rent
and shall be due and payable by Tenant with the first monthly installment of
Base Rent coming due under the Lease after Tenant has satisfied all of the
conditions set forth in Section 2.03 above (or in the exercise of reasonable
diligence should have satisfied the same).
In witness whereof the parties have executed this Work Letter Agreement
as of November 30, 1998.
Witnessed by: LANDLORD:
CAMBRIDGE ONE COMMERCIAL PLAZA, LLC
By: One Commercial Management, LLC
Its Managing Member
_________________ By: Levstone Commercial Management Corp.
Its Manager
_________________ By: /s/ Mark R. Stone
----------------------------
Its Vice President
TENANT:
_________________ FIRST NATIONAL BANK OF NEW ENGLAND
_________________ By: /s/ Leslie Galbraith
-------------------------------------
Its Executive Vice President
-3-
<PAGE>
EXHIBIT 10.9
SECOND AMENDMENT OF LEASE
-------------------------
The Parties agree to the following, effective as of the date of this
instrument:
SECTION I. THE PARTIES.
- --------- -----------
1.1 CAMBRIDGE ONE COMMERCIAL PLAZA, LLC, a Connecticut limited liability
company with a place of business in care of Cambridge Realty Partners, LLC, 280
Trumbull Street, Hartford, Connecticut 06103, is hereinafter referred to as
"LANDLORD".
1.2 FIRST INTERNATIONAL BANK, NATIONAL ASSOCIATION (formerly First
National Bank of New England), a national banking association with a place of
business at One Commercial Plaza, Hartford, Connecticut 06103, is hereinafter
referred to as "TENANT".
SECTION II. THE LEASE.
- ---------- ---------
Landlord and Tenant entered into a Lease Agreement dated as of June 1,
1997, for premises in the building known as One Commercial Plaza and located at
280 Trumbull Street, Hartford, Connecticut, which Lease Agreement was amended by
a First Amendment of Lease dated November 30, 1998. The Lease Agreement, as so
amended, is referred to herein as the "LEASE". All terms defined in the Lease
shall have the same meaning in this instrument unless redefined in this
instrument.
SECTION III. AMENDMENTS TO THE LEASE.
- ----------- -----------------------
3.1 AMENDMENT TO SECTION 1.2 OF THE LEASE.
-------------------------------------
The space consisting of 3,800 rentable square feet on the ground floor of
the Building identified in the Lease as the "RETAIL SPACE" and depicted on
Exhibit B-1 thereto is hereby withdrawn from the effect of the Lease and deleted
- -----------
from the Premises. All possession and control of such Retail Space revert to
Landlord, and Tenant surrenders all rights and claims thereto.
The space consisting of 469 rentable square feet on the concourse floor of
the building depicted on Exhibit B-8 attached hereto (the "ADDITIONAL STORAGE
-----------
SPACE") is hereby submitted to the effect of the lease and added to the
Premises. Exhibit B-8 attached hereto is hereby made part of the Lease.
------------
The reference in Section 1.2 to "Retail Space 3,800 rentable
square feet on the ground floor" is hereby deleted. A reference to "Additional
Storage Space 469 rentable square feet on the concourse floor" is
added to Section 1.2, and a reference to Exhibit B-8 is hereby added to the list
-----------
of exhibits in the last sentence in Section 1.2.
<PAGE>
3.2 AMENDMENT TO SECTION 3.1 OF THE LEASE.
-------------------------------------
The first paragraph of Section 3.1 of the Lease is hereby deleted and the
following substituted in lieu thereof:
Tenant shall pay Landlord as base rent (the "BASE RENT") for each year
during the Term the sum of Five Hundred Thirty-nine Thousand Twenty-
nine and 50/100 Dollars ($539,029.50) payable in equal monthly
installments of Forty-four Thousand Nine Hundred Nineteen and 13/100
Dollars ($44,919.13) due in advance on the first day of each month
during the Term, except that the Base Rent at the rate of Four
Thousand Six Hundred Ninety and No/100 Dollars ($4,690.00) per annum
for the Additional Storage Space shall not be payable until April 1,
1999.
In the second sentence of Section 3.1, the reference to "Retail Space $17.50"
is hereby deleted. In the second sentence of Section 3.1, a reference to
"Additional Storage Space $10.00" is added.
3.3 AMENDMENT TO SECTION 4.1 OF THE LEASE.
-------------------------------------
In Section 4.1, paragraph (a), the phrase "5.695 percent" is hereby
deleted, and the phrase "5.130 percent" is substituted in lieu thereof. In
Section 4.1, paragraph (d), the phrase "9.419 percent" is hereby deleted, and
the phrase "8.458 percent" is substituted in lieu thereof.
3.4 AMENDMENT TO SECTION 5.1 OF THE LEASE.
-------------------------------------
The first sentence of Section 5.1 of the Lease is hereby deleted and the
following is substituted in lieu thereof:
Tenant shall use the Premises only for general office purposes and
for no other purpose.
3.5 AMENDMENT TO SECTION 16.3 OF THE LEASE.
--------------------------------------
The last sentence of Section 16.3 is hereby deleted.
3.6 AMENDMENT TO SECTION 20.1 OF THE LEASE.
--------------------------------------
The second paragraph of Section 20.1 is hereby deleted in its entirety.
3.7 AMENDMENT TO SECTION 34.1(B) OF THE LEASE.
-----------------------------------------
Section 34.1 of the Lease is hereby amended by adding the words "and the
Additional Storage Space" to the second line of subsection (b) thereof after the
words "except that the Base Rent for the Storage Space".
-2-
<PAGE>
3.8 AMENDMENT TO SECTION 34.5 OF THE LEASE.
--------------------------------------
The last paragraph of Section 34.5 is hereby deleted and the following
substituted in lieu thereof:
For the purpose of determining Market Rent, the parties shall use as
a guideline the then market rent for similar space available in
similar buildings in Hartford's central business district, including
the Building.
3.9 AMENDMENT TO ARTICLE 35 OF THE LEASE.
------------------------------------
Article 35 is deleted in its entirety. Such deletion shall not affect any
of Tenant's rights with respect to the Building directory as contained in
Section 12.3 of the Lease.
3.10 AMENDMENT TO ARTICLE 36 OF THE LEASE.
------------------------------------
Article 36 is deleted in its entirety.
Section IV. GENERAL CLAUSES.
- ---------- ---------------
4.1 Except as modified by this instrument, Landlord and Tenant ratify and
confirm the terms of this Lease.
4.2 Terms defined in the Lease shall have the same meaning in this
instrument as in the Lease unless redefined in this instrument.
4.3 The Lease and this instrument are binding on Landlord and Tenant and
their respective heirs, successors and assigns.
4.4 Tenant's obligation to pay amounts due and owing prior to termination
or expiration of the Lease shall survive such termination or expiration.
4.5 The word "includes" means "includes without limitation". The word
"include" means "include without limitation". The word "any" means "any and
all". The word "until" means "unless and until".
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
March 26, 1999.
Witnessed by:
LANDLORD:
CAMBRIDGE ONE COMMERCIAL PLAZA, LLC
By: One Commercial Management, LLC,
Its Managing Member
By: Levstone Commercial Management Corp.,
Its Managing Member
______________________
______________________ By /s/ Mark R. Stone
--------------------------
Name: Mark R. Stone
Title: Vice President
TENANT:
______________________ FIRST INTERNATIONAL BANK, NATIONAL ASSOCIATION
______________________ By: /s/ Leslie A. Galbraith
---------------------------
Name: Leslie A. Galbraith
Title: President
-4-
<PAGE>
EXHIBIT 10.11
December 2, 1998
Leslie A. Galbraith
53 Collie Brook Road
East Hampton, CT 06424
Dear Leslie:
Reference is made to that certain employment agreement (the "Employment
Agreement") dated August 25, 1997 between First National Bank of New England
(now known as First International Bank, National Association) (the "Bank") and
you.
The Bank and you agree that the Employment Agreement is amended to provide
that, beginning as of the date hereof, you will be employed as President, Chief
Operating Officer and Chief Financial Officer of the Bank (or equivalent titles)
in accordance with the terms and conditions of the Employment Agreement.
Except to the extent expressly amended herein, the Employment Agreement
remains unmodified and in full force and effect in accordance with its terms.
Please sign in the space provided below to indicate your acceptance of the
foregoing.
Very truly yours,
FIRST INTERNATIONAL BANK,
NATIONAL ASSOCIATION
/s/ Brett N. Silvers
By:___________________________________
Brett N. Silvers
Its Chairman and Chief Executive Officer
Agreed to:
/s/ Leslie A. Galbraith
_____________________________
<PAGE>
EXHIBIT 10.12
EXECUTION COPY
--------------
REVOLVING COMMERCIAL LOAN WAREHOUSE AND SECURITY AGREEMENT
----------------------------------------------------------
REVOLVING COMMERCIAL LOAN WAREHOUSE AND SECURITY AGREEMENT, dated as
of December 4, 1998 (as amended or otherwise modified from time to time, this
"Agreement") among PRUDENTIAL SECURITIES CREDIT CORPORATION, a Delaware
---------
corporation, having an office at One Seaport Plaza, New York, New York 10292
(the "Lender"), and FIRST NATIONAL BANK OF NEW ENGLAND, a national bank, having
------
its principal office at 280 Trumbull Street, Hartford, Connecticut 06103 (the
"Borrower"), and its parent, FIRST INTERNATIONAL BANCORP, INC., a Delaware
- ---------
corporation, having its principal office at 280 Trumbull Street, Hartford,
Connecticut 06103 (the "Guarantor").
---------
WHEREAS, the Lender intends to lend and the Borrower intends to borrow
up to a maximum of $75,000,000 to fund the origination of Commercial Loans (as
----------
defined herein); and
WHEREAS, the Lender's Affiliate, Prudential Securities Incorporated
("PSI"), will have the right of first refusal, but not the obligation, to act as
---
the sole manager (such role as sole manager, the "Manager Role") on any
------------
securities issuances ("Securitizations") sponsored by the Borrower or one of its
---------------
Affiliates relating to up to $250,000,000 of the Commercial Loans, on the terms
and under the conditions set forth in the Engagement Letter, dated as of
December 4, 1998, among PSI, the Borrower and the Guarantor (the "Engagement
----------
Letter"). Such Securitizations shall be structured in a manner as shall be
- ------
consented to by PSI.
NOW, THEREFORE, in consideration of the promises and for other good
and valuable consideration, the parties hereto hereby agree as follows:
Section 1. The Loan. (a) Subject to the terms of this Agreement:
--------- --------
1. The Lender agrees to lend to the Borrower up to $75,000,000, (such
borrowing, the "Loan") to be made in one or more advances (each, an "Advance").
---- -------
The Borrower agrees that the Loan shall be used to finance fixed or adjustable
rate Commercial Loans underwritten pursuant to Borrower's underwriting
guidelines that are to be included in a Securitization, as such Commercial Loans
are identified to the Lender in writing and in electronic form from time to
time. All Commercial Loans financed hereunder shall be closed loans; i.e., this
facility shall not be used for "wet" or "table" fundings. The Lender may refuse
to lend against any Commercial Loan(s) which the Lender reasonably believes will
1
<PAGE>
not be eligible for inclusion in a securitized pool either (x) due to the
characteristics of such Commercial Loan or (y) due to the expected aggregate
characteristics of the Commercial Loans.
2. Each Advance shall be made on a date up to one week prior to
the Maturity Date referred to below (each such date, a "Funding Date"); provided
------------ --------
that:
(i) (a) the conditions precedent to the making of the Advances set
forth in Sections 1(a)4 and 1(a)5 hereof shall be satisfied and (b) the Lender
shall have received officers' certificates, dated the date of such Advance and
signed by a duly authorized officer of the Borrower and the Guarantor,
certifying that (x) the representations and warranties of the Borrower and the
Guarantor, as applicable, in Section 4 hereof shall be true and correct on and
as of such Funding Date as if made on and as of such date, and (y) no Event of
Default shall have occurred and be continuing or would exist after the making of
the Advance on such Funding Date;
(ii) the Lender shall have received (A) in connection with each
Advance, a receipt from the Custodian (as defined below) to the effect that it
has received the original notes relating to the Commercial Loans that are being
pledged in connection with the Advance being made on such Funding Date; and (B)
prior to the initial Advance: (1) a legal opinion from counsel to the Borrower
and the Guarantor, in the form of Exhibit B attached hereto; (2) the Secured
Note (as defined herein) executed by the Borrower (3) the Custody Agreement (as
defined herein) executed by the Borrower and the Custodian; (4) the Guarantee,
in the form of Exhibit E hereto, executed by the Guarantor, (5) a receipt from
the Custodian to the effect that it has received the assignment of Collateral
and power of attorney referred to in Sections 2(f) and (g) of the Custody
Agreement (as defined below), and (6) the payment of a one time commitment fee
in the amount of $600,000 by the Borrower to the Lender;
(iii) the Lender has satisfactorily completed its due diligence
investigation of the Commercial Loans being pledged on such Funding Date;
(iv) if any Commercial Loan to be pledged to the Lender pursuant to
an Advance shall have an outstanding principal balance greater than or equal to
$1,000,000, the Borrower shall have delivered to the Lender, at least three
Business Days prior to the related Funding Date, a credit memorandum, in form
and substance satisfactory to the Lender, containing, among other things, an
environmental report for any real estate pledged as collateral for such
Commercial Loan.
2
<PAGE>
(v) the Borrower shall have delivered to the Lender and the
Custodian the Commercial Loan Schedule with respect to the Commercial Loans that
are being pledged on such Funding Date; and
(vi) no other Advance shall have been made in the same calendar week
as such Funding Date.
3. The Loan shall accrue interest daily on its outstanding
principal amount, with interest calculated on the basis of actual days elapsed
and a 360-day year. The daily interest rate on the outstanding principal amount
of the Loan shall be LIBOR plus 1.20% and shall be reset on each Business Day.
Interest which accrues during each calendar month shall be payable on the first
Business Day of the following month, with any outstanding interest due and
payable in its entirety on the date of termination of this Agreement (including
the Maturity Date).
"LIBOR" means the London interbank offered rate for one-month U.S.
-----
dollar deposits on the basis of the offered rates of the Reference Banks for
one-month U.S. Dollar Deposits, as such rates appear on Telerate Page 3750, as
of 11:00 a.m. (New York Time) reset daily, as determined by Lender in its sole
discretion.
Any amounts pre-paid or required to be repaid under this Agreement
prior to the Maturity Date may be re-borrowed, subject to the terms and
conditions of this Agreement, until the Maturity Date.
4. Not later than 4:00 p.m. New York time three Business Days
prior to the proposed Funding Date for an Advance, the Borrower shall deliver to
the Lender (i) a written notice in the form of Exhibit D hereto (the "Funding
-------
Notice") and (ii) an electronic disk or tape, in a mutually satisfactory form to
be agreed upon by the Lender and the Borrower, detailing certain specified
characteristics of the Commercial Loans previously pledged and those Commercial
Loans proposed to be pledged in connection with such Advance (each such
schedule, a "Commercial Loan Schedule").
------------------------
5. The Borrower shall reimburse the Lender for any of the Lender's
out-of-pocket costs and attorneys' fees and expenses incurred by the Lender in
connection with this Agreement, such costs not to exceed $35,000 (plus related
attorneys' disbursements) up to the date hereof. In addition, the Borrower
shall reimburse the Lender for any of the Lender's out-of-pocket costs and
expenses incurred in connection with its due diligence review, such costs not to
exceed $20,000 in the aggregate up to and including the Maturity Date.
3
<PAGE>
(b) The amount of each Advance shall not exceed the lesser of (i)
85.0% of the aggregate outstanding principal balance of the Commercial Loans
proposed to be pledged to the Lender in connection with such Advance as of the
related Cut-Off Date, minus in the event that a Collateral Deficiency Situation
-----
exists as of the date of such Advance, the Restoration Amount as of the date of
such Advance and (ii) the product of (x) the Market Value of the Commercial
Loans proposed to be pledged in connection with such Advance and (y) 0.85 (such
product, the "Borrowing Base"), minus (z) in the event that a Collateral
-------------- -----
Deficiency Situation exists as of the date of such Advance, the Restoration
Amount as of the date of such Advance.
For purposes of this Agreement:
Affiliate means, as to any Person, any other Person controlling,
---------
controlled by or under common control with such Person. "Control" means the
power to direct the management and policies of a Person, directly or indirectly,
whether through ownership of voting securities, by contract or otherwise.
"Controlled" and "Controlling" have meanings correlative to the foregoing.
Business Day means any day other than (i) a Saturday or Sunday or (ii)
------------
a day on which banking institutions in New York City or London are authorized or
obligated to be closed.
Collateral Deficiency Situation shall be deemed to be existing as of
-------------------------------
any day on which (i) the outstanding principal amount of the Loan as of such day
(including accrued interest but excluding the amount of any Advance to be made
on such day) exceeds (ii) the lesser of (a) the Borrowing Base of the Commercial
Loans then pledged to the Lender (disregarding the Commercial Loans, if any,
proposed to be pledged to the Lender on such day) and (b) the Market Value of
the Commercial Loans theretofore pledged to the Lender (disregarding the
Commercial Loans, if any, proposed to be pledged to the Lender on such day).
Commercial Loan has the meaning set forth in Section 2.
---------------
Commercial Loan Schedule means each schedule of Commercial Loans
------------------------
listing the Commercial Loans which have been or are to be pledged by the
Borrower in connection with (x) each Advance or (y) a Collateral Deficiency,
such schedule identifying each Commercial Loan by address of and the name of the
underlying obligor and setting forth as to each Commercial Loan at least the
following information: (i)the address and name of the underlying obligor, (ii)
the original principal amount, (iii) the Cut-Off Date, (iv) the principal
outstanding as of the related Cut-Off
4
<PAGE>
Date, (v) the account number, (vi) the amount of any change in the outstanding
principal balance of each Commercial Loan since the date of the last delivered
Commercial Loan Schedule, (vii)the paid-through date, (viii) a description of
the related collateral, (ix) if the primary collateral includes real estate, the
related loan-to-value ratio of such property, (x) the interest rate, (xi)
whether such Commercial Loan bears a fixed or floating rate of interest, (xii)
the original term, (xiii) the remaining term (xiv) the loan type and (xv) any
other information that Lender may reasonably request.
Cut-Off Date means, as of any date, the close of business on the date
------------
set forth in the related Commercial Loan Schedule. In no event shall the Cut-Off
Date precede by more than two weeks the date on which the related Commercial
Loan Schedule is delivered.
GAAP means generally accepted accounting principals applied on a
----
consistent basis.
Loan Documents means this Agreement, as it may be renewed, extended or
--------------
continued from time to time the Secured Note, the Custody Agreement, the
Guaranty, and any other document, instrument or agreement executed by the
Borrower, the Guarantor or the Custodian in connection herewith or therewith, as
any of the same may be amended, extended or replaced from time to time.
Reference to any specific Loan Document in this Agreement or any other Loan
Document shall be deemed to include any amendment, extension or replacement
thereof.
Market Value means, as of any date and with respect to any Commercial
------------
Loan, the servicing-released fair market value of such Commercial Loan as of
such date as determined by the Lender (or an Affiliate thereof) in its sole
discretion.
Person means any individual, corporation, partnership, joint venture,
------
association, limited liability company, joint-stock company, trust (including
any beneficiary thereof), unincorporated organization or government or any
agency or political subdivision thereof.
Pledged Commercial Loan means, as of any date of determination, any
-----------------------
Commercial Loan for which the related note is then held by the Custodian as
bailee for the Lender for purposes of perfecting the Lender's security interest.
Reference Banks means leading banks selected by the Lender and engaged
---------------
in transactions in Eurodollar deposits in the international Eurocurrency market
(i) with an established
5
<PAGE>
place of business in London, (ii) whose quotations appear on Telerate Page 3750
on the Funding Date in question, (iii) which have been designated as such by the
Custodian and (iv) not controlling, controlled by, or be under common control
with, the Borrower.
Restoration Amount means, as of any date of determination, the amount,
------------------
if any, by which (i) the outstanding principal amount of the Loan as of such
date (including accrued interest, but excluding the amount of any Advance to be
made on such date) exceeds (ii) the lesser of (a) the Borrowing Base of the
Commercial Loans theretofore pledged to the Lender (disregarding any Commercial
Loans proposed to be pledged to the Lender on such date) and (b) the Market
Value of the Commercial Loans theretofore pledged to the Lender (disregarding
any Commercial Loans proposed to be pledged to the Lender on such date).
(c) The Loan shall mature on December 3, 1999, as such date may be
extended by means of a Credit Increase Confirmation and Note Amendment (the
"Maturity Date"), pursuant to the terms of Section 1(f) below.
-------------
(d) The Loan is pre-payable at any time without premium or penalty
(except as otherwise provided herein), in whole or in part; provided, that
Pledged Commercial Loans may not be removed from this facility (including in
connection with any prepayment of the Loan in part) with the result that, in the
Lender's sole reasonable determination, the remaining Pledged Commercial Loans
are, in the aggregate, materially inferior as Collateral (as defined in section
3(b) below) as compared to the pool of Pledged Commercial Loans immediately
prior to such removal. In addition, no Pledged Commercial Loans may be removed
from this facility with the result that a Collateral Deficiency Situation would
then exist. Notwithstanding the foregoing, however, a Pledged Commercial Loan
may in any event be removed from this facility if (i) such Pledged Commercial
Loan has been paid in full by the obligor, (ii) such Pledged Commercial Loan
breaches one or more of the representations and warranties listed in Section
4(b) below, (iii) the Lender has advised the Borrower that the Lender believes
that any such Pledged Commercial Loan is unacceptable for inclusion in a
Securitization or (iv) such Pledged Commercial Loan is to be included in a
Securitization for which PSI is acting in the Manager Role or which PSI has been
offered but has not elected to accept the Manager Role in accordance with the
terms of the Engagement Letter. If the Borrower intends to prepay the Loan in
whole or in substantial part from a source other than the proceeds of a
Securitization, the Borrower shall give two Business Days' written notice to the
Lender.
6
<PAGE>
(e) If the Loan is not repaid in whole on or prior to the Maturity
Date, the Loan, if continued by the Lender as provided in paragraph (f) below,
shall, commencing on the Maturity Date, bear interest at a rate per annum equal
to LIBOR plus 5.00% until repaid.
(f) In the event the Loan is not repaid in whole on or prior to the
Maturity Date, the Lender shall have the option, in its sole discretion, to
continue the Loan on the Maturity Date through the last day of the month
following the Maturity Date and, thereafter, on a month-to-month basis through
the last day of each succeeding month. If the Lender elects to continue the
Loan as aforesaid, it shall deliver notice of such election to the Borrower by
means of a Credit Increase Confirmation and Note Amendment in the form of
Exhibit C no later than 3:00 p.m. on the Business Day preceding the then
scheduled date of maturity of the Loan (any such preceding date, an "Election
--------
Date"). If no such notice is delivered, the Loan shall immediately and
- ----
automatically become due and payable without any further action by the Lender on
the day following such Election Date, and in such event the Lender may exercise
all rights and remedies available to it as the holder of a first perfected
security interest under the Uniform Commercial Code of the State of New York
(the "New York UCC").
------------
(g) The Loan shall be evidenced by the secured promissory note of the
Borrower in the form attached hereto as Exhibit A (the "Secured Note").
------------
(h) If any Pledged Commercial Loan is removed from the facility
provided hereby except (i) in connection with a Securitization for which PSI is
acting in the Manager Role or for which PSI has been offered, but has not
elected to accept, the Manager Role in accordance with the terms of the
Engagement Letter, (ii) in connection with such Commercial Loan being paid in
full (iii) for the purpose of curing a breach of a representation and warranty,
(iv) if the Lender has advised the Borrower that the Lender believes that any
such Pledged Commercial Loan is unacceptable for inclusion in a Securitization,
or (v) if the Lender does not continue the Maturity Date until the earlier to
occur of (x) December 3, 2000 or (y) the Termination Date (as such term is
defined and set forth in the Engagement Letter), then an amount equal to 1.0% of
the average outstanding principal balance of such Commercial Loan during the
time it was a Pledged Commercial Loan shall be paid by Borrower to the Lender on
the date such Commercial Loan is removed from this facility.
Section 2. Purpose of Loan. The Borrower agrees that the Loan shall
--------- ---------------
be used to finance the following types of
7
<PAGE>
commercial loans: equipment loans, working capital term loans and loans secured
by mortgages on commercial real estate (such loans being the "Commercial
----------
Loans"). Unless removed as permitted hereunder, Commercial Loans shall be sold
- -----
to a trust or other vehicle acceptable to Lender to be established in a
Securitization, and shall be pledged to secure the Loan as such Commercial Loans
are identified to the Lender and the Custodian in writing and in electronic form
from time to time. Each of the Commercial Loans shall be loans made to small
business concerns either (a) originated by the Borrower pursuant to its
published underwriting criteria existing at the time the Commercial Loans were
originated if such Commercial Loans were originated prior to the date hereof and
if such criteria was different than the criteria heretofore supplied to the
Lender, (b) originated by the Borrower pursuant to its published underwriting
criteria heretofore supplied to the Lender (or if such criteria have been
changed, the terms of such new underwriting criteria shall have been supplied to
Lender and are acceptable to Lender) or (c) originated by third parties and re-
underwritten by the Borrower on terms consistent with its published underwriting
criteria (or pursuant to underwriting criteria presented to and acceptable to
Lender); provided, however, that the Lender shall have the right to conduct such
-------- -------
review of any such Commercial Loans as the Lender may, in its sole discretion,
decide to conduct. The Lender may decline to include in the facility any
Commercial Loan.
Section 3. Custody of Original Notes and Loan Documents. (a) Prior
--------- --------------------------------------------
to the time that the Borrower requests any Advance by the Lender with respect to
any Commercial Loan, the Borrower shall cause to be delivered to the Custodian,
at the offices of the Custodian located in New York, New York, or at any such
other place as the parties hereto may select from time to time, the originals of
all notes evidencing any Commercial Loan in which the Lender is to be granted a
security interest pursuant to this Agreement. Upon delivery to the Custodian by
the Borrower (or by the title company as directed by the Borrower) of any note
evidencing a Commercial Loan, the Custodian will immediately execute and deliver
to the Lender and Borrower the Initial Trust Receipt and Certification, in the
form attached as Exhibit A to the Custody Agreement, as provided in Section 3(a)
of the Custody Agreement. Delivery of the note or notes to the Custodian and
the Custodian's continuous possession of such note or notes shall be a condition
precedent to any such Commercial Loan being considered as Collateral (as defined
in (b) below) for the purposes of the computation of the amount of any Advance
or the Loan under this Agreement.
(b) Within 30 days after Borrower delivers to the Custodian a note
evidencing a Commercial Loan, Borrower shall deliver to Marine Midland Bank, as
custodian (the "Custodian") on
8
<PAGE>
behalf of the Lender, the documents and instruments listed in Section 2(b)-(e)
of that certain Commercial Loan Custody Agreement dated as of December 4, 1998
(the "Custody Agreement") among the Borrower, the Custodian and the Lender.
-----------------
(Such documents and instruments, including without limitation all mortgages
relating thereto (with respect to each Pledged Commercial Loan, the related
"Loan File"), and the original note or notes evidencing and relating to the
Commercial Loans, together with any proceeds thereof, are hereinafter referred
to as the "Collateral.") Within three days of delivery to the Custodian by the
----------
Borrower (or by the title company as directed by the Borrower) of the Loan File
relating to a Commercial Loan, the Custodian will execute and deliver to the
Lender, with a copy to the Borrower, the Final Trust Receipt and Certification,
in the form attached as Exhibit B to the Custody Agreement, as provided in
Section 3(b) of the Custody Agreement.
The Borrower hereby pledges all of its right, title and interest in
and to the Collateral to the Lender to secure the repayment of principal of and
interest on the Loan and all other amounts owing to the Lender hereunder
(collectively, the "Secured Obligations").
-------------------
(c) Whenever any Pledged Commercial Loan is removed from this
facility, as permitted hereunder, all files held by the Custodian relating to
such removed Pledged Commercial Loan shall be returned to the Borrower in the
manner set forth in the Custody Agreement.
Section 4. Representations, Warranties and Covenants. (a) The
--------- -----------------------------------------
Borrower and Guarantor, as applicable, represent and warrant to the Lender that:
(i) The Borrower has been duly organized and is validly existing as a
national banking association under the laws of the United States. The
Guarantor has been duly organized and is validly existing as a corporation
in good standing under the laws of the State of Delaware.
(ii) They are duly licensed as a "Licensee" or are otherwise qualified
in each state in which they transact business where the ownership or
leasing of their properties or the conduct of their business requires such
license or qualification and are not in default of such state's applicable
law, rules and regulations. They have the requisite power and authority
and legal right to own and grant a lien on all of their right, title and
interest in and to the Collateral, and to execute and deliver, engage in
the transactions contemplated by, and perform and observe
9
<PAGE>
the terms and conditions of, this Agreement, the Custody Agreement and the
other Loan Documents, as applicable.
(iii) At all times after the Custodian has received an original note
and Loan File relating to a Commercial Loan from the Borrower and until
payment in full of the Loan, the Borrower will not commit any act in
violation of applicable laws, or regulations promulgated with respect
thereto.
(iv) Each of the Borrower and the Guarantor is solvent and is not in
default under any mortgage, borrowing agreement or other instrument or
agreement pertaining to indebtedness for borrowed money, and the execution,
delivery and performance by the Borrower and the Guarantor of this
Agreement and the other Loan Documents, as applicable, and the execution by
the Borrower of the Secured Note do not conflict with any term or provision
of the charter, certificate of incorporation or by-laws of any of them or
any law, rule, regulation, order, judgment, writ, injunction or decree
applicable to any of them of any court, regulatory body, administrative
agency or governmental body having jurisdiction over any of them and will
not result in any violation of any mortgage, instrument or agreement
pertaining to indebtedness for borrowed money.
(v) All financial statements of the Borrower or the Guarantor
furnished to the Lender do not omit to disclose any material liabilities or
other facts relevant to the Borrower's or the Guarantor's condition. All
certificates of the Borrower or the Guarantor or any of their officers
furnished to the Lender are true and complete. All such financial
statements have been prepared in accordance with GAAP. No financial
statement or other financial information as of a date later than the date
set forth in the Guarantor's most recent 10-K or 10-Q filing under the
Securities Exchange Act of 1934, as amended, has been furnished by the
Borrower to another lender of the Borrower that has not been furnished to
the Lender.
(vi) Except as have been previously obtained, no consent, approval,
authorization or order of, registration or filing with, or notice to any
governmental authority or court is required under applicable law in
connection with the execution, delivery and performance by them of this
Agreement and the other Loan Documents, as applicable.
(vii) There is no action, proceeding or investigation pending or, to
the best knowledge of any of them, threatened against any of them before
any court, administrative agency or other tribunal (A) asserting the
invalidity of this
10
<PAGE>
Agreement, as applicable, or the other Loan Documents, as applicable, (B)
seeking to prevent the consummation of any of the transactions contemplated
by this Agreement or the other Loan Documents, as applicable, or (C) which
might materially and adversely affect the validity of the Commercial Loans
or the performance by any of them of their obligations under, or the
validity or enforceability of, this Agreement or the other Loan Documents,
as applicable.
(viii) There has been no adverse change in the business, operations,
financial condition, properties or prospects of the Borrower and the
Guarantor taken as a whole since the date set forth in the Guarantor's most
recent 10-K or 10-Q filing under the Securities Exchange Act of 1934, as
amended, which would have a material adverse affect on their ability to
perform their respective obligations under this Agreement or the other Loan
Documents, as applicable.
(ix) This Agreement and the other Loan Documents, as applicable,
have been duly authorized, executed and delivered by the Borrower and the
Guarantor, as applicable, all requisite corporate action having been taken,
and each is valid, binding and enforceable against the Borrower and the
Guarantor, as the case may be, in accordance with its terms.
(x) When a note and the related Loan File evidencing a Commercial
Loan and the other Loan Documents are delivered to the Custodian, the
security interest granted pursuant to this Agreement will constitute a
fully-perfected first priority security interest in the Collateral in favor
of the Lender.
(xi) The Boards of Directors of the Borrower and the Guarantor have
approved the transactions contemplated by this Agreement and the other Loan
Documents, such approvals have been duly noted in the minutes of the Boards
of Directors of the Borrower and the Guarantor and, from the time of
execution of this Agreement and the other Loan Documents, will be
continuously an official record (as such term is used in Section
13(e)(1)(D) of the Federal Deposit Insurance Act, as amended by the
Financial Institution Reform, Recovery and Enforcement Act and as in effect
on the date hereof) of the Borrower and the Guarantor.
(xii) At the time of origination of a Commercial Loan, in all
instances where commercial real property serves as the primary collateral
for such Commercial Loan, the related mortgaged property was free of
contamination from toxic substances or hazardous wastes requiring action
under
11
<PAGE>
applicable laws or is subject to ongoing environmental rehabilitation, and
the Borrower has no knowledge of any such contamination from toxic
substances or hazardous waste material on any mortgaged property unless
such items are below action levels or such mortgaged property is subject to
ongoing environmental rehabilitation.
(b) With respect to every Commercial Loan and related note and
Loan File delivered to the Custodian and pledged to the Lender to secure the
Loan, the Borrower and the Guarantor represent and warrant to the Lender that:
(i) Such note evidencing a Commercial Loan and the related Loan
File are complete and authentic and all signatures thereon are genuine.
(ii) Such Commercial Loan was (a) originated by the Borrower
pursuant to its published underwriting criteria existing at the time the
Commercial Loans were originated if such Commercial Loans were originated
prior to the date hereof and if such criteria was different than the
criteria heretofore supplied to the Lender, (b) originated by the Borrower
pursuant to its published underwriting criteria heretofore supplied to the
Lender (or if such criteria have been changed, the terms of such new
underwriting criteria shall have been supplied to Lender) or (c) originated
by third parties and re-underwritten by the Borrower on terms consistent
with its published underwriting criteria (or pursuant to other underwriting
criteria previously supplied to Lender), and such Commercial Loan arose
from a bona fide loan, complying with all applicable state and Federal laws
and regulations, to Persons having legal capacity to contract and is not
subject to any defense, set-off or counterclaim.
(iii) All amounts represented to be payable on such Commercial Loan
are, in fact, payable in accordance with the provisions of such Commercial
Loan.
(iv) No payment default or material non-payment default has
occurred in any provisions of such Commercial Loan.
(v) Any real property subject to any security interest granted by
an obligor in connection with any Commercial Loan is not subject to any
other encumbrances other than (i) a stated prior mortgage or mortgages,
(ii) liens for taxes not yet due and payable or similar governmental
charges not yet due and payable or still subject to payment without
interest or penalty or (iii) zoning
12
<PAGE>
restrictions, utility easements, covenants or conditions and restrictions
of record and other encumbrances, which will neither defeat nor render
invalid such security interest or the priority thereof nor materially
impair the marketability or value of such real property nor be violated by
the existing improvements or the intended use thereof.
(vi) The Borrower holds good and indefeasible title to, and is the
sole owner of, such Commercial Loan, subject to no liens, charges,
mortgages, participations, encumbrances or rights of any Person.
(vii) Each Commercial Loan conforms to the description thereof as
set forth on the related Commercial Loan Schedule delivered to the
Custodian and the Lender.
(viii) The Commercial Loans do not have characteristics which are
materially worse than those of other loans made to small business concerns
financed by the Borrower during the twelve-month period preceding the
related Funding Date.
(ix) Each Commercial Loan will be eligible for inclusion in a pool
to be securitized; the Lender may refuse to lend against any Commercial
Loan which the Lender believes will not be eligible for inclusion in such a
securitized pool either (x) due to the characteristics of such Commercial
Loan or (y) due to the expected aggregate characteristics of all Commercial
Loans.
(x) No Commercial Loan shall have been originated in, or be
subject to the laws of, any jurisdiction under which the sale, transfer and
assignment of such Commercial Loan under this Agreement shall be unlawful,
void or voidable.
(c) The Borrower and the Guarantor covenant with the Lender that,
during the term of this facility:
1. The Borrower's Tangible Net Worth (determined in accordance with
GAAP) shall not be less than $40,000,000.
2. The Borrower's Tangible Net Worth shall not be less than its
Tangible Net Worth as shown on the Borrower's audited financial statements
as of September 30, 1998 (as delivered previously to the Lender) plus fifty
----
percent (50%) of all accumulated positive net income from September 30, 1998
less $4,000,000. "Tangible Net Worth" means the difference between (x) net
- ---- ------------------
worth determined in accordance with GAAP less (y) the sum of (i) receivables
from stockholders or Affiliates of the Borrower and (ii) intangible assets
determined in accordance with GAAP
13
<PAGE>
(which include assets such as copyrights, patents, trademarks, goodwill,
computer programs, capitalized advertising costs, organization costs, licenses,
leases, franchises, exploration permits, and import and export permits, etc.).
3. The Borrower's leverage ratio shall not exceed 8:1, such
ratio being the ratio of (x) the Borrower's total liabilities, less subordinated
debt maturing in more than one year, to (y) the Borrower's Tangible Net Worth
(determined as set forth above).
4. The Borrower will continue to be a wholly-owned subsidiary
of the Guarantor.
5. The Borrower will continue to maintain for itself and its
subsidiaries insurance coverage with respect to employee dishonesty, forgery or
alteration, theft, disappearance and destruction, robbery and safe burglary,
property (other than money and securities) and computer fraud in an aggregate
amount of at least $4,000,000, and shall name Lender as a loss payee.
6. All subordinated debt will remain subordinate to the Loan and no
payments of principal will be made on such subordinated debt so long as the Loan
is outstanding; provided, however that (a) principal payments (plus accrued
interest to the date of redemption) on subordinated debt may be made from the
proceeds of new equity offerings in an equivalent or greater amount, and (b)
regularly scheduled payments of interest on subordinated debt may be made for so
long as no payment default or other Event of Default hereunder has occurred and
is continuing.
7. Notwithstanding anything to the contrary contained herein, with
the prior written consent of the Lender (not to be unreasonably withheld)
Borrower is permitted to assign its rights hereunder to, and the Loan can be
assumed by, another wholly-owned subsidiary of the Guarantor (the "Assignee")
--------
(in which case all of the provisions of this Agreement shall, to the same extent
as they apply to the Borrower hereunder, apply to the Assignee rather than to
the Borrower) on the condition that (a) the Assignee acquires substantially all
of the Borrower's assets relating to its commercial lending business, including
without limitation, Borrower's interest in the Commercial Loans, (b) the
Assignee assumes substantially all of the Borrower's liabilities relating to its
commercial lending business, including without limitation, the Loan, but
expressly excluding the Borrower's deposits, (c) Lender receives such documents
evidencing (a) and (b) above as Lender shall reasonably request, and (d)
Borrower and Assignee execute and deliver to Lender such amendments to this
Agreement and the other Loan Documents and such opinions of counsel as Lender
shall reasonably request in order to evidence
14
<PAGE>
that the Assignee has assumed all of the Borrower's rights and obligations, and
is bound by all of the Borrower's agreements, set forth herein.
8. The Borrower and Guarantor shall make available to Lender
and its agents and employees, upon reasonable prior notice and during normal
business hours, the books and records of the Borrower and the Guarantor relating
to the Pledged Commercial Loans and the transactions contemplated hereby.
Section 5. Mandatory Prepayment of Loan. (a) Upon discovery by the
--------- ----------------------------
Borrower, the Guarantor, the Custodian or the Lender of any breach of any of the
representations and warranties listed in Section 4 preceding, the party
discovering such breach shall promptly give notice of such discovery to the
others.
The Lender has the right to require, in its unreviewable discretion,
the Borrower to repay the Loan in part with respect to (i) any Commercial Loan
which breaches one or more of the representations and warranties listed in
Section 4(b) preceding or (ii) any Commercial Loan which the Lender reasonably
believes to be unacceptable for inclusion in a Securitization; provided,
however, that the Borrower may, in lieu of repaying the Loan in part, substitute
one or more other Commercial Loans, in replacement for any Commercial Loan
described in (i) or (ii) above.
(b) If any Commercial Loan, as indicated on any Commercial Loan
Schedule delivered pursuant to Section 9 hereof, becomes thirty (30) or more
days delinquent in payment, the Lender may require the Borrower to prepay the
Loan in part with respect to such Commercial Loan; provided, however, that the
Borrower may, in lieu of repaying the Loan in part, substitute one or more other
Commercial Loans, in replacement for any Commercial Loan that has become thirty
(30) or more days delinquent in payment.
(c) If the Borrower awards a Securitization or whole-loan trade
involving any Pledged Commercial Loan to any party including but not limited to
an investment banking house, agent or underwriter other than PSI, or to a group
of managers which does not include PSI, then, in addition to any other rights or
remedies Lender has (including, but not limited to, amounts owed to the Lender
under Section 1(h) hereof), (x) the Lender may demand that the Borrower prepay
any portion of the Loan evidenced hereby relating to the dollar amount of the
Pledged Commercial Loans to be included in such Securitization or whole loan
trade, in which PSI has not been selected for participation, for payment within
five Business Days of the demand for prepayment and (y) the Lender may refuse to
make further Advances hereunder if such
15
<PAGE>
Advances would relate to Pledged Commercial Loans to be included in such
Securitization or whole-loan trade in which PSI has not been selected for
participation. The Borrower shall give immediate notice, by facsimile
transmission, to the attention of Jeff French at the Lender, (fax 212-214-7678)
and Joe Donovan and Andrew Yuder at PSI (fax 212-778-7403), of any decision to
award the Manager Role or to name any group of managers for any Securitization
or whole-loan trade involving any Pledged Commercial Loans.
(d) If, on any date other than a Funding Date, the Lender determines
that a Collateral Deficiency Situation exists, the Lender shall so notify the
Borrower, and the Borrower, within three (3) Business Days, shall either (i) pay
to the Lender the Restoration Amount or (ii) deliver to the Custodian on behalf
of the Lender additional Commercial Loans with an aggregate Market Value at
least equal to the Restoration Amount. The provisions of Section l(b) shall
govern with regard to a Collateral Deficiency Situation as of a Funding Date;
provided, however, that if the Collateral Deficiency Situation results from a
release by the Lender of its lien, such Collateral Deficiency Situation shall be
remedied as aforesaid on the business day on which such Collateral Deficiency
Situation arises.
Section 6. Guaranty; Additional Documents. (a) Guaranty. In support
--------- ------------------------------ --------
of the Secured Obligations, the Guarantor, in its capacity as guarantor (the
"Guarantor"), shall execute and deliver to the Lender a guaranty in the form of
Exhibit E hereto (the "Guaranty").
--------
(b) Further Documents. The Borrower and the Guarantor will execute and
deliver, or cause to be executed and delivered, to the Lender from time to time,
such confirmatory or supplementary security agreements, financing statements,
reaffirmations and consents and such other documents, instruments or agreements
as the Lender may reasonably request, which are in the Lender's judgment
necessary or desirable to obtain for the Lender the benefit of the Collateral.
Section 7. Servicing. The Borrower shall service the Commercial Loans
--------- ---------
with the degree of skill and care consistent with that which the Borrower
customarily exercises with respect to similar loans owned, managed or serviced
by it and all applicable industry standards. The Borrower shall comply with all
applicable state and federal laws and regulations; shall maintain all state and
federal licenses and franchises necessary for it to perform its servicing
responsibilities hereunder and shall not impair the rights of the Lender in any
Commercial Loans or for payment thereunder.
16
<PAGE>
Section 8. No Oral Modifications; Successors and Assigns. No
--------- ---------------------------------------------
provisions of this Agreement shall be waived or modified except by a writing
duly signed by the authorized agents of the Lender, the Borrower and the
Guarantor. This Agreement shall be binding upon the successors and assigns of
the parties hereto.
Section 9. Reports. (a) The Borrower shall provide the Lender with
--------- -------
an electronic disk or tape (each, a "Supplemental Commercial Loan Schedule")
-------------------------------------
(i) three Business Days prior to each Funding Date, (ii) within 10 Business
Days after the end of each month, and (iii) within two Business Days following
any request made by the Lender or any Affiliate thereof for such a report,
setting forth, on a loan-by-loan basis, all the information contained in the
definition of "Commercial Loan Schedule" herein, plus the current principal
balance outstanding of each Commercial Loan as of the end of the prior calendar
month and the change in the current principal balance outstanding of each
Commercial Loan since the date of the last delivered Commercial Loan Schedule or
Supplemental Commercial Loan Schedule, as the case may be. Such Supplemental
Commercial Loan Schedule will also contain delinquency information concerning
(x) all Commercial Loans then held in this warehouse facility and (y) any
Commercial Loans proposed to be delivered to this facility on the next Funding
Date. The Supplemental Commercial Loan Schedule shall be in a format as may be
agreed upon by the Borrower and the Lender from time to time.
(b) The Borrower shall provide the Lender and the Custodian with a
"hard-copy" Commercial Loan Schedule or Supplemental Commercial Loan Schedule
meeting the requirements of the Custody Agreement on each date on which an
electronic disk or tape is delivered to the Lender (or a designated Affiliate
thereof); the electronic disk or tape and the Commercial Loan Schedule shall
each relate to the same Cut-Off Date.
(c) The Borrower shall furnish to Lender (i) promptly, copies of any
material and adverse notices (including, without limitation, notices of
defaults, breaches, potential defaults or potential breaches) given to or
received from its other lenders, (ii) immediately, notice of the occurrence of
any "Event of Default" hereunder or of any situation which the Borrower
reasonably expects to develop into an "Event of Default" hereunder, (iii)
copies of the Guarantor's annual and quarterly financial statements reflecting
any public filings made to the Securities and Exchange
Commission, provided that any annual Form 10-K filing shall be furnished no
later than 90 days after each year-end and any quarterly Form 10-Q filing shall
be furnished no later than 45 days after each quarter end, (iv) annual audited
financial statements 90 days after each year-end, (v) three (3)
17
<PAGE>
days prior to the date of each Advance (the date of which Advance shall be no
later than two (2) weeks after the receipt of the Supplemental Commercial Loan
Schedule delivered pursuant to Section 9 (a) (ii) above), portfolio performance
data with respect to the Commercial Loans (vi) any other financial information
reasonably requested by the Lender and (vii) an officer's certificate within ten
(10) Business Days after the end of each quarter to the effect that the
covenants set forth in Section 4(c) are true on such date and containing therein
the mathematical calculations used to determine Tangible Net Worth and all
required ratios. All required financial statements, information and reports
shall be prepared in accordance with GAAP, or, if applicable to SEC filings, SEC
accounting regulations.
Section 10. Events of Default. Each of the following shall constitute
---------- -----------------
an "Event of Default" hereunder:
----------------
(a) Failure of the Borrower to (i) make any payment of interest or
principal or any other sum which has become due, whether by acceleration or
otherwise, under the terms of the Secured Note, this Agreement or any other Loan
Document evidencing or securing indebtedness of the Borrower to the Lender or
(ii) pay or deliver the Restoration Amount;
(b) Assignment or attempted assignment by the Borrower of this
Agreement or any rights hereunder, without first obtaining the specific written
consent of the Lender, or the granting by the Borrower of any security interest,
lien or other encumbrance on any Collateral to other than the Lender;
(c) The filing by or against the Borrower, the Guarantor or any
Affiliate thereof of a petition for liquidation, reorganization, arrangement or
adjudication as a bankrupt or similar relief under the bankruptcy, insolvency or
similar laws of the United States or any state or territory thereof or of any
foreign jurisdiction; the failure of the Borrower or such Affiliate to secure
dismissal of any such petition filed against it within thirty (30) days of such
filing; the making of any general assignment by the Borrower or any Affiliate
for the benefit of creditors; the appointment of a receiver or trustee for the
Borrower or any such Affiliate, or for any part of the Borrower's or such
Affiliate's assets; the institution by the Borrower or any Affiliate of any
other type of insolvency proceeding (under the Bankruptcy Code or otherwise) or
of any formal or informal proceeding, for the dissolution or liquidation of,
settlement of claims against, or winding up of the affairs of, the Borrower or
any Affiliate; the institution of any such proceeding against the Borrower or
any Affiliate if the Borrower or such Affiliate shall fail to secure dismissal
thereof within thirty (30) days thereafter; the consent by the Borrower or any
18
<PAGE>
Affiliate to any type of insolvency proceeding against the Borrower or such
Affiliate (under the Bankruptcy Code or otherwise); the occurrence of any event
or existence of any condition which could be the ground, basis or cause for any
proceeding or petition described in this Section;
(d) Any materially adverse change in the financial condition of the
Borrower or the Guarantor or the existence of any other condition which, in the
Lender's sole determination, constitutes an impairment of the Borrower's or the
Guarantor's ability to perform their obligations under this Agreement or the
Borrower's obligations under the Secured Note;
(e) Failure to service the Commercial Loans in substantial compliance
with the servicing requirements set forth in Section 7 hereof;
(f) A breach by the Borrower or the Guarantor of (i) any
representation or warranty set forth in Sections 4(a) hereof, (ii) any the
covenants set forth in Sections 4(c) and 9 hereof, or (iii) a use by the
Borrower of the proceeds of the Loan for a purpose other than as set forth in
Section 2 hereof;
(g) The Borrower, the Guarantor or any of their Affiliates shall
default in (i) any payment of principal or interest of any indebtedness (other
than the Loan) or guarantee obligation (other than the Guarantee) beyond the
grace period, if any, provided therefor in the instruments or agreements
pursuant to which such indebtedness was created (not to exceed 14 days), or in
(ii) the observance or performance of any other provision of such indebtedness
or guarantee, and the lender or beneficiary thereunder shall have the ability to
declare an "event of default" under such instrument or agreement, which would
result in either an acceleration of the indebtedness created thereunder or the
termination of future funding commitments to the Borrower or Guarantor.
Section 11. Remedies Upon Default. (a) Upon the happening of one or
---------- ---------------------
more Events of Default, the Lender may (x) refuse to make further Advances
hereunder and (y) immediately declare the principal of the Secured Note then
outstanding to be immediately due and payable, together with all interest
thereon and fees and expenses accruing under this Agreement; provided that, upon
--------
the occurrence of the Event of Default referred to in Section 10(c), such
amounts shall immediately and automatically become due and payable without any
further action by any Person or entity. Upon such declaration or such automatic
acceleration, the balance then outstanding on the Secured Note shall become
immediately due and payable without presentation, demand or further notice of
any kind to the Borrower.
19
<PAGE>
(b) Upon the occurrence of an Event of Default, the Lender may assume
all collection and servicing functions (including, without limitation, the
establishment of new addresses and accounts to receive all payments on the
Pledged Commercial Loans) or may appoint a successor servicer designated by the
Lender to assume those functions. At all times following such events, for so
long as the Loan or any portion thereof is outstanding, the Lender shall have
the right to collect and receive all further payments made on the Collateral,
and if any such payments are received by the Borrower, the Borrower shall not
commingle the amounts received with other funds of the Borrower and shall
promptly remit all such payments received over to the Lender.
(c) Following the occurrence and during the continuance of an Event
of Default, interest shall accrue on the Loan at a default interest rate of
LIBOR plus 5.00%.
Section 12. Indemnification. The Borrower agrees to hold the Lender
---------- ---------------
(which term shall include all Affiliates, officers, directors, employees and
agents of Lender and its Affiliates) harmless from and indemnifies the Lender
against all liabilities, losses, damages, judgments, costs and expenses of any
kind which may be imposed on, incurred by, or asserted against the Lender
relating to or arising out of this Agreement, the other Loan Documents or any
transaction contemplated hereby or thereby resulting from anything other than
the Lender's gross negligence or willful misconduct. The Borrower also agrees to
reimburse the Lender for all reasonable expenses in connection with the
enforcement of this Agreement and the other Loan Documents including without
limitation the reasonable fees and disbursements of counsel. The Borrower's
agreements in this Section shall survive the payment in full of the Secured Note
and the expiration or termination of this Agreement. The Borrower hereby
acknowledges that, notwithstanding the fact that the Secured Note is secured by
the Collateral, the obligations of the Borrower under the Secured Note are
recourse obligations of the Borrower.
Section 13. Power of Attorney. The Borrower hereby authorizes the
---------- -----------------
Lender, at the Borrower's expense, to file such financing statement or
statements relating to the Collateral without the Borrower's signature thereon
as the Lender at its option may deem appropriate, and appoints the Lender as the
Borrower's attorney-in-fact to execute any such financing statement or
statements in the Borrower's name and to perform all other acts which the Lender
deems appropriate to perfect and continue the security interest granted hereby
and to protect, preserve and realize upon the Collateral, including, but not
limited to, the right to endorse notes, complete blanks in
20
<PAGE>
documents and sign assignments on behalf of the Borrower as its attorney-in-
fact. This Power of Attorney is coupled with an interest and is irrevocable
without the Lender's consent. Notwithstanding the foregoing, the power of
attorney hereby granted may be exercised only during the occurrence and
continuance of any Event of Default hereunder.
SECTION 14. GOVERNING LAW; AGREEMENT CONSTITUTES SECURITY AGREEMENT.
---------- -------------------------------------------------------
THIS AGREEMENT IS INTENDED BY THE PARTIES HERETO TO BE GOVERNED BY NEW YORK LAW,
WITHOUT GIVING EFFECT TO PRINCIPALS OF CONFLICTS OF LAW, AND TO CONSTITUTE A
SECURITY AGREEMENT WITHIN THE MEANING OF THE NEW YORK UCC.
Section 15. Lender May Act Through Affiliates. The Lender may, from
---------- ---------------------------------
time to time, designate one or more Affiliates for the purpose of performing any
action hereunder.
Section 16. Notices. All demands, notices and communications relating
---------- -------
to this Agreement shall be in writing and shall be deemed to have been duly
given if mailed, by registered or certified mail, return receipt requested, or
by overnight courier, or, if by other means, when received by the other party or
parties at the address shown below, or such other address as may hereafter be
furnished to the other party or parties by like notice. Any such demand, notice
or communication hereunder shall be deemed to have been received on the date
delivered to or received at the premises of the addressee (as evidenced, in the
case of registered or certified mail, by the date noted on the return receipt).
If to the Borrower:
First National Bank of New England
280 Trumbull Street
Hartford, CT 06103
Attention: Leslie Galbraith
Telephone: 860-241-2529
Fax Number: 860-241-2501
If to the Guarantor:
First International Bancorp, Inc.
280 Trumbull Street
Hartford, CT 06103
Attention: Leslie Galbraith
Telephone: 860-241-2529
Fax Number: 860-241-2501
21
<PAGE>
With a copy to:
Bruce C. Silvers, Esq.
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103
Telephone: 860-541-3043
Fax Number: 860-527-5188
If to the Lender:
Prudential Securities Credit
Corporation
One Seaport Plaza
Credit Analysis Department
New York, New York 10292
Attention: Jeff French
Telephone: (212) 214-7558
Fax Number: (212) 214-7678
With copies to:
Prudential Securities Incorporated
One New York Plaza
Investment Banking Group
New York, New York 10292
Attention: Andrew Yuder
Phone Number: (212) 778-2581
Fax Number: (212) 778-7403
Richard L. Fried, Esq.
Stroock & Stroock & Lavan LLP
180 Maiden Lane
New York, New York 10038
Phone Number: (212) 806-6047
Fax Number: (212) 806-6006
Section 17. Severability. Any provision of this Agreement which is
---------- ------------
prohibited, unenforceable or not authorized in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition,
unenforceability or non-authorization, without invalidating the remaining
provisions hereof or affecting the validity, enforceability or legality of such
provision in any other jurisdiction.
Section 18. Counterparts. This Agreement may be executed by the
---------- ------------
parties hereto in separate counterparts, each of which when so executed and
delivered shall be an original, but
22
<PAGE>
all such counterparts shall together constitute one and the same instrument.
Section 19. Headings. The section headings contained herein are for
---------- --------
convenience of reference only and shall not define or limit any of the terms and
provisions hereof.
[Rest of Page Intentionally Left Blank]
23
<PAGE>
IN WITNESS WHEREOF, the parties have executed
this Agreement the date and year first above written.
FIRST NATIONAL BANK OF NEW ENGLAND
By: -------------------------------
Name:
Title:
FIRST INTERNATIONAL BANCORP, INC.
By: ------------------------------
Name:
Title:
PRUDENTIAL SECURITIES CREDIT
CORPORATION
By: -------------------------------
Name:
Title:
24
<PAGE>
EXHIBIT A
---------
SECURED NOTE
Dated as of December 4, 1998
FOR VALUE RECEIVED, the undersigned, FIRST NATIONAL BANK OF NEW
ENGLAND, a national bank, whose address is 280 Trumbull Street,, Hartford,
Connecticut 06103 (the "Borrower"), promises to pay to the order of PRUDENTIAL
SECURITIES CREDIT CORPORATION, a Delaware corporation, whose address is One
Seaport Plaza, New York, New York 10292(the "Lender") on or before the Maturity
Date the amount then outstanding under that certain Revolving Commercial Loan
Warehouse and Security Agreement dated as of December 4, 1998 (the "Agreement").
Capitalized terms used herein and not defined herein shall have their respective
meanings as set forth in the Agreement.
The holder of this Note is authorized to record the date and amount of
each Advance and the date and amount of each repayment of principal thereof on
the schedule annexed hereto and any such recordation shall constitute prima
-----
facie evidence of the accuracy of the amount so recorded; provided that the
- ----- --------
failure of the holder hereof to make such recordation (or any error in such
recordation) shall not affect the obligations of the Borrower hereunder or under
the Agreement.
MAXIMUM RATE OF INTEREST: It is intended that the rate of interest
------------------------
herein shall never exceed the maximum rate, if any, which may be legally charged
on the Loan evidenced by this Note ("Maximum Rate"), and if the provisions for
interest contained in this Note would result in a rate higher than the Maximum
Rate, interest shall nevertheless be limited to the Maximum Rate and any amounts
which may be paid toward interest in excess of the Maximum Rate shall be applied
to the reduction of principal, or, at the option of the Lender, returned to the
Borrower.
DUE DATE: The Loan evidenced hereby not paid before the Maturity Date
--------
shall be due and payable on the Maturity Date.
PLACE OF PAYMENT: All payments hereon shall be made, and all notices
----------------
to the Lender required or authorized hereby shall be given, at the office of the
Lender at the address designated in the heading of this Note, or to such other
place as the Lender may from time to time direct by written notice to the
Borrower.
A-1
<PAGE>
PAYMENT AND EXPENSES OF COLLECTION: All amounts payable hereunder are
----------------------------------
payable by wire transfer in immediately available funds to the account number
specified by the Lender, in lawful money of the United States. Payments remitted
by the Borrower via wire transfer initiated after 1:00 p.m. New York City shall
be deemed to be received on the next business day. The Borrower agrees to pay
all costs of collection when incurred, including, without limiting the
generality of the foregoing, reasonable attorneys' fees through appellate
proceedings, and to perform and comply with each of the covenants, conditions,
provisions and agreements contained in every instrument now evidencing or
securing said indebtedness.
SECURITY: This Note is issued pursuant to the Agreement and is
--------
secured by a pledge of the collateral described therein. Notwithstanding the
pledge of the collateral, the Borrower hereby acknowledges, admits and agrees
that the Borrower's obligations under this Note are recourse obligations of the
Borrower to which the Borrower pledges its full faith and credit.
DEFAULTS: Upon the happening of an Event of Default (as defined in
--------
the Agreement), the Lender shall have all rights and remedies set forth in the
Agreement.
The failure to exercise any of the rights and remedies set forth in
the Agreement shall not constitute a waiver of the right to exercise the same or
any other option at any subsequent time in respect of the same event or any
other event. The acceptance by the Lender of any payment hereunder which is
less than payment in full of all amounts due and payable at the time of such
payment shall not constitute a waiver of the right to exercise any of the
foregoing rights and remedies at that time or at any subsequent time or nullify
any prior exercise of any such rights and remedies without the express consent
of Lender, except as and to the extent otherwise provided by law.
WAIVERS: The Borrower, and any indorsers or guarantors hereof,
-------
severally waive diligence, presentment, protest and demand and also notice of
protest, demand, dishonor and nonpayments of this Note, and expressly agree that
this Note, or any payment hereunder, may be extended from time to time, and
consent to the acceptance of further collateral, the release of any collateral
for this Note, the release of any party primarily or secondarily liable hereon,
and that it will not be necessary for the Lender, in order to enforce payment of
this Note, to first institute or exhaust Lender's remedies against the Borrower
or any other party liable hereon or against any collateral for this Note. None
of the foregoing shall affect the liability of the Borrower and any indorsers or
guarantors hereof. No extension
A-2
<PAGE>
of time for the payment of this Note, or an installment hereof, made by
agreement by the lender with any Person now or hereafter liable for the payment
of this Note, shall affect the liability under this Note of the Borrower, even
if the Borrower is not a party to such agreement; provided, however, the Lender
and the Borrower, by written agreement between them, may affect the liability of
the Borrower.
TERMINOLOGY: If more than one party joins in the execution of this
-----------
Note, the covenants and agreements herein contained shall be the joint and
several obligation of each and all of them and of their respective heirs,
executors, administrators, successors and assigns, and relative words herein
shall be read as if written in the plural when appropriate. Any reference
herein to the Lender shall be deemed to include and apply to every subsequent
holder of this Note. Words of masculine or neuter import shall be read as if
written in the neuter or masculine or feminine when appropriate.
AGREEMENT: Reference is made to the Agreement for provisions as to
---------
Advances, rates of interest, mandatory principal repayments, collateral and
acceleration.
APPLICABLE LAW: THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED UNDER
--------------
THE LAWS OF THE STATE OF NEW YORK, THE LAWS OF WHICH THE BORROWER HEREBY
EXPRESSLY ELECTS TO APPLY TO THIS NOTE. THE BORROWER AGREES THAT ANY ACTION OR
PROCEEDING BROUGHT TO ENFORCE OR ARISING OUT OF THIS NOTE MAY BE COMMENCED IN
THE SUPREME COURT OF THE STATE OF NEW YORK, OR IN THE DISTRICT COURT OF THE
UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK.
FIRST NATIONAL BANK OF NEW ENGLAND
By: ------------------------------
Name:
Title:
A-3
<PAGE>
Schedule to
Secured Note
------------
<TABLE>
<CAPTION>
Amount of Total
Amount of Principal Principal
Date Advance Repaid Outstanding
- ------------------- --------------------- ----------------- ----------------
<S> <C> <C> <C>
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- ---------------------- ----------------- ----------------
$
- ------------------- --------------------- ----------------- ----------------
</TABLE>
A-4
<PAGE>
EXHIBIT B
---------
FORM OF LEGAL OPINION
---------------------
December 4, 1998
Prudential Securities Credit Corporation
One Seaport Plaza
Credit Analysis Department
New York, NY 10292
Prudential Securities Incorporated
One New York Plaza
Investment Banking Group
New York, NY 10292
Re: First National Bank of New England
----------------------------------
Ladies and Gentlemen:
We have acted as counsel to First National Bank of New England, a banking
corporation organized under the laws of the United States (the "Borrower"), and
First International Bancorp, Inc., a Delaware corporation (the "Guarantor"), in
connection with the Revolving Commercial Loan Warehouse and Security Agreement
dated as of December 4, 1998 (the "Warehouse Loan Agreement"), among the
Borrower, the Guarantor, and Prudential Securities Credit Corporation (the
"Lender"), and the transactions contemplated thereby. Capitalized terms used
herein and not otherwise defined shall have the respective meanings given such
terms in the Warehouse Loan Agreement. This opinion is rendered to you pursuant
to Section 1(a)(2)(ii)(B)(1) of the Warehouse Loan Agreement.
Although we act generally as counsel to the Borrower and the Guarantor, our
representation is limited to matters individually referred to us by the
Borrower's or Guarantor's management.
As to all matters of fact (including factual conclusions and
characterizations and descriptions of purpose, intention or other state of
mind), we have relied, with your permission, entirely upon (a) the
representations and warranties of the Borrower and Guarantor (the "Loan
Parties") set forth in the Warehouse Loan Agreement and each of the other
documents executed in connection therewith by the Loan Parties which have been
provided to us, and (b) certificates of certain of
B-1
<PAGE>
the officers of the Loan Parties and have assumed, without independent inquiry,
the accuracy of those representations, warranties, and certificates. For
purposes of our opinion rendered in paragraph 1 below, with respect to the
incorporation, organization, existence, qualification, or standing of any Loan
Party, our opinion relies entirely upon and is limited by those certificates of
public officials attached hereto as Exhibit A.
---------
In connection with this opinion, we have examined originals or copies of
the following documents:
(i) the Warehouse Loan Agreement;
(ii) the Secured Note;
(iii) the Guaranty;
(iv) the Custody Agreement;
(v) the Articles of Association (the "Borrower's Charter") of the
Borrower, certified by the Comptroller of the Currency as of , 1998, and
certified by an officer of the Borrower as of the date hereof as being true,
complete and correct and in full force and effect;
(vi) the Restated Certificate of Incorporation (the "Guarantor's Charter"
and, together with the Borrower's Charter, the "Charters") of the Guarantor,
certified by the Secretary of State of the State of Delaware as of 1,
1998, and certified by an officer of the Guarantor as of the date hereof as
being true, complete and correct and in full force and effect;
(vii) the By-Laws of the Borrower (the "Borrower's By-Laws"), certified by
an officer of the Borrower as of the date hereof as being true, complete and
correct and in full force and effect;
(viii) the By-Laws of the Guarantor (the "Guarantor's By-Laws" and,
together with the Borrower's By-Laws, the "By-Laws") (the Charters and the By-
Laws together being referred to sometimes herein as the "Governing Documents"),
certified by an officer of the Guarantor as of the date hereof as being true,
complete and correct and in full force and effect;
(ix) the certificate of certain officers of the Borrower, as of the date
hereof, as to certain actions taken by the
B-2
<PAGE>
Board of Directors of the Borrower at a meeting held on _________, 1998;
(x) the certificate of certain officers of the Guarantor, as of the date
hereof, as to certain actions taken by the Board of Directors of the Guarantor
at a meeting held on ________, 1998; and
(xi) those certificates of certain public officials with respect to the
Loan Parties attached hereto as Exhibit A.
---------
The documents specified in paragraphs (i) through (iv) above are referred
to herein, collectively, as the "Loan Documents". This opinion is based
entirely on our review of the documents listed in the preceding paragraph, and
we have made no other documentary review or investigation of any kind whatsoever
for purposes of this opinion.
We have assumed the genuineness of all signatures, the conformity to the
originals of all documents reviewed by us as copies, the authenticity and
completeness of all original documents reviewed by us in original or copy form
and the legal competence of each individual executing any document.
For purposes of this opinion, we have made such examination of law as we
have deemed necessary. This opinion is limited solely to the internal
substantive laws of the State of Connecticut as applied by courts located in
Connecticut without regard to choice of law, the federal laws of the United
States of America (except for Federal and state securities or blue sky laws, as
to which we express no opinion in this letter), and the Delaware General
Corporation Law as applied by courts located in Delaware (the "DGCL"), and we
express no opinion as to the laws of any other jurisdiction. To the extent to
which this opinion deals with matters governed by or relating to the laws of the
State of New York, by which the Warehouse Loan Agreement and certain of the
other Loan Documents are stated to be governed, we have assumed, with your
permission and without any independent investigation, that such laws are
identical to the internal substantive laws of the State of Connecticut. No
opinion is given herein as to the choice of law or internal substantive rules of
law that any court or other tribunal may apply to the transactions contemplated
by the Warehouse Loan Agreement and the other Loan Documents.
Our opinion is further subject to the following exceptions, qualifications
and assumptions, all of which we understand to be acceptable to you:
B-3
<PAGE>
(a) We have assumed without any independent investigation that (i)
each party to the Warehouse Loan Agreement and the other Loan Documents,
other than the Loan Parties, at all times relevant thereto, is validly
existing and in good standing under the laws of the jurisdiction in which
it is organized, and is qualified to do business and in good standing under
the laws of each jurisdiction where such qualification is required
generally or necessary in order for such party to enforce its rights under
such Loan Documents, and (ii) each party to the Warehouse Loan Agreement
and the other Loan Documents, at all times relevant thereto, had and has
the full power, authority and legal right under its certificate of
incorporation, partnership agreement, by-laws, and other governing
organizational documents, and the applicable corporate, partnership, or
other enterprise legislation and other applicable laws, as the case may be
(other than, to the limited extent the same may be applicable to the Loan
Parties and relevant to our opinions expressed below, the Loan Parties with
respect to the Governing Documents, the federal laws of the United States
of America, and the DGCL), to execute, and to perform its obligations
under, the Warehouse Loan Agreement and the other Loan Documents.
(b) We have assumed without any independent investigation (i) that
each of the Loan Parties has received the agreed to and stated
consideration for the incurrence of the Loans and other obligations
applicable to it under the terms of the Warehouse Loan Agreement and the
other Loan Documents, (ii) that each of the Warehouse Loan Agreement and
the other Loan Documents is a valid and binding obligation of each party
thereto other than the Loan Parties, and (iii) that each of the Warehouse
Loan Agreement and the other Loan Documents is a valid and binding
obligation of the Loan Parties to the extent that laws other than those of
the State of Connecticut are relevant thereto (other than the federal laws
of the United States of America, and the DGCL, but only to the limited
extent the same may be applicable to the Loan Parties and relevant to our
opinions expressed below).
(c) The enforcement of any obligations of any of the Loan Parties
under any of the Warehouse Loan Agreement or the other Loan Documents may
be limited by bankruptcy, insolvency, reorganization, moratorium,
marshaling or other laws and rules of law affecting the enforcement
generally of creditors' rights and remedies (including such as may deny
giving effect to waivers of debtors' or
B-4
<PAGE>
guarantors' rights); and we express no opinion as to the status under any
fraudulent conveyance laws or fraudulent transfer laws of any of the
obligations of any of the Loan Parties under any of the Warehouse Loan
Agreement or the other Loan Documents.
(d) We express no opinion as the availability of any specific or
equitable relief of any kind, or as to the enforceability of any particular
provision of any of the Warehouse Loan Agreement or the other Loan
Documents relating to remedies after default.
(e) The enforcement of any of your rights may in all cases be subject
to an implied duty of good faith and fair dealing and to general principles
of equity (regardless of whether such enforceability is considered in a
proceeding at law or in equity) and, as to any of your rights to collateral
security, will be subject to a duty to act in a commercially reasonable
manner.
(f) We express no opinion as to the enforceability of any particular
provision of any of the Warehouse Loan Agreement or the other Loan
Documents relating to (i) waivers of rights to object to jurisdiction or
venue, or consents to jurisdiction or venue, (ii) waivers of rights to (or
methods of) service of process, or other rights or benefits bestowed by
operation of law, (iii) waivers of any applicable defenses, setoffs,
recoupments, or counterclaims, (iv) waivers or variations of provisions
which are not capable of waiver or variation under the Uniform Commercial
Code of the State of Connecticut (the "Connecticut UCC"), (v) the grant of
powers of attorney to the Lender, (vi) exculpation or exoneration clauses,
indemnity clauses, and clauses relating to releases or waivers of unmatured
claims or rights, or (vii) the providing for a penalty rate of interest or
late charges on overdue or defaulted obligations, or the payment of any
premium, liquidated damages, or other amount which may be held by any court
to be a "penalty" or a "forfeiture". We express no opinion as to the
effect of suretyship defenses, or defenses in the nature thereof, with
respect to the obligations of any applicable guarantor, joint obligor,
surety, accommodation party, or other secondary obligor.
(g) No opinion is given herein as to the effect of so-called "usury
savings clauses" or other provisions of the Warehouse Loan Agreement or the
other Loan Documents purporting to deal with compliance with usury laws or
B-5
<PAGE>
other laws relating to limitations on the amount of interest or other
similar charges which lenders may make or receive in connection with
lending transactions.
(h) When any opinion set forth below is given to our knowledge, or to
the best of our knowledge, or with reference to matters of which we are
aware or which are known to us, or with a similar qualification, that
knowledge is limited to the actual knowledge of the individual lawyers in
this firm who have participated directly and substantively in the specific
transactions to which this opinion relates and without any special or
additional investigation undertaken for the purposes of this opinion.
(i) We express no opinion as to the effect of events occurring,
circumstances arising, or changes of law becoming effective or occurring,
after the date hereof on the matters addressed in this opinion letter, and
we assume no responsibility to inform you of additional or changed facts,
or changes in law, of which we may become aware.
(j) We have assumed, based solely upon certificates of certain
officers of the Loan Parties, that (i) the Guarantor is the corporate
parent of the Borrower, owning all of its outstanding stock; (ii) the
Guaranty is necessary or convenient to the conduct, promotion or attainment
of the business of the Borrower; and (iii) the Custodian is not an
affiliate of, or controlled by, the Borrower or the Guarantor.
(k) We have made no examination of, and no opinion is given herein as
to, any Loan Party's title to or other ownership rights in, the accuracy of
the descriptions of, or the existence of any liens, charges, encumbrances,
restrictions or limitations on, or adverse claims against, any of the
property or assets of any Loan Party. We have assumed without any
independent investigation that each Loan Party has rights in the Collateral
and any other assets in which it purports to grant a security interest
under the Loan Documents, and that each of the Loan Documents executed by
each Loan Party that purports to grant collateral creates a valid security
interest in such portion of the Collateral and any such other assets in
which a security interest may be created by contract to secure the
obligations of such Loan Party to the extent that laws other than those of
the State of Connecticut are relevant thereto. We express no opinion as to
the
B-6
<PAGE>
priority or (except to the extent specifically set forth in paragraphs 6
and 7 below) the attachment, validity, or perfection of any security
interest, mortgage, or other lien or encumbrance with respect to any of the
property or assets of any Loan Party. Further, we express no opinion as to
any security interest in any Collateral or any other assets excluded from,
or not governed by, Article 9 of the Connecticut UCC. We call your
attention to the following:
(i) there exist certain limitations, resulting from the
operation of Section 9-306 of the Connecticut UCC, on the perfection
of any security interest in proceeds of collateral, such that further
action (in or out of Connecticut) may be necessary to maintain
perfection of such interests;
(ii) Section 552 of the federal Bankruptcy Code limits the
extent to which property acquired by a debtor after the commencement
of a case under the Bankruptcy Code may be subject to a security
interest resulting from any security agreement entered into by the
debtor before the commencement of the case; and under Section 547 of
the Bankruptcy Code, a security interest that is deemed transferred
within the relevant period set forth in Section 547(e) of the
Bankruptcy Code may be avoidable under certain circumstances; and
(iii) the security interests in the Collateral may be subject to
the limitations set forth in Section 9-318 of the Connecticut UCC;
and, in any event, any security interests in the assets of any Loan
Party may be subject to the economic effects of valid recoupments,
offsets, counterclaims, and similar rights of the makers of the
promissory notes included in the Collateral or other contractual
parties, the terms of contracts between any Loan Party and such other
parties, and any claims or defenses of such other parties against any
Loan Party arising under or extrinsic to such contracts.
(l) We express no opinion as to the effect on the opinions expressed
herein of (i) the compliance or non-compliance of the Lender or any other
party (other than the Loan Parties) to the Loan Documents with any state,
federal or other laws or regulations applicable to it or (ii) the legal or
regulatory status or the nature of the business of any such Lender or other
party.
B-7
<PAGE>
(m) We have assumed without any independent investigation that the
Custodian will maintain physical possession of the promissory notes
included in the Collateral and that the Custodian will not hold any such
notes in a securities account.
In addition to the foregoing, with respect to the opinions set forth in
paragraph 7 below, our opinion is further subject to the following assumptions,
limitations and exceptions:
(n) we have assumed that (i) the promissory notes that are included in
the Collateral (the "Collateral Notes") are instruments as defined in the
Connecticut UCC and are not investment property as defined in the
Connecticut UCC, (ii) the Borrower is the owner of the Collateral Notes,
(iii) the Collateral Notes will be delivered to the Lender or an agent for
the Lender in New York and perfection of the security interest granted to
the Lender in the Collateral Notes will be governed by the Uniform
Commercial Code of the State of New York (the "NY UCC") and that the effect
of such delivery in New York and perfection being governed by the New York
UCC will be the same as it would be if delivery were made in Connecticut
and perfection were governed by the Connecticut UCC, (iv) the Collateral
Notes will not constitute "proceeds" of other collateral within the meaning
of (S)9-306 of the Connecticut UCC and are not subject to a security
interest described in (S)(S)9-304(4) or 9-304(5) of the Connecticut UCC
which provide for 21 day periods during which a security interest in
instruments can be perfected without taking or continuing possession of the
instrument, (v) the Custodian is not affiliated with the Borrower and
neither the Borrower nor the Custodian has any right, directly or
indirectly, to control the business affairs of the other, and (vi) neither
the Borrower, the Lender nor Custodian has any notice of adverse claims to
the Collateral Notes.
(o) no opinion is expressed herein as to whether the Collateral Notes
constitute negotiable instruments or as to whether the Lender or Custodian
will be a holder in due course of such instruments.
Based upon the foregoing, and subject to the limitations and qualifications
set forth below, we are of the opinion that:
1. The Borrower is validly existing as a national banking association
under the laws of the United States. The Guarantor is a corporation validly
existing and in corporate
B-8
<PAGE>
good standing under the laws of the State of Delaware. Each of the Loan Parties
has the requisite corporate power and authority to enter into and to perform its
obligations under each of the Warehouse Loan Agreement and the other Loan
Documents to which it is a party.
2. The execution and delivery by each of the Loan Parties of the Warehouse
Loan Agreement and the other Loan Documents to which it is a party, and the
performance by each of the Loan Parties of its obligations under each of the
Warehouse Loan Agreement and the other Loan Documents to which it is a party,
are within such Loan Party's corporate powers and have been duly authorized by
all requisite corporate action on the part of such Loan Party. Each of the Loan
Parties has duly executed and delivered each of the Loan Documents to which it
is a party.
3. Each of the Warehouse Loan Agreement and the other Loan Documents to
which each of the Loan Parties is a party constitutes a valid and binding
agreement of such Loan Party, enforceable against such Loan Party in accordance
with its respective terms.
4. The execution and delivery by each of the Loan Parties of each of the
Loan Documents to which it is a party and the consummation of the transactions
contemplated thereby and compliance by such Loan Party with the provisions
thereof (i) will not conflict with or result in a breach or default (or give
rise to any right of termination, cancellation or acceleration) under any of the
provisions of the Governing Documents of such Loan Party or, to the best of our
knowledge, any other material agreement binding upon such Loan Party of which we
are aware, except for such conflict, breach or default as to which requisite
waivers or consents have been obtained, (ii) will not violate any law, statute,
rule or regulation of the State of Connecticut, the DGCL or the federal laws of
the United States of America or, to the best of our knowledge, any judgment,
order, writ, injunction or decree of any court or other tribunal located in the
State of Connecticut of which we are aware, applicable to such Loan Party or any
of its properties or assets, and (iii) to the best of our knowledge, will not
result in the creation or imposition of any lien (other than liens evidenced by
the Loan Documents in favor of the Lender) on any asset of such Loan Party.
Except for the filings necessary to create, record or perfect, or maintain the
perfection of, or to enforce, the security interests created by the Loan
Documents, to the best of our knowledge, no consent or approval by, or any
notification of or filing with, any court, public body or authority of the State
of Connecticut is required to be obtained by any of the Loan Parties in
connection with the
B-9
<PAGE>
execution, delivery and performance by such Loan Party of each of the Loan
Documents to which it is a party or the consummation by such Loan Party of the
transactions contemplated thereby.
5. To our knowledge, but without having investigated any governmental
records or court dockets, and without having made any other independent
investigation, there is no action, suit or proceeding pending against any of the
Loan Parties or any of their respective assets before any court or arbitrator or
any governmental body, agency or official, in which there is a reasonable
possibility of an adverse decision which could reasonably be expected to affect
materially and adversely the consolidated financial position of the Borrower, or
which in any manner draws into question the validity of the Warehouse Loan
Agreement or the other Loan Documents.
6. The provisions of the Warehouse Loan Agreement are effective under the
Connecticut UCC to create a valid, attached security interest in favor of the
Lender in all right, title and interest of the Borrower in the Collateral, to
the extent that Article 9 of the Connecticut UCC is applicable.
7. Upon the delivery to the Custodian of the promissory notes included in
the Collateral, and assuming the continued possession at all times by the
Custodian or the Lender of such promissory notes, the Lender will have a
perfected security interest in such promissory notes under the Connecticut UCC,
and such security interest will have priority over other security interests in
such promissory notes that can be perfected under Article 9 of the Connecticut
UCC.
This opinion is delivered solely to you and for your benefit in connection
with the Warehouse Loan Agreement and may not be relied upon by you for any
other purpose or furnished or referred to, or relied upon, by any other person
or entity for any reason without our prior written consent.
Very truly yours,
B-10
<PAGE>
Exhibit C
---------
CREDIT INCREASE CONFIRMATION AND
NOTE AMENDMENT
Dated ______________
Reference is made to (x) the Revolving Commercial Loan Warehouse and
Security Agreement, dated as of December 4, 1998 (the "Revolving Warehouse
Agreement") among Prudential Securities Credit Corporation (the "Lender"), First
National Bank of New England (the "Borrower") and First International Bancorp,
Inc. (the "Guarantor") and(y) the Secured Note dated as of December 4, 1998 (the
"Note") from the Borrower to the Lender.
Section 1.
- ---------
The "Maturity Date" referenced in the Revolving Warehouse Agreement
and in the Note shall be ______________________.
The maximum Loan amount available under the Revolving Warehouse
Agreement and in the Note shall be _________________.
[Any other changes.]
Section 2.
- ---------
As amended by Section 1 hereof all provisions of the Revolving
Warehouse Agreement and of the Note are reconfirmed as of the date hereof. The
Borrower and the Guarantor, in addition, hereby reconfirm and remake as of the
date hereof each and every of their respective representations, warranties and
covenants set forth in the Revolving Warehouse Agreement.
C-1
<PAGE>
FIRST NATIONAL BANK OF NEW ENGLAND
By:_________________________________
Name:
Title:
FIRST INTERNATIONAL BANCORP, INC.
By:_________________________________
Name:
Title:
PRUDENTIAL SECURITIES CREDIT CORPORATION
By:_________________________________
Name:
Title:
C-2
<PAGE>
Exhibit D
---------
FUNDING NOTICE
--------------
___________, __, 19__
Prudential Securities Credit Corporation
One Seaport Plaza
Treasury Department
New York, NY 10292
Attention: Robert Troiano
Fax: (212) 214-7535
Re: Revolving Commercial Loan Warehouse
and Security Agreement, dated as of
December 4, 1998 ("Agreement")
-------------------------------
Ladies and Gentlemen:
Reference is made to the Agreement for defined terms used herein.
Pursuant to Section 1(a)4 of the Agreement, this letter constitutes notice that
the undersigned desires to obtain an Advance on __________ __, 19__, in the
principal amount of $____________, constituting ___% of the aggregate
outstanding principal balance of the Commercial Loans shown on the attached
Commercial Loan Schedule, as of the Cut-Off Date shown thereon.
This letter will further certify that: (1) the undersigned has no
notice or knowledge of any Event of Default; (2) the representations and
warranties in the Agreement relating to the Commercial Loans shown on the
attached Commercial Loan Schedule are true and correct as of the date hereof;
(3) each of the conditions to an Advance listed in Section 1(a)2. of the
Agreement are true and correct as of the date hereof and shall be true and
correct on the date of the Advance requested herein, before and after giving
effect thereto.
FIRST NATIONAL BANK OF NEW ENGLAND
By:____________________________________
Name:
Title:
cc: Prudential Securities Credit Corporation
Dan Lynch - Fax: (212) 214-7533
D-1
<PAGE>
Prudential Securities Incorporated
Peter Austin - Fax: (212) 778-7401
Lina Hsu - Fax: (212) 778-3716
Marine Midland Bank
Susan Barstock - Fax: (212) 658-6425
D-2
<PAGE>
Exhibit E
---------
GUARANTY
In order to induce PRUDENTIAL SECURITIES CREDIT CORPORATION ("Lender") to lend
up to $75,000,000 to FIRST NATIONAL BANK OF NEW ENGLAND ("Borrower"), a wholly-
owned subsidiary of FIRST INTERNATIONAL BANCORP, INC., pursuant to the Revolving
Commercial Loan Warehouse and Security Agreement, dated as of December 4, 1998
(the "Warehouse Agreement"), to fund the origination of certain Commercial
Loans, FIRST INTERNATIONAL BANCORP, INC. (the "Guarantor") hereby absolutely,
unconditionally and irrevocably guarantees, as a primary obligor and not merely
as a surety, the due and punctual payment of the Borrower's obligations under
the Warehouse Agreement and the related Note when and as due, whether at stated
payment dates, at maturity, by acceleration or otherwise, and all other
obligations of the Borrower to the Lender pursuant to the Warehouse Agreement,
including without limitation all of the Lender's out-of-pocket costs and
attorneys' fees and expenses associated therewith (the "Obligations"). The
Guarantor further agrees that the Obligations may be extended and renewed, in
whole or in part, in accordance with the provisions of the Warehouse Agreement,
without notice to or further assent from it, and that it will remain bound upon
its guarantee notwithstanding any extension or renewal of any Obligations by the
Lender. Capitalized terms used herein but not defined herein shall have the
meaning set forth in the Warehouse Agreement.
In furtherance of the foregoing and not in limitation of any other right which
the Lender may have at law or in equity against the Guarantor by virtue hereof,
upon the occurrence of an event requiring the payment by the Borrower of any
Obligations, the Guarantor hereby promises to and will, upon receipt of written
demand by the Lender, forthwith pay, or cause to be paid, to the Lender in cash
the amount of such unpaid Obligations. Upon payment by the Guarantor of any
sums to the Lender as provided above, all rights of the Guarantor against the
Borrower arising as a result thereof by way of right of subrogation or otherwise
shall in all respects be subordinated and junior in right of payment to the
prior indefeasible payment in full of all the Obligations to the Lender.
The Guarantor waives presentment to, demand of payment from and protest to the
Borrower of any of the Obligations, and also waives notice of acceptance of its
guarantee and notice of protest for nonpayment. The obligations of the
Guarantor hereunder shall not be affected by (a) the failure of the Lender
E-1
<PAGE>
to assert any claim or demand or to enforce any right or remedy against the
Borrower under the provisions of the Warehouse Agreement or otherwise; (b) any
rescission, waiver, amendment or modification of any of the terms or provisions
of the Warehouse Agreement or any other agreement or (c) the release of any
security held by the Lender for the Obligations or any of them.
The Guarantor further agrees that its guarantee constitutes a guarantee of
payment when due and not of collection, and waives any right to require that any
resort be had by the Lender to any security held for payment of the Obligations.
The representations, warranties and covenants relating to the Guarantor set
forth in Section 4 to the Warehouse Agreement are incorporated herein by
reference, and such representations and warranties are true and correct on the
date hereof.
The obligations of the Guarantor hereunder shall not be subject to any
reduction, limitation, impairment or termination for any reason, including,
without limitation, any claim of waiver, release, surrender, alteration or
compromise, and shall not be subject to any defense or setoff, counterclaim,
recoupment or termination whatsoever by reason of the invalidity, illegality or
unenforceability of the Obligations or otherwise. Without limiting the
generality of the foregoing, the obligations of the Guarantor hereunder shall
not be discharged or impaired or otherwise affected by the failure of the Lender
to assert any claim or demand or to enforce any remedy under the Warehouse
Agreement or any other agreement, by any waiver or modification on any thereof,
by any default, failure or delay, willful or otherwise, in the performance of
the Obligations, or by any other act or omission which may or might in any
manner or to any extent vary the risk of the Guarantor or otherwise operate as a
discharge of the Guarantor as a matter of law or equity.
The Guarantor further agrees that its guarantee shall continue to be effective
or be reinstated, as the case may be, if at any time payment, or any part
thereof, of principal of or interest on any Obligation is rescinded or must
otherwise be restored by the Lender upon the bankruptcy or reorganization of the
Borrower or otherwise, all as though such payment had not been made.
The Guarantor hereby irrevocably and unconditionally consents to submit to the
exclusive jurisdiction of the federal and New York State courts located in the
City of New York for any action, suit or proceeding instituted by the Lender to
enforce this Guaranty. The Guarantor further agrees that service of any
E-2
<PAGE>
process, summons, notice or documents by U.S. registered or certified mail to
the Guarantor's address set forth below shall be effective service of process
for any such proceeding. The Guarantor hereby irrevocably and unconditionally
waives any objection the Guarantor may have at any time to the venue or forum of
any such proceeding brought in such a court.
E-3
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Guaranty on the day and
year set forth below.
Date: December 4, 1998
FIRST INTERNATIONAL BANCORP, INC.
By:__________________________________
Name:
Title:
Address of Guarantor:
First International Bancorp, Inc.
280 Trumbull Street
Hartford, Connecticut 06103
Tel. No. 860-241-2529
Fax No. 860-241-2501
Attention: Leslie Galbraith
Accepted:
PRUDENTIAL SECURITIES CREDIT CORPORATION,
Lender
By:_________________________________
Name:
Title:
E-4
<PAGE>
ACKNOWLEDGMENT
STATE OF____________)
):ss.:
COUNTY OF___________)
On this _____ day of December, 1998, before me came__________________________,
the _____________ of FIRST INTERNATIONAL BANCORP, INC. to me known to be the
Guarantor described in, and who executed the foregoing instrument, and
acknowledged that (s)he executed the same.
____________________________________
Notary Public
Commission Expires________________
E-5
<PAGE>
EXECUTION COPY
EXHIBIT 10.13
================================================================================
$65,000,000
LOAN PURCHASE AND SERVICING AGREEMENT
Dated as of December 23, 1998
Among
FNBNE FUNDING CORP.
as the Seller
-------------
FIRST NATIONAL BANK OF NEW ENGLAND
as the Servicer
---------------
the INVESTORS
named herein
-------------
VARIABLE FUNDING CAPITAL CORPORATION
as a Purchaser
--------------
FIRST UNION CAPITAL MARKETS, a
division of WHEAT FIRST SECURITIES, INC.
as the Deal Agent
-----------------
FIRST UNION NATIONAL BANK
as the Liquidity Agent
----------------------
and
MARINE MIDLAND BANK
as the Collateral Custodian and Backup Servicer
-----------------------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS.................................................................................. 1
Section 1.1 Certain Defined Terms..................................................................... 1
---------------------
Section 1.2 Other Terms............................................................................... 25
-----------
Section 1.3 Computation of Time Periods............................................................... 25
---------------------------
ARTICLE II THE PURCHASE FACILITY........................................................................ 25
Section 2.1 Purchases of Asset Interests.............................................................. 25
----------------------------
Section 2.2 The Initial Purchase and Incremental Purchases............................................ 26
----------------------------------------------
Section 2.3 Reduction of the Purchase Limit........................................................... 27
-------------------------------
Section 2.4 Determination of Yield.................................................................... 27
----------------------
Section 2.5 Percentage Evidenced by Asset Interest.................................................... 27
--------------------------------------
Section 2.6 Dividing or Combining Asset Interests..................................................... 27
-------------------------------------
Section 2.7 Settlement Procedures..................................................................... 28
---------------------
Section 2.8 [Reserved.]............................................................................... 30
-----------
Section 2.9 Substitution of Loans..................................................................... 30
---------------------
Section 2.10 Collections and Allocations............................................................... 31
---------------------------
Section 2.11 Payments, Computations, Etc............................................................... 31
---------------------------
Section 2.12 Optional Repurchase...................................................................... 32
-------------------
Section 2.13 Fees...................................................................................... 32
----
Section 2.14 Increased Costs; Capital Adequacy; Illegality............................................. 33
---------------------------------------------
Section 2.15 Taxes..................................................................................... 34
-----
Section 2.16 Assignment of the Purchase Agreement...................................................... 36
------------------------------------
ARTICLE III CLOSING; CONDITIONS OF CLOSING AND PURCHASES................................................. 36
Section 3.1 Conditions to Closing and Initial Purchase................................................ 36
------------------------------------------
Section 3.2 Conditions Precedent to All Purchases and Remittances of Collections...................... 37
--------------------------------------------------------------------
ARTICLE IV REPRESENTATIONS AND WARRANTIES............................................................... 38
Section 4.1 Representations and Warranties of the Seller.............................................. 38
--------------------------------------------
Section 4.2 Representations and Warranties of Seller Relating to the Agreement and the Loans.......... 42
--------------------------------------------------------------------------------
Section 4.3 Representations and Warranties of the Seller Relating to the Purchase Limit and Capital
---------------------------------------------------------------------------------------
Limit..................................................................................... 44
-----
ARTICLE V GENERAL COVENANTS OF THE SELLER.............................................................. 44
Section 5.1 General Covenants......................................................................... 44
-----------------
Section 5.2 Covenants of Seller....................................................................... 44
-------------------
Section 5.3 Release of Lien........................................................................... 48
---------------
Section 5.4 Hedging Agreement......................................................................... 49
-----------------
Section 5.5 Retransfer of Ineligible Loans............................................................ 50
------------------------------
Section 5.6 Retransfer of Assets...................................................................... 51
--------------------
Section 5.7 Year 2000 Compatibility................................................................... 52
-----------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI ADMINISTRATION AND SERVICING OF LOANS........................................................ 52
Section 6.1 Appointment and Acceptance; Duties........................................................ 52
----------------------------------
Section 6.2 Duties and Responsibilities of the Servicer and the Collateral Custodian.................. 52
------------------------------------------------------------------------
Section 6.3 Authorization of the Servicer............................................................. 56
-----------------------------
Section 6.4 Collection of Payments.................................................................... 57
---------------------
Section 6.5 Servicer Advances......................................................................... 58
-----------------
Section 6.6 Realization Upon Defaulted Loans.......................................................... 59
--------------------------------
Section 6.7 Representations and Warranties of Backup Servicer and Collateral Custodian................ 59
--------------------------------------------------------------------------
Section 6.8 Maintenance of Insurance Policies......................................................... 61
---------------------------------
Section 6.9 Representations and Warranties of Servicer................................................ 61
------------------------------------------
Section 6.10 Covenants of Servicer..................................................................... 63
---------------------
Section 6.11 Covenants of Backup Servicer and Collateral Custodian..................................... 64
-----------------------------------------------------
Section 6.12 Servicing Compensation.................................................................... 65
----------------------
Section 6.13 Custodial Compensation.................................................................... 65
----------------------
Section 6.14 Payment of Certain Expenses by Servicer................................................... 65
---------------------------------------
Section 6.15 Reports................................................................................... 65
-------
Section 6.16 Annual Statement as to Compliance......................................................... 66
---------------------------------
Section 6.17 Annual Independent Public Accountant's Servicing Reports.................................. 66
--------------------------------------------------------
Section 6.18 Adjustments............................................................................... 67
-----------
Section 6.19 Merger or Consolidation of the Servicer................................................... 67
---------------------------------------
Section 6.20 Limitation on Liability of the Servicer and Others........................................ 68
-------------------------------------------------
Section 6.21 Indemnification of the Seller, the Deal Agent, the Liquidity Agent and the Secured
----------------------------------------------------------------------------------
Parties................................................................................... 68
-------
Section 6.22 The Servicer and Backup Servicer Not to Resign............................................ 69
----------------------------------------------
Section 6.23 Access to Certain Documentation and Information Regarding the Loans....................... 69
-------------------------------------------------------------------
Section 6.24 Backup Servicer........................................................................... 70
---------------
Section 6.25 Identification of Records................................................................. 72
-------------------------
Section 6.26 Servicer Termination Events............................................................... 72
---------------------------
Section 6.27 Appointment of Successor Servicer......................................................... 73
--------------------------------
Section 6.28 Notification.............................................................................. 74
------------
Section 6.29 Protection of Right, Title and Interest in Assets......................................... 74
-------------------------------------------------
Section 6.30 Release of Loan Files..................................................................... 75
---------------------
ARTICLE VII EARLY AMORTIZATION EVENTS.................................................................... 75
Section 7.1 Early Amortization Events................................................................. 75
-------------------------
ARTICLE VIII INDEMNIFICATION.............................................................................. 77
Section 8.1 Indemnities by the Seller................................................................. 77
-------------------------
ARTICLE IX THE DEAL AGENT AND THE LIQUIDITY AGENT....................................................... 80
Section 9.1 Authorization and Action.................................................................. 80
------------------------
Section 9.2 Delegation of Duties...................................................................... 80
--------------------
Section 9.3 Exculpatory Provisions.................................................................... 81
----------------------
Section 9.4 Reliance.................................................................................. 82
--------
Section 9.5 Non-Reliance on Deal Agent, Liquidity Agent and Others.................................... 82
------------------------------------------------------
Section 9.6 Reimbursement and Indemnification......................................................... 83
---------------------------------
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
Section 9.7 Deal Agent and Liquidity Agent in their Individual Capacities............................ 83
-------------------------------------------------------------
Section 9.8 Successor Deal Agent or Liquidity Agent.................................................. 83
---------------------------------------
ARTICLE X ASSIGNMENTS; PARTICIPATIONS.................................................................. 84
Section 10.1 Assignments and Participations........................................................... 84
------------------------------
ARTICLE XI MISCELLANEOUS................................................................................ 87
Section 11.1 Amendments and Waivers................................................................... 87
----------------------
Section 11.2 Notices, Etc............................................................................. 88
------------
Section 11.3 [Reserved.].............................................................................. 88
-----------
Section 11.4 No Waiver, Rights and Remedies........................................................... 88
------------------------------
Section 11.5 Binding Effect........................................................................... 88
--------------
Section 11.6 Term of this Agreement................................................................... 89
----------------------
Section 11.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION TO VENUE..................... 89
--------------------------------------------------------------------
Section 11.8 WAIVER OF JURY TRIAL..................................................................... 89
--------------------
Section 11.9 Costs, Expenses and Taxes................................................................ 89
-------------------------
Section 11.10 No Proceedings........................................................................... 90
--------------
Section 11.11 Recourse Against Certain Parties......................................................... 90
--------------------------------
Section 11.12 Protection of Ownership Interest; Appointment of Deal Agent as Attorney-in-Fact.......... 91
-------------------------------------------------------------------------------
Section 11.13 Confidentiality.......................................................................... 92
---------------
Section 11.14 Execution in Counterparts; Severability; Integration..................................... 93
----------------------------------------------------
</TABLE>
iii
<PAGE>
EXHIBITS
--------
EXHIBIT A Form of Notice of Sale
EXHIBIT B Form of Lock-Box Notice
EXHIBIT C "Limited Purpose" Provisions
EXHIBIT D Form of Assignment and Acceptance
EXHIBIT E Form of Monthly Report
EXHIBIT F Form of Servicer's Certificate
EXHIBIT G Credit and Collection Policies
EXHIBIT H Form of Purchase Certificate
EXHIBIT I Form of Hedging Agreement (including Schedule and Confirmation)
EXHIBIT J Form of Officer's Certificate as to Solvency
EXHIBIT K Form of Officer's Closing Certificate
EXHIBIT L Form of Power of Attorney
SCHEDULES
---------
SCHEDULE I Conditions Precedent
SCHEDULE II Concentration and Mix Requirements
SCHEDULE III Tradenames, Fictitious Names and "Doing Business As" Names
SCHEDULE IV List of Loans
SCHEDULE V Locations of Loan Documents
SCHEDULE VI Lock-Box Banks and Lock-Box Accounts
iv
<PAGE>
THIS LOAN PURCHASE AND SERVICING AGREEMENT (the "Agreement") is made as of
December 23, 1998, among:
(1) FNBNE FUNDING CORP., a Delaware corporation, as borrower (the
"Seller");
(2) FIRST NATIONAL BANK OF NEW ENGLAND, a national banking association,
("FNBNE"), as servicer (the "Servicer");
(3) the financial institutions listed on the signature pages of this
Agreement under the heading "Investors" and their respective successors and
assigns (the "Investors");
(4) VARIABLE FUNDING CAPITAL CORPORATION, a Delaware corporation ("VFCC");
(5) FIRST UNION CAPITAL MARKETS, a division of WHEAT FIRST SECURITIES,
INC. ("FCM"), as deal agent (the "Deal Agent");
(6) FIRST UNION NATIONAL BANK ("First Union"), as liquidity agent (the
"Liquidity Agent"); and
(7) MARINE MIDLAND BANK ("Marine Midland"), as collateral custodian (the
"Collateral Custodian") and as backup servicer (the "Backup Servicer").
IT IS AGREED as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 CERTAIN DEFINED TERMS.
---------------------
(a) Certain capitalized terms used throughout this Agreement are defined
above or in this Section 1.1.
(b) As used in this Agreement and its exhibits, the following terms shall
have the following meanings (such meanings to be equally applicable to both the
singular and plural forms of the terms defined).
Addition Date: With respect to any Additional Loans, the date on which such
- -------------
Additional Loans become Pool Assets.
Additional Loans: All Loans that become Pool Assets after the Closing Date (or,
- ----------------
if no Purchase is made on the Closing Date, then on the date of the initial
Purchase hereunder).
<PAGE>
Adjusted Eurodollar Rate: On any day, an interest rate per annum equal to the
- ------------------------
quotient, expressed as a percentage and rounded upwards (if necessary), to the
nearest 1/100 of 1%, obtained by dividing (i) the LIBOR Rate, as applicable, on
such day by (ii) the decimal equivalent of 100% minus the Eurodollar Reserve
Percentage on such day.
Administration Agreement: That certain Amended and Restated Administration
- -------------------------
Agreement executed between VFCC and FCM, as the same may be amended,
supplemented, or otherwise modified from time to time.
Adverse Claim: A lien, security interest, pledge, charge, encumbrance or other
- -------------
right or claim of any Person.
Affected Party: As defined in Section 2.14(a).
- --------------
Affiliate: With respect to a Person means any other Person controlling,
- ---------
controlled by or under common control with such Person. For 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" or "controlled" have meanings correlative
to the foregoing.
Aggregate Outstanding Loan Balance: As of any date of determination, the sum of
- ----------------------------------
the Outstanding Loan Balances of all Eligible Loans included as part of the
Asset Pool on such date.
Aggregate Unpaids: At any time, an amount, equal to the sum of all Yield
- -----------------
(accrued and to accrue), Capital and all other amounts owed hereunder, under any
Hedging Agreement (including, without limitation, payments in respect of the
termination of any such Hedging Agreement) or under any fee letter delivered by
the Originator to the Deal Agent and the Purchasers and outstanding at such time
(whether due or accrued).
Agent's Account: A special account (account number 01 41 96 47) in the name of
- ---------------
the Deal Agent or, so long as VFCC is the sole Purchaser hereunder, in the name
of VFCC, at Bankers Trust Company.
Agreement: This Loan Purchase and Servicing Agreement, dated as of December 23,
- ---------
1998, as amended, modified, supplemented or restated from time to time.
AIG: National Union Fire Insurance Company of Pittsburgh, PA, which is a member
- ---
company of American International Group, Inc.
AIG Loan: A Loan to an Obligor that is a short term import loan, with a term of
- --------
360 days or less and with interest and principal payable at maturity, a portion
of the Outstanding Loan Balance of which is insured by the AIG Policy.
2
<PAGE>
AIG Policy: That policy no. 649-8512, dated July 28, 1998, of AIG in favor of
- ----------
FNBNE, which insures the AIG Loans, as such policy or successor policy may be
replaced or renewed from time to time, so long as the Deal Agent, as agent for
the Secured Parties, is (i) named as a loss payee, or as an additional insured,
on such policy and on such renewal or replacement policy or (ii) otherwise
satisfied that the AIG Policy inures to its benefit.
Amortization Period: The period beginning on the Termination Date and ending on
- -------------------
the Collection Date.
Asset: All right, title and interest of the transferring party to and under any
- -----
and all of the following:
(i) the Transferred Loans, and all monies due or to become due
in payment of such Loans on and after the related Transfer Date;
(ii) any Related Property securing the Transferred Loans
including all proceeds from any sale or other disposition of such Related
Property;
(iii) the Loan Documents;
(iv) the Lock-Box Account, all funds held in such account, and
all certificates and instruments, if any, from time to time representing or
evidencing the Lock-Box Account or such funds;
(v) the Cash Collateral Account, all funds held in such
account, and all certificates and instruments, if any, from time to time
representing or evidencing the Cash Collateral Account or such funds;
(vi) the Collection Account, all funds held in such account,
and all certificates and instruments, if any, from time to time
representing or evidencing the Collection Account or such funds;
(vii) all Collections and all other payments made or to be made
in the future with respect to such Loans or by the Obligor thereunder and
under any guarantee or similar credit enhancement with respect to such
Loans, including but not limited to SBA guarantees and the AIG Policy;
(viii) all payments received pursuant to any Hedging Agreement or
Hedge Transaction; and
(ix) all income and Proceeds of the foregoing.
3
<PAGE>
Asset Interest: At any time, an undivided variable percentage ownership
- --------------
interest in all Assets. Each Asset Interest shall be calculated in accordance
with Section 2.5. The undivided percentage interest of an Asset Interest shall
equal
C+R
------
AOLB
where:
C = equals the Capital in respect of such Asset Interest.
R = equals the aggregate Reserves in respect of such Asset
Interest.
AOLB = equals the Aggregate Outstanding Loan Balance.
Asset Pool: At any time, all then outstanding Assets.
- ----------
Assignment and Acceptance: An assignment and acceptance entered into by an
- -------------------------
Investor and an Eligible Assignee, and accepted by the Deal Agent, in
substantially the form of Exhibit D hereto.
Available Collections: As defined in Section 2.7 hereof.
- ---------------------
Average Default Ratio: For any Determination Date, the arithmetic average of
- ---------------------
the Default Ratios, expressed as percentages, for the three (3) Collection
Periods ended on such date, except that (i) in the case of the first
Determination Date following the Closing Date, the "Average Default Ratio" shall
be the Default Ratio for the Collection Period ended on such date, and (ii) in
the case of the second Determination Date following the Closing Date, the
"Average Default Ratio" shall be the arithmetic average of the Default Ratios
for the two (2) Collection Periods ended on such date.
Average Net Loss Ratio: For any Determination Date, the arithmetic average of
- ----------------------
the Net Loss Ratios, expressed as percentages, for the three (3) Collection
Periods ended on such date, except that (i) in the case of the first
Determination Date following the Closing Date, the "Average Net Loss Ratio"
shall be the Net Loss Ratio for the Collection Period ended on such date, and
(ii) in the case of the second Determination Date following the Closing Date,
the "Average Net Loss Ratio" shall be the arithmetic average of the Net Loss
Ratios for the two (2) Collection Periods ended on such date.
Backup Servicer: Marine Midland Bank, and its permitted successors and assigns.
- ---------------
Backup Servicer Fee: As set forth in the Backup Servicer and Collateral
- -------------------
Custodian Fee Letter.
Backup Servicer and Collateral Custodian Fee Letter: The letter, dated as of
- ---------------------------------------------------
the Closing Date, among FNBNE, the Seller, the Backup Servicer, the Collateral
Custodian, the Deal Agent and
4
<PAGE>
First Union, setting forth among other things the Backup Servicer Fee and the
Collateral Custodian Fee.
Bankruptcy Code: The Federal Bankruptcy Code, as amended from time to time
- ---------------
(Title 11 of the United States Code).
Base Rate: On any date, a fluctuating rate of interest per annum equal to the
- ---------
higher of (a) the Prime Rate or (b) the Federal Funds Rate plus one-half of one
percent (0.5%).
Benefit Plan: Any employee benefit plan as defined in Section 3(3) of ERISA in
- ------------
respect of which the Seller or any ERISA Affiliate of the Seller is, or at any
time during the immediately preceding six years was, an "employer" as defined in
Section 3(5) of ERISA.
Breakage Costs: Any amount or amounts as shall compensate a Purchaser for any
- --------------
loss, cost or expense incurred by such Purchaser (as determined in such
Purchaser's sole discretion) as a result of a prepayment by the Seller of
Capital or Yield pursuant to the terms hereof.
Business Day: Any day of the year other than a Saturday or a Sunday on which
- ------------
(a) banks are not required or authorized to be closed in New York City,
Charlotte, North Carolina, and Hartford, Connecticut, and (b) if the term
"Business Day" is used in connection with the Adjusted Eurodollar Rate, means
the foregoing only if such day is also a day of year on which dealings in United
States dollar deposits are carried on in the London interbank market.
Capital: The sum of the amounts paid to the Seller for the initial Purchase and
- -------
in connection with each Incremental Purchase pursuant to Section 2.2, reduced
from time to time by Collections and other payments received and distributed to
Purchasers on account of such Capital pursuant to Section 2.7; provided,
--------
however, that such Capital shall not be reduced by any distribution of any
- -------
portion of Principal Collections if at any time such distribution is rescinded
or must be returned for any reason.
Capital Limit: At any time the sum of (i) the Aggregate Outstanding Loan
- -------------
Balance for all Eligible Loans that are Commercial Loans multiplied by the
Purchase Rate with respect to Commercial Loans, (ii) the Aggregate Outstanding
Loan Balance for all Eligible Loans that are SBA Loans multiplied by the
Purchase Rate with respect to SBA Loans, and (iii) the Aggregate Outstanding
Loan Balance for all Eligible Loans that are AIG Loans multiplied by the
Purchase Rate with respect to AIG Loans.
Cash Collateral Account: As defined in Section 6.4(g).
- -----------------------
Casualty Loss: With respect to any item of Related Property, the loss, theft,
- -------------
damage beyond repair or governmental condemnation or seizure of such item of
Related Property.
Change in Control: The date on which (i) any Person or "group" acquires any
- -----------------
"beneficial ownership" (as such terms are defined under Rule 13d-3 of, and
Regulation 13D under, the
5
<PAGE>
Securities Exchange Act of 1934, as amended), either directly or indirectly, of
membership interests or other equity interests or any interest convertible into
any such interest in the Originator having more than fifty percent (50%) of the
voting power for the election of directors of the Originator, if any, under
ordinary circumstances, or (ii) (except in connection with any Securitization or
in connection with the sale of Assets under the Purchase Agreement) the
Originator sells, transfers, conveys, assigns or otherwise disposes of all or
substantially all of the assets of the Originator; provided, however, it shall
-------- -------
not be a Change in Control for any one or more of the following Persons,
individually or collectively, to gain more than fifty percent (50%) of such
voting power: Arnold Chase, Cheryl Chase, Rhoda L. Chase, David T. Chase, Brett
N. Silvers, Nancy W. Silvers, and any family members, Affiliates, and heirs of
any of the foregoing (collectively, the "Permitted Owners"), and any trusts,
partnerships or other entities as to which the sole beneficiaries are any of the
Permitted Owners.
Charged-Off Loan: Any Loan (i) for which an Insolvency Event has occurred with
- ----------------
respect to the related Obligor, (ii) for which the related Obligor has suffered
any other change which materially and adversely affects its viability as a going
concern, or (iii) which is or otherwise should be written off as uncollectible
by the Servicer in accordance with the Credit and Collection Policies.
Closing Date: December 23, 1998.
- ------------
Code: The Internal Revenue Code of 1986, as amended.
- ----
Collateral Custodian: Marine Midland Bank, and its permitted successors and
- --------------------
assigns.
Collateral Custodian Fee: As set forth in the Backup Servicer and Collateral
- ------------------------
Custodian Fee Letter.
Collection Account: As defined in Section 2.10.
- ------------------
Collection Date: The date following the Termination Date on which the aggregate
- ---------------
outstanding Capital has been reduced to zero, the Purchasers have received all
Yield and other amounts due to the Purchasers in connection with this Agreement
each Hedge Transaction has been terminated and each Hedge Counterparty has
received all amounts owing to it under its respective Hedging Agreement and the
Deal Agent has received all amounts due to it in connection with this Agreement.
Collection Period: Each calendar month, except in the case of the first
- -----------------
Collection Period, the period beginning on the Closing Date to and including the
last day of the calendar month in which the Closing Date occurs.
Collections: With respect to any Transferred Loan, all cash collections or
- -----------
other cash proceeds of such Loan received by the Servicer, Originator or Seller
from or on behalf of any Obligor in payment of any amounts owed in respect of
such Loan, including, without limitation, any Interest Collections, any
Principal Collections, Deemed Collections, Insurance Proceeds, interest
6
<PAGE>
earnings in the Collection Account, all recoveries on Charged-Off Loans, and all
payments received pursuant to any Hedging Agreement or Hedge Transaction.
Commercial Line of Credit: A revolving, line of credit Loan to an Obligor that
- -------------------------
is neither an SBA Loan nor an AIG Loan.
Commercial Loans: All of the Commercial Lines of Credit and the Commercial Term
- ----------------
Loans.
Commercial Term Loan: A term loan to an Obligor that is neither an SBA Loan nor
- --------------------
an AIG Loan.
Commercial Paper Notes: On any day, any short-term promissory notes issued by
- ----------------------
VFCC with respect to financing its purchase of any Asset Interest hereunder.
Commitment: For each Investor, the commitment of such Investor to purchase
- ----------
Asset Interests from the Seller in an amount not to exceed the amount set forth
opposite such Investor's name on the signature pages of this Agreement, as such
amount may be modified in accordance with the terms hereof.
Commitment Fee: As defined in Section 2.13(a) hereof.
- --------------
Commitment Termination Date: December 23, 2001 or such later date to which the
- ---------------------------
Commitment Termination Date may be extended (if extended) in the sole discretion
of VFCC and each Investor in accordance with the terms of Section 2.1(b).
Conversion: As defined in Section 2.1(c).
- ----------
Cost of Funds Adjustment: The difference by which the CP Rate exceeds the
- ------------------------
Adjusted Eurodollar Rate.
CP Rate: For any Fixed Period, the per annum rate equivalent to the weighted
- -------
average of the per annum rates paid or payable by VFCC from time to time as
interest on or otherwise (by means of interest rate hedges or otherwise) in
respect of the promissory notes issued by VFCC that are allocated, in whole or
in part, by the Deal Agent (on behalf of VFCC) to fund or maintain the Asset
Interest during such period, as determined by the Deal Agent (on behalf of VFCC)
and reported to the Seller and the Servicer, which rates shall reflect and give
effect to (i) the commissions of placement agents and dealers in respect of such
promissory notes, to the extent such commissions are allocated, in whole or in
part, to such promissory notes by the Deal Agent (on behalf of VFCC), (ii) any
incremental carrying costs associated with the issuance of such promissory notes
maturing on dates other than those dates on which funds are received by VFCC,
and (iii) other borrowings by VFCC, including, without limitation, borrowings to
fund small or odd dollar amounts that are not easily accommodated in the
commercial paper market; provided, however, that if any component of such rate
-------- -------
is a discount rate, in calculating the "CP Rate," the
7
<PAGE>
Deal Agent shall for such component use the rate resulting from converting such
discount rate to an interest bearing equivalent rate per annum.
Credit and Collection Policies: Those credit, collection, customer relation and
- ------------------------------
service policies of the Originator and the Servicer as of the date hereof
relating to the Loans and related Loan Documents, set forth in Exhibit G, as the
---------
same may be amended or modified from time to time in accordance with Section
6.10(e).
Deal Agent: FCM, as Deal Agent hereunder, together with its successors and
- ----------
assigns.
Deemed Collections: On any day, an amount equal to the unpaid balance
- ------------------
(including any principal and accrued interest thereon) of any Loan included in
the Asset Pool if on such day (a) the Deal Agent, as agent for the Secured
Parties, does not have a valid perfected security interest in such Loan and any
Related Property, or (b) a Warranty Event has occurred with respect to such
Loan.
Defaulted Loan: As of any day of determination, a Loan (i) as to which the
- --------------
Obligor thereof has failed to make any payment, or part thereof, required to be
made thereunder for 60 days following the due date thereof, or (ii) that is a
Charged-Off Loan.
Default Ratio: For any Collection Period, the percentage equivalent of a
- -------------
fraction, the numerator is which is the product of (a) the Outstanding Loan
Balance of Defaulted Loans at the end of such Collection Period, and (b) 12, and
the denominator of which is the Outstanding Loan Balance of Additional Loans
added to the Asset Pool during such Collection Period.
Delinquent: On any day with respect to any Loan and any specified time period
- ----------
any payment, or portion thereof, due with respect thereto, has not been made by
the Obligor of such loan for the specified time period from the due date of such
payment.
Derivatives: Any exchange-traded or over-the-counter (i) forward, future,
- -----------
option, swap, cap, collar, floor, foreign exchange contract, any combination
thereof, whether for physical delivery or cash settlement, relating to any
interest rate, interest rate index, currency, currency exchange rate, currency
exchange rate index, debt instrument, debt price, debt index, depository
instrument, depository price, depository index, equity instrument, equity price,
equity index, commodity, commodity price or commodity index, (ii) any similar
transaction, contract, instrument, undertaking or security, or (iii) any
transaction, contract, instrument, undertaking or security containing any of the
foregoing.
Determination Date: With respect to any Payment Date, the last day of the
- ------------------
immediately preceding Collection Period.
Early Amortization Event: As defined in Section 7.1.
- ------------------------
8
<PAGE>
Eligible Assignee: A Person whose short-term rating is at least A-1 from S&P
- -----------------
and P-1 from Moody's, or whose obligations under this Agreement are guaranteed
by a Person whose short-term rating is at least A-1 from S&P and P-1 from
Moody's and is satisfactory to VFCC and the Deal Agent.
Eligible Loan: On any date of determination, each Loan (a) which is a
- -------------
Transferred Loan and identified on the list of Loans delivered by the Seller to
the Collateral Custodian as part of a Notice of Sale, (b) which is a Commercial
Loan, an AIG Loan or an SBA Loan, and (c) which satisfies each of the following
requirements (unless otherwise agreed to in writing by the Deal Agent in its
sole discretion):
(i) the Loan is evidenced by a promissory note which has been
duly authorized and which, together with the related Loan Documents, is in
full force and effect and constitutes the legal, valid and binding
obligation of the Obligor of such Loan to pay the stated amount of the Loan
and interest thereon, and the related Loan Documents are enforceable
against such Obligor in accordance with their respective terms;
(ii) the Loan was originated and maintained in accordance with
the terms of the Credit and Collection Policies and arose in the ordinary
course of the Originator's business from the loaning of money to the
Obligor thereof;
(iii) the Loan is not a Defaulted Loan or a Charged-Off Loan or a
Loan any payment or portion thereof is more than 30 days Delinquent;
(iv) the Obligor of such Loan is an Eligible Obligor and has
executed all appropriate documentation including documentation relating to
its collateral required by the Originator;
(v) the promissory note which evidences the Loan is an
"instrument" and is not a "general intangible," an "account," or "chattel
paper" as such terms are defined and used in the UCC of all jurisdictions
which govern the perfection of the security interest granted therein;
(vi) all material consents, licenses, approvals or
authorizations of, or registrations or declarations with, any Governmental
Authority required to be obtained, effected or given in connection with the
making of such Loan have been duly obtained, effected or given and are in
full force and effect and the Loan was otherwise originated in accordance
with all federal and state governmental consumer and other applicable laws
and regulations;
(vii) the Loan is denominated and payable only in United States
Dollars in the United States and the collateral securing such Loan is
located only in the United States
9
<PAGE>
unless otherwise agreed in writing by the Deal Agent upon its credit approval,
including receipt and review of due diligence conducted by FNBNE;
(viii) [Reserved]
(ix) the Loan, together with the Loan Documents related
thereto, does not contravene in any material respect any laws, rules or
regulations applicable thereto (including, without limitation, laws, rules
and regulations relating to usury, truth in lending, fair credit billing,
fair credit reporting, equal credit opportunity, fair debt collection
practices and privacy) and with respect to which no party to the Loan
Documents related thereto is in material violation of any such law, rule or
regulation in any respect;
(x) the Loan, together with the related Loan Documents, is
fully assignable;
(xi) the Loan was documented and closed in accordance with the
Originator's policies and procedures, including the relevant opinions and
assignments, and only one current original promissory note with respect to
such Loan, which promissory note has been delivered to the Collateral
Custodian, duly endorsed for transfer under this Agreement;
(xii) except for Permitted Liens, the Loan and all Related
Property are free of any Liens; and all filings and other actions required
to perfect the security interest of the Deal Agent as agent for the Secured
Parties in the Assets related thereto have been made or taken;
(xiii) the Required Loan Documents relating to such Loan are in
the possession of the Collateral Custodian;
(xiv) [Reserved]
(xv) no right of recission, set off, counterclaim, defense or
other material dispute has been asserted with respect to such Loan;
(xvi) the Loan was made under the existing Loan Documents,
which Loan Documents have not been modified in any respect or such Loan
extended as a result of any adverse credit reason (including, without
limitation on, rescheduling of installment payments);
(xvii) any Related Property with respect to such Loan is insured
in accordance with the Credit and Collection Policies;
(xviii) the Loan Documents with respect to such Loan are complete
in accordance with the Credit and Collection Policies;
10
<PAGE>
(xix) the Obligor with respect to such Loan is an Eligible
Obligor ;
(xx) the Loan has an Eligible Risk Rating of 3.0 or better and
was otherwise approved according to the Originator's Credit and Collection
Policies;
(xxi) if a Loan is a Commercial Line of Credit, (i) interest is
due and payable monthly, (ii) the initial term of the Loan does not exceed
12 months, with all outstanding principal and interest due at the end of 12
months, and (iii) its respective Loan Documents provide that if it is not
renewed it shall be amortized over a period not to exceed 36 additional
months;
(xxii) if a Loan is an SBA Loan, (i) the initial term of the
Loan does not exceed 12 months and the Schedule of Payments provides for
monthly interest payments with all outstanding principal and interest due
at the end of 12 months, (ii) it was originated and approved under SBA
policies and guidelines, and (iii) it is supported by a 90% SBA guaranty;
(xxiii) if a Loan is a Commercial Term Loan, (i) the first
Scheduled Payment on such Loan is due within 45 days after its Purchase
Date, (ii) its term does not exceed 25 years, and (iii) its Schedule of
Payments has equal payments of principal and interest except for the final
payment which may be less than the other payments; and
(xxiv) if a Loan is an AIG Loan, (i) its term to maturity does
not exceed 360 days and such term may not be extended, (ii) the Obligor
thereunder qualifies as a covered "Buyer" under the AIG Policy and is not
on the "Excluded Buyer List" provided for under the AIG Policy, and a
portion of such Loan is supported by AIG insurance pursuant to the AIG
Policy, (iii) it qualifies as an "Insured Transaction" under the AIG
Policy; and (iv) AIG's corporate unsecured debt rating is at least AA by
S&P and Aa2 by Moody's.
Eligible Obligor: Any Obligor which satisfies each of the following
- ----------------
requirements at all times:
(i) the Obligor is not in the gaming, nuclear waste, bio-
tech, oil and gas or real estate industries;
(ii) the Obligor is a legal operating entity, duly organized
and validly existing under the laws of its jurisdiction of organization;
(iii) the Obligor is not the subject of any Insolvency Event;
(iv) the Obligor is not an Affiliate of any of the parties
hereto;
(v) the Obligor is not the Obligor of any Loan, any payment
or portion thereof is more than 30 days Delinquent or any Charged-Off
Loans;
11
<PAGE>
(vi) the Obligor is not a Governmental Authority;
(vii) the Obligor is in compliance with all material terms and
conditions of its Loan Documents;
(viii) the Obligor's principal office and any Related Property
are located in the United States or any other country or territory of the
United States approved by the Deal Agent upon receipt and review of
satisfactory legal due diligence, Rating Agency discussions and credit
approval; and
(ix) the Obligor has an Eligible Risk Rating of 3.0 or better.
Eligible Risk Rating: As of any date of determination, with respect to a
- --------------------
designated Loan or Obligor, a risk rating of "1.0," "2.0," or "3.0" as
determined by, or should have been determined by, the Servicer in accordance
with the Credit and Collection Policies or as designated by the Originator.
ERISA: The U.S. Employee Retirement Income Security Act of 1974, as amended
- -----
from time to time, and the regulations promulgated and rulings issued
thereunder.
ERISA Affiliate: (a) Any corporation which is a member of the same controlled
- ---------------
group of corporations (within the meaning of Section 414(b) of the Code) as the
Seller; (b) a trade or business (whether or not incorporated) under common
control (within the meaning of Section 414(c) of the Code) with the Seller; or
(c) a member of the same affiliated service group (within the meaning of Section
414(m) of the Code) as the Seller, any corporation described in clause (a) above
or any trade or business described in clause (b) above.
Eurodollar Disruption Event: The occurrence of any of the following: (a) a
- ---------------------------
determination by a Purchaser that it would be contrary to law or to the
directive of any central bank or other governmental authority (whether or not
having the force of law) to obtain United States dollars in the London interbank
market to make, fund or maintain any Purchase, (b) the failure of one or more of
the Reference Banks to furnish timely information for purposes of determining
the Adjusted Eurodollar Rate, (c) a determination by a Purchaser that the rate
at which deposits of United States dollars are being offered to such Purchaser
in the London interbank market does not accurately reflect the cost to such
Purchaser of making, funding or maintaining any Purchase or (d) the inability of
a Purchaser to obtain United States dollars in the London interbank market to
make, fund or maintain any Purchase.
Eurodollar Reserve Percentage: For any day, that percentage (expressed as a
- -----------------------------
decimal) which is in effect from time to time under Regulation D of the Board of
Governors of the Federal Reserve System (or any successor), as such regulation
may be amended from time to time or any successor regulation, as the reserve
requirement (including, without limitation, any basic, supplemental, emergency,
special, or marginal reserves) applicable with respect to Eurocurrency
12
<PAGE>
Liabilities as that term is defined in Regulation D (or against any other
category of liabilities that includes deposits by reference to which the LIBOR
Rate is determined), whether or not the Purchasers have any Eurocurrency
Liabilities subject to such reserve requirement at that time. All Capital whose
Yield is computed by reference to the Adjusted Eurodollar Rate shall be deemed
to constitute Eurocurrency Liabilities and as such shall be deemed subject to
reserve requirements without benefits of credits for proration, exceptions or
offsets that may be available from time to time to a Purchaser. The Adjusted
Eurodollar Rate shall be adjusted automatically on and as of the effective date
of any change in the Eurodollar Reserve Percentage.
Facility: This Loan Purchase and Servicing Agreement, dated as of December 23,
- --------
1998, as amended, modified, supplemented or restated from time to time.
Federal Funds Rate: For any period, a fluctuating interest rate per annum equal
- -------------------
for each day during such period to the weighted average of the federal funds
rates as quoted by First Union and confirmed in Federal Reserve Board
Statistical Release H.15(519) or any successor or substitute publication
selected by First Union (or, if such day is not a Business Day, for the
preceding Business Day), or, if, for any reason, such rate is not available on
any day, the rate determined, in the sole opinion of First Union, to be the rate
at which federal funds are being offered for sale in the national federal funds
market at 9:00 A.M. Charlotte, North Carolina time.
Fee Letter: The letter, dated as of the Closing Date, among the Seller, the
- -----------
Servicer, the Deal Agent and First Union setting forth, among other things, the
Commitment Fee rate.
First Union: First Union National Bank, in its individual capacity, and its
- ------------
successors or assigns.
Fixed Period: For any Payment Date the period beginning on, and including the
- ------------
sixteenth day of the immediately preceding calendar month (or, with respect to
the first Fixed Period, the Closing Date) and ending on, and including the
fifteenth day of the calendar month in which such Payment Date occurs.
FNBNE Existing Account: Account No. 2005 maintained at FNBNE for the purpose of
- ----------------------
receiving Collections.
GAAP: Generally accepted accounting principles as in effect from time to time
- ----
in the United States.
Governmental Authority: Any nation or government, any state or other political
- ----------------------
subdivision thereof, any entity exercising executive, legislative, judicial,
regulatory or administrative functions of or pertaining to government and any
court or arbitrator having jurisdiction over such Person.
H.15: Federal Reserve Statistical Release H.15.
- ----
13
<PAGE>
Hedge Breakage Costs: For any Hedge Transaction, any amount payable by the
- --------------------
Seller for the early termination of that Hedge Transaction or any portion
thereof.
Hedge Counterparty: Any entity which (a) on the date of entering into any Hedge
- ------------------
Transaction (i) is an interest rate swap dealer that is either a Purchaser or an
Affiliate of a Purchaser, or has been approved in writing by the Deal Agent
(which approval shall not be unreasonably withheld), and (ii) has a long-term
unsecured debt rating of not less than "A" by S&P and not less than "A-2" by
Moody's ("Long-term Rating Requirement") and a short-term unsecured debt rating
of not less than "A-1" by S&P and not less than "P-1" by Moody's ("Short-term
Rating Requirement"), and (b) in a Hedging Agreement (i) consents to the
assignment of the Seller's rights under the Hedging Agreement to the Deal Agent
pursuant to Section 5.4(a) and (ii) agrees that in the event that Moody's or S&P
reduces its long-term unsecured debt rating below the Long-term Rating
Requirement, it shall transfer its rights and obligations under each Hedging
Transaction to another entity that meets the requirements of clause (a) and (b)
hereof and has entered onto a Hedging Agreement with the Seller on or prior to
the date of such transfer.
Hedge Notional Amount: For any Purchase, the aggregate notional amount in effect
- ---------------------
on any day under all Hedge Transactions entered into pursuant to Section 5.4(a)
for that Purchase.
Hedge Transaction: Each interest rate swap transaction between the Seller and a
- -----------------
Hedge Counterparty which is entered into pursuant to Section 5.4(a) and is
governed by a Hedging Agreement.
Hedging Agreement: Each agreement between the Seller and a Hedge Counterparty
- -----------------
which governs one or more Hedge Transactions entered into pursuant to Section
5.4, which agreement shall consist of a "Master Agreement" in a form published
by the International Swaps and Derivatives Association, Inc., together with a
"Schedule" thereto substantially in the form of Exhibit I hereto or such other
----------
form as the Deal Agent shall approve in writing, and each "Confirmation"
thereunder confirming the specific terms of each such Hedge Transaction.
Increased Costs: Any amounts required to be paid by the Seller to an Affected
- ---------------
Party pursuant to Section 2.14.
Incremental Purchase: Any Purchase that increases the aggregate outstanding
- --------------------
Capital hereunder.
Indebtedness: With respect to any Person at any date, (a) all indebtedness of
- ------------
such Person for borrowed money or for the deferred purchase price of property or
services (other than current liabilities incurred in the ordinary course of
business and payable in accordance with customary trade practices) or which is
evidenced by a note, bond, debenture or similar instrument, (b) all obligations
of such Person under capital leases, (c) all obligations of such Person in
respect of acceptances issued or created for the account of such Person, (d) all
liabilities secured by any Lien on any property owned by such Person even though
such Person has not assumed or otherwise become liable for the payment thereof,
and (e) all indebtedness, obligations or liabilities of that Person in respect
of Derivatives.
14
<PAGE>
Indemnified Amounts: As defined in Section 8.1.
- -------------------
Indemnified Party: As defined in Section 8.1.
- -----------------
Industry: The industry of an Obligor as determined by reference to the four
- --------
digit standard industry classification codes.
Insolvency Event: With respect to a specified Person, (a) the filing of a
- ----------------
decree or order for relief by a court having jurisdiction in the premises in
respect of such Person or any substantial part of its property in an involuntary
case under any applicable Insolvency Law now or hereafter in effect, or
appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator or
similar official for such Person or for any substantial part of its property, or
ordering the winding-up or liquidation of such Person's affairs, and such decree
or order shall remain unstayed and in effect for a period of 60 consecutive
days; or (b) the commencement by such Person of a voluntary case under any
applicable Insolvency Law now or hereafter in effect, or the consent by such
Person to the entry of an order for relief in an involuntary case under any such
law, or the consent by such Person to the appointment of or taking possession by
a receiver, liquidator, assignee, custodian, trustee, sequestrator or similar
official for such Person or for any substantial part of its property, or the
making by such Person of any general assignment for the benefit of creditors, or
the failure by such Person generally to pay its debts as such debts become due,
or the taking of action by such Person in furtherance of any of the foregoing.
Insolvency Laws: The Bankruptcy Code of the United States and all other
- ---------------
applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement,
receivership, insolvency, reorganization, suspension of payments, or similar
debtor relief laws from time to time in effect affecting the rights of creditors
generally.
Insurance Policy: With respect to any Loan included in the Asset Pool, an
- ----------------
insurance policy covering physical damage to or loss to any assets or Related
Property of the Obligor securing such Loan.
Insurance Proceeds: Any amounts payable or any payments made, to the Servicer
- ------------------
under any Insurance Policy.
Interest Collections: Any and all amounts received in respect of any interest,
- --------------------
fees or other similar charges on a Loan from or on behalf of any Obligors that
are deposited into the Collection Account, or received by the Servicer,
Originator, or Seller in respect of Loans, in the form of cash, checks, wire
transfers, electronic transfers or any other form of cash payment (net of any
payment owed by the Seller to, and including any receipts from, any Hedge
Counterparties).
Investment: With respect to any Person, any direct or indirect loan, advance or
- ----------
investment by such Person in any other Person, whether by means of share
purchase, capital contribution, loan or otherwise, excluding the acquisition of
assets pursuant to the Purchase Agreement and
15
<PAGE>
excluding commission, travel and similar advances to officers, employees and
directors made in the ordinary course of business.
Issuer: VFCC and any other Investor whose principal business consists of
- ------
issuing commercial paper or other securities to fund its acquisition and
maintenance of receivables, accounts, instruments, chattel paper, general
intangibles and other similar Assets.
Jurisdiction: Delaware and Connecticut.
- ------------
LIBOR Rate: For a Fixed Period, an interest rate per annum equal to the average
- ----------
(rounded upward to the nearest one-sixteenth (1/16) of one percent) per annum
rate of interest determined by First Union at its the principal office in
Charlotte, North Carolina as its LIBOR Rate (each such determination, absent
manifest error, to be conclusive and binding) as of two Business Days prior to
the first day of the applicable Fixed Period, as the rate at which deposits in
immediately available funds in U.S. dollars are being, have been, or would be
offered or quoted by First Union to major banks in the applicable interbank
market for Eurodollar deposits at or about 11:00 a.m. (Charlotte, North Carolina
time) on the Business Day which is the second Business Day immediately preceding
the first day of the applicable Fixed Period, for delivery on the first day of
such Fixed Period, for a term comparable to such Fixed Period and in an amount
approximately equal to the requested Capital. If no such offers or quotes are
generally available for such amount, then the LIBOR Rate shall be the rate
appearing on the Telerate Page 3750 as of 11:00 A.M. (London time) on the
Business Day which is the second Business Day immediately preceding the first
day of such Fixed Period for a term comparable to such Fixed Period.
Lien: With respect to any Asset, (a) any mortgage, lien, pledge, charge
- ----
security interest or encumbrance of any kind in respect of such Asset or (b) the
interest of a vendor or lessor under any conditional sale agreement, financing
lease or other title retention agreement relating to such Asset.
Liquidation Expenses: With respect to any Defaulted Loan, the aggregate amount
- --------------------
of all out-of-pocket expenses reasonably incurred by the Servicer (including
amounts paid to any subservicer) in connection with the repossession,
refurbishing and disposition of any related assets securing such Loan including
the attempted collection of any amount owing pursuant to such Loan.
Liquidity Bank: Each liquidity bank that is a party to the Liquidity Purchase
- --------------
Agreement.
Liquidity Purchase Agreement: The Liquidity Purchase Agreement, dated as of
- ----------------------------
December 23, 1998, among VFCC, the Deal Agent, the Liquidity Agent, and First
Union, as an investor, and each other liquidity bank a party thereto.
Loan: A secured commercial loan arising from the extension of credit to an
- ----
Obligor by the Originator or one of its subsidiaries in the ordinary course of
the Originator's business, including, without limitation, all Commercial Loans,
all SBA Loans, and all AIG Loans, which loan is secured by accounts receivable,
inventory, machinery and equipment or real property; and such
16
<PAGE>
term further includes all monies due or owing and all Interest Collections,
Principal Collections and other amounts received from time to time with respect
to such loan receivable and all Proceeds.
Loan Document: With respect to any Loan, (i) the related original promissory
- -------------
note, (ii) any related loan agreement, (iii) any security agreement, (iv) where
real property serves as the primary Collateral for the Loan, the mortgage, if
any, related thereto, (v) any assignment of leases, and (vi) any other
documents, instruments, certificates or assignments (including amendments or
modifications thereof) executed by the Obligor thereof or by another Person on
the Obligor's behalf in respect of such Loan and related promissory note,
including, without limitation, general or limited guaranties, and any power of
attorney.
Lock-Box: A post office box to which Collections are remitted for retrieval by
- --------
a Lock-Box Bank and deposited by such Lock-Box Bank into a Lock-Box Account.
Lock-Box Account: An account maintained for the purpose of receiving
- ----------------
Collections at a bank or other financial institution which has executed a Lock-
Box Notice for the purpose of receiving Collections, but specifically excluding
the FNBNE Existing Account.
Lock-Box Bank: Any of the banks or other financial institutions holding one or
- -------------
more Lock-Box Accounts.
Lock-Box Notice: A notice, in substantially the form of Exhibit B, among the
- --------------- ---------
Seller, the Originator (if applicable) and a Lock-Box Bank.
Minimum Net Portfolio Yield: 2.0%.
- ---------------------------
Monthly Report: As defined in Section 6.15(a).
- --------------
Moody's: Moody's Investors Service, Inc., and any successor thereto.
- -------
Multiemployer Plan: A "multiemployer plan" as defined in Section 4001(a)(3) of
- ------------------
ERISA which is or was at any time during the current year or the immediately
preceding five years contributed to by the Seller or any ERISA Affiliate on
behalf of its employees.
Net Loss Ratio: For any Collection Period, the percentage equivalent of a
- --------------
fraction, the numerator of which is the Outstanding Loan Balance of all Loans
that became Charged-Off Loans during such Collection Period, and the denominator
of which is the Aggregate Outstanding Loan Balance as of the end of such
Collection Period.
Net Portfolio Yield: For any Fixed Period, the difference between the Portfolio
- -------------------
Yield for such Fixed Period and the Yield for such Fixed Period.
17
<PAGE>
Notice of Sale: A notice, substantially in the form of Exhibit A hereto,
- -------------- ---------
delivered pursuant to Section 2.2.
Obligor: With respect to any Loan, the Person or Persons obligated to make
- -------
payments pursuant to the respective Loan Documents, including any guarantor
thereof (but not including the SBA or AIG). For purposes of calculating any of
the concentration and mix criteria set forth on Schedule II, all Loans in the
Asset Pool or to be transferred to the Asset Pool, the Obligor of which is an
Affiliate of another Obligor, shall be aggregated with all Loans of such other
Obligor. For example, if Obligor A is an Affiliate of Obligor B, and the
--- -------
aggregate Outstanding Loan Balance of all of Obligor A's Loans in the Asset Pool
constitutes 5% of the Aggregate Outstanding Loan Balance, and the aggregate
Outstanding Loan Balance of all of Obligor B's Loans in the Asset Pool
constitutes 5% of the Aggregate Outstanding Loan Balance, then the Obligor
concentration for Obligor A would be 10% and the Obligor concentration for
Obligor B would also be 10%.
Officer's Certificate: A certificate signed by any officer of the Seller or the
- ---------------------
Servicer, as the case may be, and delivered to the Deal Agent.
Officer's Certificate as to Solvency: A certificate signed by any officer of
- ------------------------------------
the Seller or FNBNE, as the case may be, and delivered to the Deal Agent in the
form of Exhibits J-1 and J-2 attached hereto.
-------- --- ---
Officer's Closing Certificate: A certificate signed by any officer of the
- -----------------------------
Seller or FNBNE, as the case may be, and delivered to the Deal Agent in the form
of Exhibits K-1 and K-2.
------------ ---
Opinion of Counsel: A written opinion of counsel, who may be counsel for the
- ------------------
Seller or the Servicer and who shall be reasonably acceptable to the Deal Agent.
Originator: FNBNE.
- ----------
Originator Assets: Any Asset that was transferred to the Seller by the
- -----------------
Originator.
Outstanding Loan Balance: With respect to any Loan, the then outstanding
- -------------------------
principal balance thereof.
Payment Date: The twenty-first (21st) day of each calendar month or, if such
- ------------
day is not a Business Day, the next succeeding Business Day, commencing with
January 21, 1999.
Permitted Investments: Any one or more of the following types of investments:
- ---------------------
(a) marketable obligations of the United States, the full and timely
payment of which are backed by the full faith and credit of the United States
and which have a maturity of not more than 270 days from the date of
acquisition;
18
<PAGE>
(b) marketable obligations, the full and timely payment of which are
directly and fully guaranteed by the full faith and credit of the United States
and which have a maturity of not more than 270 days from the date of
acquisition;
(c) bankers' acceptances and certificates of deposit and other
interest-bearing obligations (in each case having a maturity of not more than
270 days from the date of acquisition) denominated in dollars and issued by any
bank with capital, surplus and undivided profits aggregating at least
$100,000,000, the short-term obligations of which are rated A-1 by S&P and P-1
by Moody's;
(d) repurchase obligations with a term of not more than ten days for
underlying securities of the types described in clauses (a), (b) and (c) above
entered into with any bank of the type described in clause (c) above;
(e) commercial paper rated at least A-1 by S&P and P-1 by
Moody's; and,
(f) demand deposits, time deposits or certificates of deposit (having
original maturities of no more than 365 days) of depository institutions or
trust companies incorporated under the laws of the United States or any state
thereof (or domestic branches of any foreign bank) and subject to supervision
and examination by federal or state banking or depository institution
authorities; provided, however that at the time such investment, or the
-------- -------
commitment to make such investment, is entered into, the short-term debt rating
of such depository institution or trust company shall be at least A-1 by S&P and
P-1 by Moody's.
Permitted Liens: Liens in favor of the Deal Agent as agent for the Secured
- ---------------
Parties created pursuant to this Agreement.
Person: An individual, partnership, corporation (including a business trust),
- ------
limited liability company, joint stock company, trust, unincorporated
association, sole proprietorship, joint venture, government (or any agency or
political subdivision thereof) or other entity.
Pool Assets: On any day any and all Assets in the Asset Pool.
- ------------
Portfolio Yield: As of any date of determination the weighted average interest
- ---------------
rate of all Loans in the Asset Pool.
Power of Attorney: A power of attorney signed by any officer of the Seller in
- -----------------
the form of Exhibit L hereto.
---------
Prepaid Loan: Other than Commercial Lines of Credit which may be prepaid but
- ------------
for which the commitment to make advances thereunder is still in effect, any
Loan that has terminated or been prepaid in full prior to its scheduled maturity
date (including because of a Casualty Loss), other than a Defaulted Loan.
19
<PAGE>
Prime Rate: The rate announced by First Union from time to time as its prime
- ----------
rate in the United States, such rate to change as and when such designated rate
changes. The Prime Rate is not intended to be the lowest rate of interest
charged by First Union in connection with extensions of credit to debtors.
Principal Collections: Any and all amounts received in respect of any principal
- ---------------------
due and payable under any Loan from or on behalf of Obligors that are deposited
into the Collection Account, or received by the Servicer, Originator, or Seller
in respect of Loans, in the form of cash, checks, wire transfers, electronic
transfers or any other form of cash payment.
Proceeds: With respect to any Pool Asset, whatever is receivable or received
- --------
when such Pool Asset is sold, collected, liquidated, foreclosed, exchanged, or
otherwise disposed of, whether such disposition is voluntary or involuntary, and
includes all rights to payment with respect to any insurance relating to such
Pool Asset.
Program Fee: As defined in the Section 2.13(b).
- -----------
Purchase: A purchase by a Purchaser of an undivided interest in the Assets from
- --------
the Seller pursuant to Article II, including a reinvestment under Clause
ELEVENTH of Section 2.7.
Purchasers: Collectively, VFCC, First Union, and the Investors and any other
- ----------
Person that agrees, pursuant to the pertinent Assignment and Acceptance, to
purchase an Asset Interest pursuant to this Agreement.
Purchase Agreement: The Purchase and Sale Agreement dated as of the date
- ------------------
hereof, between the Originator and the Seller, as amended, modified,
supplemented or restated from time to time.
Purchase Date: The Closing Date (or, if a Purchase is not made on the Closing
- -------------
Date, then the date of the initial Purchase after the Closing Date), and as to
any Incremental Purchase, any Business Day that is (i) at least one (1) calendar
week following the immediately preceding Purchase Date and (ii) five (5)
Business Days immediately following the receipt by the Deal Agent of a written
request by the Seller to sell an Asset Interest, such notice to be in the form
of Exhibit A hereto.
---------
Purchase Limit: At any time, $65,000,000, on or after the Termination Date, the
- --------------
"Purchase Limit" shall mean the aggregate outstanding Capital.
Purchase Rate: (i) With respect to Commercial Loans, 85%, (ii) with respect to
- -------------
SBA Loans, 90%, and (iii) with respect to AIG Loans, a fraction expressed as a
percentage the numerator of which is the portion of the Outstanding Loan Balance
of such AIG Loans which is insured by an AIG Policy, and the denominator of
which is the Outstanding Loan Balance of such AIG Loans.
Qualified Institution: As defined in Section 6.4(d).
- ---------------------
20
<PAGE>
Rating Agency: Each of S&P, Moody's and any other rating agency that has been
- -------------
requested to issue a rating with respect to the commercial paper notes issued by
the Issuer.
Recoveries: With respect to a Defaulted Loan, proceeds from the sale of the
- ----------
Related Property, proceeds of any related Insurance Policy and any other
recoveries with respect to such Defaulted Loan and the related Equipment and
related property, and other amounts representing late fees and penalties net of
Liquidation Expenses and amounts, if any, so received that are required to be
refunded to the Obligor on such Loan.
Records: With respect to any Loans, all documents, books, records and other
- -------
information (including without limitation, computer programs, tapes, disks,
punch cards, data processing software and related property and rights)
maintained with respect to any Pool Asset and the related Obligors, other than
the Loan Documents.
Register: As defined in Section 10.1(c).
- --------
Related Property: With respect to a Loan, any property or other assets of the
- ----------------
Obligor thereunder pledged as collateral to the Originator to secure such Loan.
Replaced Loan: As defined in Section 2.9.
- -------------
Reporting Date: The date which is two Business Days after the end of the Fixed
- --------------
Period.
Required Investors: At a particular time, Investors with Commitments equal to
- ------------------
or in excess of 66 2/3 % of the Purchase Limit.
Required Loan Documents: The documents described in clause (i), (ii), (iii) and
- -----------------------
(iv) of the definition of Loan Document.
Required Reports: Collectively, the Monthly Report, the Servicer's Certificate
- ----------------
and the financial statements of the Servicer required to be delivered to the
Deal Agent pursuant to Section 6.12(c) hereof.
Requirements of Law: For any Person shall mean the certificate of incorporation
- -------------------
or articles of association and by-laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation, or order or
determination of an arbitrator or Governmental Authority, in each case
applicable to or binding upon such Person or to which such Person is subject,
whether Federal, state or local (including, without limitation, usury laws, the
Federal Truth in Lending Act, and Regulation Z and Regulation B of the Board of
Governors of the Federal Reserve System).
Reserve Percentage: The percentage that is 100% minus the applicable Purchase
- ------------------ -----
Rate.
21
<PAGE>
Reserves: As to any Asset Interest on any day, an amount equal to the Reserve
- --------
Percentage multiplied by the Capital of such Asset Interest as of the close of
business of the Collateral Custodian on such day.
Responsible Officer: As to any Person, any officer of such Person with direct
- -------------------
responsibility for the administration of this Agreement and also, with respect
to a particular matter, any other officer to whom such matter is referred
because of such officer's knowledge of and familiarity with the particular
subject.
Retransfer Amount: As defined in Section 5.6.
- -----------------
Retransfer Date: As defined in Section 5.6.
- ---------------
Revolving Period: The period commencing on the Closing Date and ending on the
- ----------------
day immediately preceding the Termination Date.
SBA: The United States Small Business Administration.
- ---
SBA Loan: A Loan to an Obligor that is a revolving line of credit, originated
- --------
and approved under SBA policies, ninety percent (90%) of the Outstanding Loan
Balance of which is guaranteed through the SBA.
S&P: Standard & Poor's Ratings Services, a division of The McGraw-Hill
- ---
Companies, Inc. and any successor thereto.
Scheduled Payment: With respect to a date on which a payment is due under a
- -----------------
Loan, the periodic payment (exclusive of any amounts in respect of insurance or
taxes and reflecting any adjustment for any partial prepayment) set forth in the
applicable Loan Documents as due from the Obligor.
Secured Party: (i) Each Purchaser and (ii) each Hedge Counterparty that is
- -------------
either a Purchaser or an Affiliate of a Purchaser if that Affiliate executes a
counterpart of this Agreement agreeing to be bound by the terms of this
Agreement applicable to a Secured Party.
Securitization: A disposition of Loans in one or a series of structured finance
- --------------
securitization transactions.
Seller: FNBNE Funding Corp., or any permitted successor thereto.
- ------
Servicer: FNBNE and its permitted successors and assigns.
- --------
Servicer Advance: An advance of Scheduled Payments made by the Servicer
- -----------------
pursuant to Section 6.5.
Servicer Assignee: As defined in Section 6.19.
- -----------------
22
<PAGE>
Servicer Termination Event: As defined in Section 6.23.
- --------------------------
Servicer's Certificate: As defined in Section 6.12(b).
- ----------------------
Servicing Duties: As defined in Section 6.1.
- ----------------
Servicing Fee: As defined in Section 2.13(c).
- -------------
Servicing Fee Rate: As defined in the Fee Letter.
- ------------------
Servicing Records: All documents, books, records and other information
- -----------------
(including, without limitation, computer programs, tapes, disks, data processing
software and related property rights) prepared and maintained by the Servicer
with respect to the Loans and the related Obligors.
Solvent: As to any Person at any time, having a state of affairs such that all
- -------
of the following conditions are met: (a) the fair value of the property owned by
such Person is greater than the amount of such Person's liabilities (including
disputed, contingent and unliquidated liabilities) as such value is established
and liabilities evaluated for purposes of Section 101(31) of the Bankruptcy
Code; (b) the present fair saleable value of the property owned by such Person
in an orderly liquidation of such Person is not less than the amount that will
be required to pay the probable liability of such Person on its debts as they
become absolute and matured; (c) such Person is able to realize upon its
property and pay its debts and other liabilities (including disputed, contingent
and unliquidated liabilities) as they mature in the normal course of business;
(d) such Person does not intend to, and does not believe that it will, incur
debts or liabilities beyond such Person's ability to pay as such debts and
liabilities mature; and (e) such Person is not engaged in business or a
transaction, and is not about to engage in a business or a transaction, for
which such Person's property would constitute unreasonably small capital.
Structuring Fee: The structuring fee agreed to between the Seller and the Deal
- ---------------
Agent in the Fee Letter.
Substitute Loan: As defined in Section 2.9.
- ---------------
Successor Servicer: As defined in Section 6.27(a).
- ------------------
Taxes: Any present or future taxes, levies, imposts, duties, charges,
- -----
assessments or fees of any nature (including interest, penalties, and additions
thereto) that are imposed by any Government Authority.
Termination Date: The earliest to occur of (a) the date of the occurrence of an
- ----------------
Early Amortization Event pursuant to Section 7.1, (b) the Commitment Termination
Date, (c) the termination of the Purchase Limit pursuant to Section 2.3, and (d)
the occurrence of an Insolvency Event with respect to either FNBNE or the
Seller.
23
<PAGE>
Termination Notice: As defined in Section 6.26.
- ------------------
Transaction: As defined in Section 3.2.
- -----------
Transaction Documents: This Agreement, the Purchase Agreement, the Liquidity
- ---------------------
Purchase Agreement, the Hedge Agreement, dated as of the date hereof among the
Seller, the Servicer and the Deal Agent, and any additional document the
execution of which is necessary or incidental to carrying out the terms of the
foregoing documents.
Transfer Date: As defined in the Purchase Agreement.
- -------------
Transferred Loans: Each Loan that is sold by the Originator to the Seller under
- -----------------
the Purchase Agreement.
Trigger Event: Any of the Early Amortization Events described in clauses (n),
- -------------
(o), (p) and (u) of Section 7.1, without regard to any applicable cure period.
UCC: The Uniform Commercial Code as from time to time in effect in the
- ---
specified jurisdiction.
United States: The United States of America.
- -------------
Unreimbursed Servicer Advances: At any time, the amount of all previous
- ------------------------------
Servicer Advances (or portions thereof) as to which the Servicer has not been
reimbursed as of such time pursuant to Section 2.7 and which the Servicer has
determined in its sole discretion will not be recoverable from Collections with
respect to the related Loan.
Warranty Event: As to any Loan included as part of the Asset Pool, the
- --------------
occurrence and continuance of a material breach of any representation or
warranty relating to such Loan and such breach is not cured within the relevant
cure period.
Yield: For each Asset Interest for any Fixed Period, the products (for each day
- -----
during such Fixed Period) of:
YR x C x 1
-----
360
where:
C = the Capital of such Asset Interest, and
YR = the Yield Rate applicable on such day;
24
<PAGE>
provided, however, that (a) no provision of this Agreement shall require the
- -------- --------
payment or permit the collection of Yield in excess of the maximum permitted by
applicable law and (b) Yield shall not be considered paid by any distribution if
at any time such distribution is rescinded or must otherwise be returned for any
reason.
Yield Rate: With respect to any Fixed Period and for each Asset Interest
- ----------
purchased by a Purchaser for each day during such period, a per annum rate equal
to the Adjusted Eurodollar Rate; provided, however, that if the CP Rate is
-------- -------
greater than the Adjusted Eurodollar Rate on any day during such Fixed Period,
then the "Yield Rate" for that day will include a Cost of Funds Adjustment; and
provided, further, that if any portion of the Capital is funded under the
- -------- -------
Liquidity Purchase Agreement by the Investors, then the "Yield Rate" for such
portion shall be a rate equal to (i) the Adjusted Eurodollar Rate, or (ii) the
Base Rate if the relevant Investor shall have notified the Deal Agent that a
Eurodollar Disruption Event has occurred.
SECTION 1.2 OTHER TERMS.
-----------
All accounting terms not specifically defined herein shall be
construed in accordance with GAAP. All terms used in Article 9 of the UCC in
the States of New York and Connecticut, as applicable, and not specifically
defined herein, are used herein as defined in such Article 9.
SECTION 1.3 COMPUTATION OF TIME PERIODS.
---------------------------
Unless otherwise stated in this Agreement, in the computation of a
period of time from a specified date to a later specified date, the word "from"
means "from and including" and the words "to" and "until" each mean "to but
excluding."
ARTICLE II
THE PURCHASE FACILITY
SECTION 2.1 PURCHASES OF ASSET INTERESTS.
----------------------------
(a) On the terms and conditions hereinafter set forth, the Seller may
on any Purchase Date during the period from the date hereof to but not including
the Termination Date, at its option, sell and assign Asset Interests to the
Purchasers. The Deal Agent may act on behalf of and for the benefit of the
Purchasers in this regard. VFCC may, in its sole discretion, purchase, or if
VFCC shall decline to purchase, the Liquidity Agent shall purchase on behalf of
the Investors, Asset Interests from time to time during the period from the date
hereof to but not including the Termination Date. Under no circumstances shall
any Purchaser make the initial Purchase or any Incremental Purchase if, after
giving effect to such Purchase or Incremental Purchase, the aggregate Capital
outstanding hereunder would exceed the lesser of (i) the Purchase Limit or (ii)
the Capital Limit. Each Asset Interest purchased by any Purchaser hereunder is
subject to the interests of the Hedge Counterparties under Sections 2.7(a)(i)
and (x) of this Agreement.
25
<PAGE>
(b The Seller may, within 60 days, but no later than 45 days, prior to
each one year anniversary of the Closing Date, by written notice to the Deal
Agent, make written request for VFCC and the Investors to extend the Commitment
Termination Date for an additional period of one year following the then
existing Commitment Termination Date. The Deal Agent will give prompt notice to
VFCC and each of the Investors of its receipt of such request for extension of
the Commitment Termination Date. VFCC and each Investor shall make a
determination, in their sole discretion and after a full credit review, not less
than 15 days prior to such anniversary date, as to whether or not it will agree
to extend the Commitment Termination Date; provided, however, that the failure
-------- -------
of VFCC or any Investor to make a timely response to the Seller's request for
extension of the Commitment Termination Date shall be deemed to constitute a
refusal by VFCC or the Investor, as the case may be, to extend the Commitment
Termination Date. The Commitment Termination Date shall only be extended upon
the consent of both (i) VFCC and (ii) 100% of the Investors.
(c Notwithstanding the foregoing Section 2.1(b), upon the proposed
conversion of FNBNE from a regulated bank to a commercial finance company (the
"Conversion"), which is otherwise subject to the provisions of this Agreement,
the Commitment Termination Date shall be the date that is the earlier of (i) the
date that is 364 days after the date of the Conversion, or (ii) the then
Commitment Termination Date, unless the Deal Agent and 100% of the Investors,
upon appropriate due diligence and credit approvals agree that the then
Commitment Termination Date should not be accelerated.
SECTION 2.2 THE INITIAL PURCHASE AND INCREMENTAL PURCHASES.
----------------------------------------------
(a Subject to the conditions described in Section 2.1, the initial
Purchase and each Incremental Purchase shall be made in accordance with the
procedures described in Section 2.2(b). After the Collection Date has occurred,
each of the Purchasers and the Deal Agent, in accordance with their respective
interests, shall assign and transfer to the Seller their respective remaining
interest in Asset Interests without any representation or warranty, express or
implied and without recourse of any kind.
(b The initial Purchase and each Incremental Purchase shall be made
pursuant to the terms of a Purchase Certificate in the form of Exhibit H hereto,
---------
after receipt by the Purchaser of a Notice of Sale delivered by the Seller to
the Deal Agent (with a copy to the Collateral Custodian) at least one (1)
Business Day prior to the Closing Date in the case of the initial Purchase and
at least five (5) Business Days prior to such proposed Purchase Date in the case
of any Incremental Purchase. Each such notice shall specify (i) the aggregate
amount of such initial Purchase or Incremental Purchase which amount must
satisfy the applicable minimum requirement set forth in the following sentence
and (ii) the date of such Purchase or Incremental Purchase. The Seller may
deliver up to four (4) notices in a calendar month (or more frequently subject
to the prior written consent of the Deal Agent), and each amount specified in
any such notice must be in an amount equal to (i) at least $5,000,000 in the
case of the initial Purchase, and (ii) $1,000,000 or an integral multiple of
$1,000 in excess thereof in the case of any Incremental Purchase. Each
26
<PAGE>
such notice shall be irrevocable. Following receipt of such notice, the Deal
Agent will consult with VFCC in order to assist VFCC in determining whether or
not to make the Purchase. If VFCC declines to make a proposed Purchase, the
initial Purchase or Incremental Purchase will be made by the Investors. On the
date of such Purchase or Incremental Purchase, as the case may be, VFCC or each
Investor shall, upon satisfaction of the applicable conditions set forth in
Article III, make available to the Seller in same day funds, at such bank or
other location reasonably designated by Seller in its Notice of Sale given
pursuant to this Section 2.2(b), an amount equal to (i) the Capital of the Asset
Interest related to such initial Purchase or Incremental Purchase, as the case
may be, in the case of a purchase by VFCC or (ii) such Investor's pro rata share
of the Capital of the Asset Interest related to such initial Purchase or
Incremental Purchase, in the case of a Purchase by the Investors.
SECTION 2.3 REDUCTION OF THE PURCHASE LIMIT.
-------------------------------
The Seller may, upon at least five Business Days' notice to the Deal Agent,
terminate in whole or reduce in part the portion of the Purchase Limit that
exceeds the sum of the aggregate Capital and Yield accrued and to accrue
thereon, and the Commitments of the Investors shall be reduced proportionately;
provided, however, that each partial reduction of the Purchase Limit shall be in
- -------- -------
an aggregate amount equal to $1,000,000 or an integral multiple of $100,000 in
excess thereof. Each notice of reduction or termination pursuant to this
Section 2.3 shall be irrevocable.
SECTION 2.4 Determination of Yield.
----------------------
The Deal Agent shall determine the Yield (including unpaid Yield, if any,
due and payable on a prior Payment Date) to be paid on each Payment Date for the
Fixed Period and shall advise the Servicer thereof on the first Business Day
after the Fixed Period.
Section 2.5 Percentage Evidenced by Asset Interest.
--------------------------------------
The variable percentage represented by an Asset Interest shall be initially
computed on its date of purchase. Thereafter, until the Termination Date, each
Asset Interest shall be automatically recomputed (or deemed to be recomputed) on
each day prior to the Termination Date. The variable percentage represented by
an Asset Interest as computed (or deemed recomputed) as of the close of business
on the day immediately preceding the Termination Date shall remain constant at
all times after the Termination Date. The variable percentage represented by the
Asset Interest shall become zero when its Capital and Yield has been paid in
full.
SECTION 2.6 DIVIDING OR COMBINING ASSET INTERESTS.
-------------------------------------
The Deal Agent may, with the consent of a Purchaser, take any of the
following actions at the end of such Fixed Period with respect to any Asset
Interest: (i) divide the Asset Interest owned by such Purchaser into two or more
portions of Asset Interests having aggregate Capital equal to the Capital of
such divided Asset Interest, (ii) combine one portion of an Asset Interest
27
<PAGE>
of such Purchaser with another portion of an Asset Interest of such Purchaser
with a Fixed Period ending on the same day, creating a new portion of an Asset
Interest having Capital equal to the Capital of the two portions of Asset
Interest combined or (iii) combine the Asset Interest of such Purchaser with the
Asset Interest to be purchased on such day by such Purchaser, creating a new
Asset Interest having Capital equal to the Capital of the two Asset Interests
combined; provided, that an Asset Interest of VFCC may not be combined with an
Asset Interest of the Investors.
SECTION 2.7 SETTLEMENT PROCEDURES.
---------------------
(a) On each Payment Date, the Servicer shall pay to the following Persons,
from (i) the Collection Account, to the extent of available funds including
interest earnings on the Collection Account, (ii) a Servicer Advance if made or
required pursuant to Section 6.5, and (iii) amounts received in respect of any
Hedge Agreement during the applicable Collection Period (the sum of such amounts
described in clauses (i), (ii) and (iii) being the "Available Collections") the
following amounts in the following order of priority:
(A) FIRST, pro rata to each Hedge Counterparty, any amounts,
-----
including any Hedge Breakage Costs, owing that Hedge Counterparty under its
respective Hedging Agreement in respect of any Hedge Transaction(s) (other
than payments in respect of Termination of any Hedging Agreement), for the
payment thereof;
(B) SECOND, to the Servicer, but only out of proceeds on the AIG
------
Policy that were paid with respect to such AIG Loan, in an amount equal to
any Unreimbursed Servicer Advances with respect to an AIG Loan, for the
payment thereof;
(C) THIRD, to the Servicer, but only out of Interest Collections, in
-----
an amount equal to any Unreimbursed Servicer Advances, for the payment
thereof;
(D) FOURTH, to the Servicer, in an amount equal to its accrued and
------
unpaid Servicing Fees to the end of the preceding Collection Period;
(E) FIFTH, to the extent not paid for by FNBNE, to the Backup
-----
Servicer, in an amount equal to any accrued and unpaid Backup Servicer Fee,
for the payment thereof;
(F) SIXTH, to the extent not paid for by FNBNE, to the Collateral
-----
Custodian, in an amount equal to any accrued and unpaid Collateral
Custodian Fee, for the payment thereof;
(G) SEVENTH, to the Deal Agent for the ratable payment to each
--------
Purchaser, in an amount equal to any accrued and unpaid Yield for such
Payment Date;
(H) EIGHTH, to the Deal Agent for the ratable payment to each
------
Purchaser in an amount equal (I) to the extent not paid by FNBNE, to any
accrued and unpaid Commitment Fees and (II) to any accrued and unpaid
Program Fees;
28
<PAGE>
(I) NINTH, to the Deal Agent, in the amount of unpaid Increased Costs
-----
and/or Taxes, for payment to the Purchasers in respect thereof;
(J) TENTH, so long as any AIG Loans are outstanding, to the Cash
-----
Collateral Account, to the extent that the balance in such account is less
than the lesser of (i) $500,000 or (ii) the Aggregate Outstanding Loan
Balance of AIG Loans on such Payment Date;
(K) ELEVENTH, to the extent that funds are available, any remaining
--------
amounts may be reinvested in Eligible Loans; provided, however, that if the
-------- -------
aggregate Capital exceeds the lesser of (i) the Capital Limit or (ii) the
Purchase Limit, an amount equal to such excess shall be paid to the Deal
Agent to pay down Capital outstanding;
(L) TWELFTH, pro rata to each Hedge Counterparty, any amounts owing
-------
that Hedge Counterparty under its respective Hedging Agreement in respect
of the termination of such Hedging Agreement;
(M) THIRTEENTH, to the extent funds are available to satisfy any
----------
unpaid Indemnified Amounts, amounts required to be paid by the Seller
pursuant to the indemnification provisions of Section 8.1 and any other
amounts due hereunder; and
(N) FOURTEENTH, (A) if such Payment Date occurs during the Revolving
----------
Period, any remaining amount shall be distributed to the Seller, and (B) if
such Payment Date occurs during the Amortization Period, to the Deal Agent
in reduction of the outstanding Capital to zero and the payment in full of
the Aggregate Unpaids.
(b) On each Business Day during the Revolving Period, the Servicer may, to
the extent of any Principal Collections on deposit in the Collection Account as
of the last day of the related Collection Period, use such funds toward the
Purchase of Eligible Loans pursuant to item ELEVENTH in subsection (a) above.
(c) Notwithstanding anything to the contrary contained in this Section 2.7
or any other provision in this Agreement, if on any Business Day during the
Revolving Period the aggregate outstanding amount of Capital shall exceed the
lesser of (i) the Purchase Limit or (ii) the Capital Limit, then the Seller
shall remit to the Deal Agent, prior to any reinvestment of funds as set forth
in item ELEVENTH of Section 2.7(a) and in any event no later than the close of
business of the Deal Agent on the next succeeding Business Day, a payment (to be
applied by the Deal Agent to outstanding Capital) in such amount as may be
necessary to reduce outstanding Capital to an amount less than or equal to the
lesser of (i) the Purchase Limit or (ii) the Capital Limit.
(d) On each Business Day occurring during the Amortization Period, all
Principal Collections on deposit in the Collection Account as of such Business
Day shall be paid to the
29
<PAGE>
Deal Agent in reduction, to zero, of the outstanding Capital and repayment in
full of the Aggregate Unpaids.
Section 2.8 [Reserved.]
-----------
Section 2.9 Substitution of Loans.
---------------------
On any day prior to the occurrence of an Early Amortization Event, the
Seller may, and upon the request of the Deal Agent shall, subject to the
conditions set forth in this Section 2.9, replace any Loan subject to a Warranty
Event or in respect of which the Obligor thereunder has requested the rewriting
and/or restructuring of such Loan with one or more other Loans (each, a
"Substitute Loan"), provided that no such replacement shall occur unless each of
the following conditions is satisfied as of the date of such replacement and
substitution:
(a) the Loan to be replaced (i) is a Defaulted Loan, (ii) has suffered a
credit rating downgrading below 3 in accordance with the Servicer's internal
credit scoring system, or (iii) has experienced a decline in its fair market
value at least 25% compared to its Purchase Price;
(b) the Seller has previously recommended to the Deal Agent (with a copy to
the Collateral Custodian) in writing that the Loan to be replaced should be
replaced (each a "Replaced Loan");
(c) each Substitute Loan is an Eligible Loan on the date of substitution
having an approximate Outstanding Loan Balance equal to that of the Replaced
Loan (with any difference paid in cash);
(d) after giving effect to any such substitution, the aggregate of all
outstanding Capital does not exceed the lesser of the (i) Purchase Limit and
(ii) the Capital Limit;
(e) the aggregate Outstanding Loan Balance of such Substitute Loans shall
be equal to or greater than the lesser of (i) the aggregate Outstanding Loan
Balance of the Replaced Loans and (ii) the amount necessary to prevent the
occurrence of a Trigger Event;
(f) all representations and warranties of the Seller contained in Sections
4.1 and 4.2 shall be true and correct as of the date of substitution of any such
Substitute Loan;
(g) the substitution of any Substitute Loan does not cause an Early
Amortization Event to occur; and
(h) the Seller shall deliver to the Deal Agent on the date of such
substitution a certificate of a Responsible Officer certifying that each of the
foregoing is true and correct as of such date.
30
<PAGE>
In connection with any such substitution, the Deal Agent as agent for the
Secured Parties shall, automatically and without further action, be deemed to
transfer to the Seller, free and clear of any Lien created pursuant to this
Agreement, all of the right, title and interest of the Deal Agent as agent for
the Secured Parties in, to and under such Replaced Loans, and the Deal Agent as
agent for the Secured Parties shall be deemed to represent and warrant that it
has the corporate authority and has taken all necessary corporate action to
accomplish such transfer, but without any other representation and warranty,
express or implied. The Deal Agent, as agent for the Purchasers, shall, at the
sole expense of the Servicer execute such documents and instruments of transfer
as may be prepared by the Servicer on behalf of the Seller and take other such
actions as shall reasonably be requested by the Seller to effect the transfer of
such Replaced Loan pursuant to this Section. Any right of the Deal Agent as
agent for the Secured Parties to substitute any Loan in the Asset Pool pursuant
to this Section 2.9 shall be in addition to, and without limitation of, any
other rights and remedies that the Deal Agent as agent for the Secured Parties
or any Secured Party may have to require the Seller or the Servicer, as
applicable, to substitute for, or accept retransfer of, any Loan pursuant to the
terms of this Agreement.
SECTION 2.10 COLLECTIONS AND ALLOCATIONS.
---------------------------
The Servicer shall promptly (but in no event later than two (2) Business
Days after the receipt thereof) identify any Collections received by it as being
on account of Interest Collections or Principal Collections and deposit all such
Interest Collections or Principal Collections received directly by it into the
Collection Account (the "Collection Account"). The Servicer shall make such
deposits or payments by wire transfer, in immediately available funds.
SECTION 2.11 PAYMENTS, COMPUTATIONS, ETC.
---------------------------
(a) Unless otherwise expressly provided herein, all amounts to be paid or
deposited by the Seller or the Servicer hereunder shall be paid or deposited in
accordance with the terms hereof no later than 11:00 A.M. (Charlotte, North
Carolina time) on the day when due in lawful money of the United States in
immediately available funds to the Agent's Account. The Seller shall, to the
extent permitted by law, pay to the Secured Parties interest on all amounts not
paid or deposited when due hereunder at 1% per annum above the Base Rate,
payable on demand; provided, however, that such interest rate shall not at any
-------- -------
time exceed the maximum rate permitted by applicable law. Such interest shall
be retained by the Deal Agent except to the extent that such failure to make a
timely payment or deposit has continued beyond the date for distribution by the
Deal Agent of such overdue amount to the Secured Parties, in which case such
interest accruing after such date shall be for the account of, and distributed
by the Deal Agent to, the Secured Parties. All computations of interest and all
computations of Yield and other fees hereunder shall be made on the basis of a
year of 360 days for the actual number of days (including the first but
excluding the last day) elapsed.
(b) Whenever any payment hereunder shall be stated to be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day, and such
31
<PAGE>
extension of time shall in such case be included in the computation of payment
of Yield, interest or any fee payable hereunder, as the case may be.
(c) If any Purchase or Incremental Purchase requested by the Seller and
approved by a Purchaser and the Deal Agent pursuant to Section 2.2, is not, for
any reason whatsoever related to a default or nonperformance by the Seller, made
or effectuated, as the case may be, on the date specified therefor, the Seller
shall indemnify such Purchaser against any reasonable loss, cost or expense
incurred by such Purchaser, including, without limitation, any loss (including
loss of anticipated profits, net of anticipated profits in the reemployment of
such funds in the manner determined by such Purchaser), cost or expense incurred
by reason of the liquidation or reemployment of deposits or other funds acquired
by such Purchaser to fund or maintain such Purchase or Incremental Purchase, as
the case may be, during such Fixed Period.
SECTION 2.12 OPTIONAL REPURCHASE.
-------------------
At any time following the Termination Date when the Aggregate Outstanding
Loan Balance is less than ten percent of the Aggregate Outstanding Loan Balance
as of the Termination Date, the Servicer may notify the Deal Agent in writing of
its intent to purchase all remaining Assets in the Asset Pool, provided that all
Hedge Transactions have been terminated. On the Payment Date next succeeding any
such notice, the Servicer shall purchase all such Assets for a price equal to
the sum of the Aggregate Unpaids, including for illustrative purposes but not in
limitation, all Yield accrued and to accrue, as reasonably determined by the
Deal Agent, and all accrued and unpaid Commitment Fees, Backup Servicer Fees,
Custodial Fees, Increased Costs, Taxes, Hedge Breakage Costs, Breakage Costs and
any other amounts payable by the Seller hereunder or under or with respect to
any Hedging Agreement, and the proceeds of such purchase will be deposited into
the Collection Account and paid in accordance with Section 2.9(b).
SECTION 2.13 FEES.
----
(a) FNBNE, in its individual capacity, shall pay to the Deal Agent from its
own funds on each Payment Date, monthly in arrears, a fee (the "Commitment
Fee"), as set forth in the Fee Letter.
(b) The Seller shall pay to the Deal Agent, on each Payment Date, monthly
in arrears, a Program Fee (the "Program Fee"), as set forth in the Fee Letter.
(c) The Servicer shall be entitled to receive out of Interest Collections a
fee (the "Servicing Fee"), monthly in arrears in accordance with Section 2.7(a),
which fee shall be equal to the product of (i) the Servicing Fee Rate and (ii)
the Aggregate Outstanding Loan Balance as of the close of business on the
immediately preceding Determination Date.
(d) The Backup Servicer shall be entitled to receive the Backup Servicer
Fee in accordance with Section 2.7(a).
32
<PAGE>
(e) The Collateral Custodian shall be entitled to receive the Custodial Fee
in accordance with Section 2.7(a).
(f) The Seller shall pay to the Deal Agent, on the Closing Date, the
Structuring Fee (net of any amounts previously paid) in immediately available
funds.
SECTION 2.14 INCREASED COSTS; CAPITAL ADEQUACY; ILLEGALITY.
---------------------------------------------
(a) If either (i) the introduction of or any change (including, without
limitation, any change by way of imposition or increase of reserve requirements)
in or in the interpretation of any law or regulation or (ii) the compliance by a
Purchaser or any Affiliate thereof (each of which, an "Affected Party") with any
guideline or request from any central bank or other governmental agency or
authority (whether or not having the force of law), (A) shall subject an
Affected Party to any Tax (except for Taxes on the overall net income of such
Affected Party), duty or other charge with respect to an Asset Interest, or any
right to make Purchases hereunder, or on any payment made hereunder or (B) shall
impose, modify or deem applicable any reserve requirement (including, without
limitation, any reserve requirement imposed by the Board of Governors of the
Federal Reserve System, but excluding any reserve requirement, if any, included
in the determination of Yield), special deposit or similar requirement against
assets of, deposits with or for the amount of, or credit extended by, any
Affected Party or (C) shall impose any other condition affecting an Asset
Interest or a Purchaser's rights hereunder, the result of which is to increase
the cost to any Affected Party or to reduce the amount of any sum received or
receivable by an Affected Party under this Agreement, then within ten days after
demand by such Affected Party (which demand shall be accompanied by a statement
setting forth the basis for such demand), the Seller shall pay directly to such
Affected Party such additional amount or amounts as will compensate such
Affected Party for such additional or increased cost incurred or such reduction
suffered.
(b) If either (i) the introduction of or any change in or in the
interpretation of any law, guideline, rule, regulation, directive or request or
(ii) compliance by any Affected Party with any law, guideline, rule, regulation,
directive or request from any central bank or other governmental authority or
agency (whether or not having the force of law), including, without limitation,
compliance by an Affected Party with any request or directive regarding capital
adequacy, has or would have the effect of reducing the rate of return on the
capital of any Affected Party as a consequence of its obligations hereunder or
arising in connection herewith to a level below that which any such Affected
Party could have achieved but for such introduction, change or compliance
(taking into consideration the policies of such Affected Party with respect to
capital adequacy) by an amount deemed by such Affected Party to be material,
then from time to time, within ten days after demand by such Affected Party
(which demand shall be accompanied by a statement setting forth the basis for
such demand), the Seller shall pay directly to such Affected Party such
additional amount or amounts as will compensate such Affected Party for such
reduction.
33
<PAGE>
(c) If as a result of any event or circumstance similar to those described
in clauses (a) or (b) of this section, and not in duplication of any payments
made under those clauses, any Affected Party is required to compensate a bank or
other financial institution providing liquidity support, credit enhancement or
other similar support to such Affected Party in connection with this Agreement
or the funding or maintenance of Purchases hereunder, then within ten days after
demand by such Affected Party, the Seller shall pay to such Affected Party such
additional amount or amounts as may be necessary to reimburse such Affected
Party for any amounts paid by it.
(d) In determining any amount provided for in this section, the Affected
Party may use any reasonable averaging and attribution methods. Any Affected
Party making a claim under this section shall submit to the Seller a certificate
as to such additional or increased cost or reduction, which certificate shall be
conclusive absent demonstrable error.
(e) If a Purchaser shall notify the Deal Agent that a Eurodollar Disruption
Event as described in clause (a) of the definition of "Eurodollar Disruption
Event" has occurred, the Deal Agent shall in turn so notify the Seller,
whereupon all Capital in respect of which Yield accrues at the Adjusted
Eurodollar Rate shall immediately be converted into Capital in respect of which
Yield accrues at the Base Rate.
SECTION 2.15 TAXES.
-----
(a) All payments made by an Obligor in respect of a Loan and all payments
made by the Seller or the Servicer under this Agreement will be made free and
clear of and without deduction or withholding for or on account of any Taxes,
unless such withholding or deduction is required by law. If withholding or
deduction is required by law, the Obligor, Seller, or Servicer (as the case may
be) shall pay to the appropriate taxing authority any such Taxes required to be
deducted or withheld and the amount payable to each Purchaser or the Deal Agent
(as the case may be) will be increased (such increase, the "Additional Amount")
such that every net payment made under this Agreement after deduction or
withholding for or on account of any Taxes (including, without limitation, any
Taxes on such increase) is not less than the amount that would have been paid
had no such deduction or withholding been deducted or withheld. The foregoing
obligation to pay Additional Amounts, however, will not apply with respect to
net income or franchise taxes imposed on a Purchaser or the Deal Agent,
respectively, with respect to payments required to be made by the Seller or
Servicer under this Agreement, by a taxing jurisdiction in which such Purchaser
or Deal Agent is organized, conducts business or is paying taxes as of the
Closing Date (as the case may be). If a Purchaser or the Deal Agent pays any
Taxes in respect of which the Seller is obligated to pay Additional Amounts
under this Section 2.15(a), the Seller shall promptly reimburse such Purchaser
or Deal Agent the amount of such Additional Amounts.
(b) The Seller will indemnify each Purchaser and the Deal Agent for
the full amount of Taxes in respect of which the Seller is required to pay
Additional Amounts (including, without limitation, any Taxes imposed by any
jurisdiction on such Additional Amounts) paid by such Purchaser or the Deal
Agent (as the case may be) and any liability (including penalties, interest
34
<PAGE>
and expenses) arising therefrom or with respect thereto; provided, however, that
-------- -------
such Purchaser or the Deal Agent, as appropriate, making a demand for indemnity
payment shall provide the Seller, at its address set forth under its name on the
signature pages hereof, with a certificate from the relevant taxing authority or
from a responsible officer of such Purchaser or the Deal Agent stating or
otherwise evidencing that such Purchaser or the Deal Agent has made payment of
such Taxes and will provide a copy of or extract from documentation, if
available, furnished by such taxing authority evidencing assertion or payment of
such Taxes. This indemnification shall be made within ten days from the date
the Purchaser or the Deal Agent (as the case may be) makes written demand
therefor.
(c) Within 30 days after the date of any payment by the Seller of any
Taxes, the Seller will furnish to the Deal Agent, at its address set forth under
its name on the signature pages hereof, appropriate evidence of payment thereof.
(d) If a Purchaser is not created or organized under the laws of the United
States or a political subdivision thereof, such Purchaser shall, to the extent
that it may then do so under applicable laws and regulations, deliver to the
Seller with a copy to the Deal Agent (i) within 15 days after the date hereof,
or, if later, the date on which such Purchaser becomes a Purchaser hereof two
(or such other number as may from time to time be prescribed by applicable laws
or regulations) duly completed copies of IRS Form 4224 or Form 1001 (or any
successor forms or other certificates or statements which may be required from
time to time by the relevant United States taxing authorities or applicable laws
or regulations), as appropriate, to permit the Seller to make payments hereunder
for the account of such Purchaser, as the case may be, without deduction or
withholding of United States federal income or similar Taxes and (ii) upon the
obsolescence of or after the occurrence of any event requiring a change in, any
form or certificate previously delivered pursuant to this Section 2.15(d),
copies (in such numbers as may from time to time be prescribed by applicable
laws or regulations) of such additional, amended or successor forms,
certificates or statements as may be required under applicable laws or
regulations to permit the Seller to make payments hereunder for the account of
such Purchaser, without deduction or withholding of United States federal income
or similar Taxes.
(e) For any period with respect to which a Purchaser or the Deal Agent has
failed to provide the Seller with the appropriate form, certificate or statement
described in clause (d) of this section (other than if such failure is due to a
change in law occurring after the date of this Agreement), the Deal Agent or
such Purchaser, as the case may be, shall not be entitled to indemnification
under clauses (a) or (b) of this section with respect to any Taxes.
(f) Within 30 days of the written request of the Seller therefor, the Deal
Agent and the Purchasers, as appropriate, shall execute and deliver to the
Seller such certificates, forms or other documents which can be furnished
consistent with the facts and which are reasonably necessary to assist the
Seller in applying for refunds of Taxes remitted hereunder; provided, however,
-------- -------
that the Deal Agent and the Purchasers shall not be required to deliver such
certificates forms or other documents if in their respective sole discretion it
is determined that the deliverance of such certificate, form or other document
would have a material adverse effect on
35
<PAGE>
the Deal Agent or any Purchaser and provided further, however, that the Seller
-------- ------- -------
shall reimburse the Deal Agent or any such Purchaser for any reasonable expenses
incurred in the delivery of such certificate, form or other document.
(g) If, in connection with an agreement or other document providing
liquidity support, credit enhancement or other similar support to the Purchasers
in connection with this Agreement or the funding or maintenance of Purchases
hereunder, the Purchasers are required to compensate a bank or other financial
institution in respect of Taxes under circumstances similar to those described
in this section then within ten days after demand by the Purchasers, the Seller
shall pay to the Purchasers such additional amount or amounts (without
duplication) as may be necessary to reimburse the Purchasers for any amounts
paid by them.
(h) Without prejudice to the survival of any other agreement of the
Seller hereunder, the agreements and obligations of the Seller contained in this
section shall survive the termination of this Agreement.
SECTION 2.16 ASSIGNMENT OF THE PURCHASE AGREEMENT.
------------------------------------
The Seller hereby represents, warrants and confirms to the Deal Agent
that the Seller has assigned to the Deal Agent, for the ratable benefit of the
Secured Parties hereunder, all of the Seller's right and title to and interest
in the Purchase Agreement. The Seller confirms that following an Early
Amortization Event the Deal Agent shall have the sole right to enforce the
Seller's rights and remedies under the Purchase Agreement for the benefit of the
Secured Parties, but without any obligation on the part of the Deal Agent, the
Purchasers or any of their respective Affiliates, to perform any of the
obligations of the Seller under the Purchase Agreement. The Seller further
confirms and agrees that such assignment to the Deal Agent shall terminate upon
the Collection Date; provided, however, that the rights of the Deal Agent and
-------- -------
the Secured Parties pursuant to such assignment with respect to rights and
remedies in connection with any indemnities and any breach of any
representation, warranty or covenants made by the Originator pursuant to the
Purchase Agreement, which rights and remedies survive the termination of the
Purchase Agreement, shall be continuing and shall survive any termination of
such assignment.
ARTICLE III
CLOSING; CONDITIONS OF CLOSING AND PURCHASES
SECTION 3.1 CONDITIONS TO CLOSING AND INITIAL PURCHASE.
------------------------------------------
The initial Purchase hereunder is subject to the conditions precedent
listed in Schedule I, each of which shall have been satisfied or waived, in the
Deal Agent's and the Purchasers' sole discretion, on or before the Closing Date
(unless otherwise indicated), in form and substance satisfactory to the Deal
Agent and the Purchasers.
36
<PAGE>
SECTION 3.2 CONDITIONS PRECEDENT TO ALL PURCHASES AND REMITTANCES OF
--------------------------------------------------------
COLLECTIONS.
-----------
Each Purchase (including the Initial Purchase) from the Seller by a
Purchaser, the right of the Servicer to remit Collections to the Seller pursuant
to Section 2.7(b) and each Incremental Purchase (each, a "Transaction") shall be
subject to the further conditions precedent that (a) with respect to any
Purchase (including the Initial Purchase) or Incremental Purchase, the Servicer
shall have delivered to the Deal Agent, at least one (1) Business Day prior to
the initial Purchase and at least five (5) Business Days prior to the date of
any Incremental Purchase in form and substance satisfactory to the Deal Agent,
(i) a Purchase Notice (Exhibit A), (ii) a Purchase Certificate (Exhibit H), and
--------- ---------
(iii) a Certificate of Assignment (Exhibit A to the Purchase Agreement)
including Schedule I thereto and such additional information as may be
reasonably requested by the Deal Agent; (b) on the date of such Transaction the
following statements shall be true and the Seller shall be deemed to have
certified that:
(i) The representations and warranties contained in Sections 4.1
and 4.2 are true and correct on and as of such day as though made on and as
of such date;
(ii) No event has occurred and is continuing, or would result from
such Transaction which constitutes an Early Amortization Event;
(iii) On and as of such day, after giving effect to such Transaction,
the outstanding Capital does not exceed the lesser of (x) the Purchase
Limit, or (y) the Capital Limit;
(iv) On and as of such day, the Seller and the Servicer each has
performed all of the agreements contained in this Agreement to be performed
by such person at or prior to such day;
(v) No law or regulation shall prohibit, and no order, judgment or
decree of any federal, state or local court or governmental body, agency or
instrumentality shall prohibit or enjoin, the making of such Purchase,
remittance of Collections or Incremental Purchase by the Purchaser in
accordance with the provisions hereof;
(vi) No Servicer Termination Date shall have occurred;
(c) The Commitment Termination Date shall not have occurred;
(d) There shall have been no material adverse change in the condition
(financial or otherwise), business, operations, results of operations, or
properties of the Originator or the Seller since the preceding Purchase; and
37
<PAGE>
(e) The Originator and Seller shall have taken such other action,
including delivery of approvals, consents, opinions, documents, and instruments
to the Purchasers and the Deal Agent as each may reasonably request.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
SECTION 4.1 REPRESENTATIONS AND WARRANTIES OF THE SELLER.
--------------------------------------------
The Seller represents and warrants as follows:
(a) Organization and Good Standing. The Seller is a corporation organized,
------------------------------
validly existing, and in good standing under the laws of the jurisdiction of its
formation, and has full corporate power, authority and legal right to own or
loan its properties and conduct its business as such properties are presently
owned or loaned and such business is presently conducted, and to execute,
deliver and perform its obligations under this Agreement and the Purchase
Agreement.
(b) Due Qualification. The Seller is duly qualified to do business and is
-----------------
in good standing as a corporation, and has obtained or will obtain all necessary
licenses and approvals, in each jurisdiction in which the nature of its business
requires it to be so qualified.
(c) Due Authorization. The execution and delivery of this Agreement and
-----------------
the Purchase Agreement and the consummation of the transactions provided for
herein and therein have been duly authorized by the Seller by all necessary
corporate action on the part of the Seller.
(d) No Conflict. The execution and delivery of this Agreement and the
-----------
Purchase Agreement, the performance by the Seller of the transactions
contemplated hereby and thereby and the fulfillment of the terms hereof and
thereof will not conflict with or result in any breach of any of the material
terms and provisions of, and will not constitute (with or without notice or
lapse of time or both) a default under, any indenture, contract, agreement,
mortgage, deed of trust, or other instrument to which the Seller is a party or
by which it or any of its property is bound.
(e) No Violation. The execution and delivery of this Agreement and the
------------
Purchase Agreement, the performance of the transactions contemplated hereby and
thereby and the fulfillment of the terms hereof and thereof will not conflict
with or violate, in any material respect, any Requirements of Law applicable to
the Seller.
(f) No Proceedings. There are no proceedings or investigations pending or,
--------------
to the best knowledge of the Seller, threatened against the Seller, before any
Governmental Authority (i) asserting the invalidity of this Agreement or the
Purchase Agreement, (ii) seeking to prevent the consummation of any of the
transactions contemplated by this Agreement or the Purchase
38
<PAGE>
Agreement or (iii) seeking any determination or ruling that could reasonably be
expected to be adversely determined, and if adversely determined, would
materially and adversely affect the performance by the Seller of its obligations
under this Agreement or the Purchase Agreement.
(g) All Consents Required. All approvals, authorizations, consents,
---------------------
orders or other actions of any Person or of any Governmental Authority required
in connection with the execution and delivery by the Seller of this Agreement
and the Purchase Agreement, the performance by the Seller of the transactions
contemplated by this Agreement and the Purchase Agreement, and the fulfillment
of the terms hereof and thereof by the Seller, have been obtained, unless the
failure to obtain such shall not materially and adversely affect the Seller's
performance of its obligations under this Agreement or under the Purchase
Agreement.
(h) Bulk Sales. The execution, delivery and performance of this
----------
Agreement do not require compliance with any "bulk sales" law by Seller.
(i) Solvency. The transactions under this Agreement and Purchase
--------
Agreement do not and will not render the Seller not Solvent.
(j) Selection Procedures; Credit and Collection Policies. No
----------------------------------------------------
procedures believed by the Seller to be materially adverse to the interests of
VFCC or the Purchasers were utilized by the Seller in identifying and/or
selecting the Loans that are in the Asset Pool. In addition, each Loan shall
comply in all respects with the Credit and Collection Policies.
(k) Taxes. The Seller has filed or caused to be filed all Tax returns
-----
which, to its knowledge, are required to be filed. The Seller has paid or made
adequate provisions for the payment of all Taxes and all assessments made
against it or any of its property (other than any amount of Tax the validity of
which is currently being contested in good faith by appropriate proceedings and
with respect to which reserves in accordance with generally accepted accounting
principles have been provided on the books of the Seller), and no Tax lien has
been filed and, to the Seller's knowledge, no claim is being asserted, with
respect to any such Tax, fee or other charge.
(l) Agreements Enforceable. This Agreement and the Purchase Agreement
----------------------
constitute the legal, valid and binding obligation of the Seller enforceable
against the Seller in accordance with their respective terms, except as such
enforceability may be limited by Insolvency Laws and except as such
enforceability may be limited by general principles of equity (whether
considered in a suit at law or in equity).
(m) Exchange Act Compliance. No proceeds of any Purchase will be used
-----------------------
by the Seller to acquire any security in any transaction which is subject to
Section 13 or 14 of the Securities Exchange Act of 1934, as amended.
(n) No Liens. Each Asset, together with the Loan Documents related
--------
thereto, shall, at all times, be owned by the Seller free and clear of any
Adverse Claim except as provided herein,
39
<PAGE>
and upon each Purchase, Incremental Purchase or remittance of Collections, the
relevant Secured Party shall acquire (subject to recordation where necessary) a
valid and perfected first priority undivided ownership interest in each Asset
then existing or thereafter arising and Collections with respect thereto, free
and clear of any Adverse Claim except as provided hereunder. No effective
financing statement or other instrument similar in effect covering any Asset or
Collections shall at any time be on file in any recording office except such as
may be filed in favor of the Deal Agent relating to this Agreement.
(o) Reports Accurate. No Monthly Report (if prepared by the Seller,
----------------
or to the extent that information contained therein is supplied by the Seller),
information, exhibit, financial statement, document, book, record or report
furnished or to be furnished by the Seller to the Deal Agent or a Purchaser in
connection with this Agreement is or will be inaccurate in any material respect
as of the date it is or shall be dated or (except as otherwise disclosed to the
Deal Agent or such Purchaser, as the case may be, at such time) as of the date
so furnished.
(p) Location of Offices. The principal place of business and chief
-------------------
executive office of the Seller and the office where the Seller keeps all the
Records is located at the address of the Seller referred to in Section 11.2
hereof (or at such other locations as to which the notice and other requirements
specified in Section 5.2(l) shall have been satisfied).
(q) Tradenames. Except as described in Schedule III, the Seller has
----------
no trade names, fictitious names, assumed names or "doing business as" names or
other names under which it has done or is doing business.
(r) Purchase Agreement. The Purchase Agreement is the only agreement
------------------
pursuant to which the Seller purchases Assets.
(s) Value Given. The Seller shall have given reasonably equivalent
-----------
value to the Originator in consideration for the transfer to the Seller of the
Assets under the Purchase Agreement, no such transfer shall have been made for
or on account of an antecedent debt owed by the Originator to the Seller, and no
such transfer is or may be voidable or subject to avoidance under any section of
the Bankruptcy Code; no event or circumstance has occurred that would constitute
an Early Amortization Event.
(t) Special Purpose Entity. The Certificate of Incorporation of the
----------------------
Seller includes substantially the provisions set forth on Exhibit C hereto, and
---------
the Originator has confirmed in writing to the Seller that, so long as the
Seller is not "insolvent" within the meaning of the Bankruptcy Code, the
Originator will not cause the Seller to file a voluntary petition under the
Bankruptcy Code or any other Insolvency Laws. Each of the Seller and the
Originator is aware that in light of the circumstances described in the
preceding sentence and other relevant facts, the filing of a voluntary petition
under the Bankruptcy Code for the purpose of making the assets of the Seller
available to satisfy claims of the creditors of the Originator would not result
in making such assets available to satisfy such creditors under the Bankruptcy
Code.
40
<PAGE>
(u) Accounting. The Seller accounts for the transfers to it from the
----------
Originator of interests in Assets and Collections under the Purchase Agreement
as sales of such Asset Interests in its books, records and financial statements,
in each case consistent with GAAP and with the requirements set forth herein.
(v) Separate Entity. The Seller is operated as an entity with assets
---------------
and liabilities distinct from those of the Originator and any Affiliates thereof
(other than the Seller), and the Seller hereby acknowledges that the Deal Agent
and the Purchasers are entering into the transactions contemplated by this
Agreement in reliance upon the Seller's identity as a separate legal entity from
the Originator and from each such other Affiliate of the Originator.
(w) Security Interest. The Seller has granted a security interest (as
-----------------
defined in the UCC) to the Deal Agent, as agent for the Secured Parties, in the
Assets and Collections, which is enforceable in accordance with applicable law
upon execution and delivery of this Agreement. Upon the making of each
Purchase, the Deal Agent, as agent for the Secured Parties, shall have acquired
a first priority perfected security interest in Assets and Collections as may be
perfected under the UCC by filing a financing statement or the delivery of
possession (except for any Permitted Liens). All filings (including, without
limitation, such UCC filings) as are necessary in any Jurisdiction to perfect
the interest of the Deal Agent as agent for the Secured Parties, in the Assets
and Collections have been (or prior to the applicable Purchase will be) made.
(x) Investments. The Seller does not own or hold directly or
-----------
indirectly, any capital stock or equity security of, or any equity interest in,
any Person.
(y) Business. Since its formation, the Seller has conducted no
--------
business other than the sale of Assets from the Originator under the Purchase
Agreement, the sale of Assets under this Agreement and such other activities as
are incidental to the foregoing.
(z) Investment Company Act.
-----------------------
(i) The Seller represents and warrants that the Seller has never
been, is not now, and will not in the future be operated in such a
manner as to cause the Seller to be an "investment company," as such
term is defined in Section 3 of the Investment Company Act of 1940, as
amended (the "1940 Act");
(ii) The Seller represents and warrants that the business and
other activities of the Seller, including but not limited to, the sale
of the Asset Interests to the Purchasers, the application and use of
the proceeds thereof by the Seller and the consummation and conduct of
the transactions contemplated by the Transaction Documents to which
the Seller is a party (a) do now and will in the future comply in all
respects with the provisions of Rule 3a-7 promulgated under the 1940
Act; and (b) do not now and will not in the future result in a
violation by the Seller, the Servicer or any other person or entity of
the 1940 Act or the rules and regulations promulgated thereunder.
41
<PAGE>
(aa) Lock-Boxes. The names and addresses of all the Lock-Box Banks,
----------
together, with the account numbers of the Lock-Box Accounts of the Seller at
such Lock-Box Banks and the names, addresses and account numbers of all accounts
to which Collections of the Assets outstanding before the initial Purchase
hereunder have been sent, are specified in Schedule VI (which shall be deemed to
be amended in respect of terminating or adding any Lock-Box Account or Lock-Box
Bank upon satisfaction of the notice and other requirements specified in respect
thereof).
(bb) FNBNE Existing Account. All Collections in the FNBNE Existing
----------------------
Account are free and clear of any Adverse Claim. As long as any Collections are
held therein, no effective financing statement or other instruments similar in
effect shall at any time be on file in any recording office with respect to the
FNBNE Existing Account except such as may be filed in favor of the Deal Agent
relating to this Agreement.
(cc) Accuracy of Representations and Warranties. Each representation
------------------------------------------
or warranty by the Seller contained herein or in any certificate or other
document furnished by the Seller pursuant hereto or in connection herewith is
true and correct in all material respects.
The representations and warranties set forth in this section shall
survive the transfer of the Assets to the Deal Agent as agent for the Secured
Parties. Upon discovery by the Seller, the Servicer, any Secured Party, the
Liquidity Agent or the Deal Agent of a breach of any of the foregoing
representations and warranties, the party discovering such breach shall give
prompt written notice to the others.
SECTION 4.2 REPRESENTATIONS AND WARRANTIES OF SELLER RELATING TO THE
--------------------------------------------------------
AGREEMENT AND THE LOANS.
-----------------------
The Seller hereby represents and warrants to the Deal Agent, each
Secured Party, the Liquidity Agent and each Investor that, as of the Closing
Date and as of each Purchase Date:
(a) Binding Obligation, Valid Transfer and Security Interest.
--------------------------------------------------------
(i) This Agreement and the Purchase Agreement each constitute
legal, valid and binding obligations of the Seller, enforceable
against the Seller in accordance with its respective terms, except as
such enforceability may be limited by Insolvency Laws and except as
such enforceability may be limited by general principles of equity
(whether considered in a suit at law or in equity).
(ii) This Agreement constitutes either (A) a valid transfer to
the Deal Agent as agent for the Secured Parties of all right, title
and interest of the Seller in, to and under all Assets in the Asset
Pool to the extent of the Asset Interest, and such transfer will be
free and clear of any Lien of any Person claiming through or under the
Seller or its Affiliates, except for Permitted Liens, or (B) a grant
of a security interest in all Assets in the Asset Pool to the Deal
Agent as agent for the Secured Parties. In connection with the
foregoing
42
<PAGE>
clause (B), upon the filing of the financing statements described in
Section 6.9(c) the Deal Agent as agent for the Secured Parties shall
have a first priority perfected security interest in such Assets in
the Asset Pool as may be perfected under the UCC by filing a financing
statement or the delivery of possession, subject only to Permitted
Liens. Neither the Seller nor any Person claiming through or under the
Seller shall have any claim to or interest in the Collection Account,
except, if this Agreement is deemed to grant a security interest in
such property, for the interest of the Seller in such property as a
debtor for purposes of the UCC.
(b) Eligibility of Loans. As of the later of the Closing Date or the
--------------------
initial Purchase Date, (i) Schedule IV to this Agreement and the information
contained in the Notice of Sale and Purchase Certificate delivered pursuant to
Section 2.2 is an accurate and complete listing in all material respects of all
the Loans that are in the Asset Pool as of such date and the information
contained therein with respect to the identity of such Loans and the amounts
owing thereunder is true and correct in all material respects as of such date,
(ii) each such Loan is an Eligible Loan, (iii) each such Loan and the Related
Property is free and clear of any Lien of any Person (other than Permitted
Liens) and in compliance with all Requirements of Law applicable to the Seller
and/or the Originator and (iv) with respect to each such Loan, all consents,
licenses, approvals or authorizations of or registrations or declarations with
any Governmental Authority required to be obtained, effected or given by the
Seller in connection with the transfer of an interest in such Loan and the
Related Property to the Deal Agent, as agent for the Secured Parties, have been
duly obtained, effected or given and are in full force and effect. On each
Purchase Date, the Seller shall be deemed to represent and warrant that (i)
Additional Loan referenced on the related Seller Notice delivered pursuant to
Section 2.2 is an Eligible Loan, (ii) each such Loan and the related Property is
free and clear of any Lien of any Person (other than Permitted Liens) and in
compliance with all Requirements of Law applicable to Seller and/or the
Originator, (iii) with respect to each such Loan, all consents, licenses,
approvals, authorizations, registrations or declarations with any Governmental
Authority required to be obtained, effected or given by the Seller in connection
with the addition of such Loan and the Related Property to the Asset Pool have
been duly obtained, effected or given and are in full force and effect and (iv)
the representations and warranties set forth in Section 4.2(a) are true and
correct with respect to each Loan transferred on such day as if made on such
day.
(c) Notice of Breach. The representations and warranties set forth in
----------------
this Section 4.2 shall survive the transfer of an interest in the respective
Assets to the Deal Agent as agent for the Secured Parties. Upon discovery by
the Seller, the Servicer, any Secured Party, the Deal Agent, the Liquidity Agent
of any Investor of a breach of any of the foregoing representations and
warranties, the party discovering such breach shall give prompt written notice
to the others.
43
<PAGE>
SECTION 4.3 REPRESENTATIONS AND WARRANTIES OF THE SELLER RELATING TO THE
------------------------------------------------------------
PURCHASE LIMIT AND CAPITAL LIMIT.
--------------------------------
The Seller is hereby deemed to represent and warrant that on each day prior
to the Termination Date, the amount of Capital outstanding on such day shall not
exceed the lesser of (x) the Purchase Limit or (y) the Capital Limit.
ARTICLE V
GENERAL COVENANTS OF THE SELLER
SECTION 5.1 GENERAL COVENANTS.
-----------------
Until the date on which all Aggregate Unpaids have been indefeasibly paid
in full, the Seller hereby covenants that it will comply in all material
respects with all applicable laws, rules, regulations and orders and preserve
and maintain its corporate existence, rights, franchises, qualifications and
privileges the loss of which rights, franchises, qualifications and privileges
would have a material adverse effect on the Seller.
SECTION 5.2 COVENANTS OF SELLER.
-------------------
The Seller hereby covenants that:
(a) Security Interests. Except as contemplated in this Agreement, the
------------------
Seller will not sell, pledge, assign or transfer to any other Person, or grant,
create, incur, assume or suffer to exist any Lien on any Loan or Related
Property that is in the Asset Pool, whether now existing or hereafter
transferred hereunder, or any interest therein, and the Seller will not sell,
pledge, assign or suffer to exist any Lien on its interest, if any, hereunder.
The Seller will promptly notify the Deal Agent of the existence of any Lien on
any Loan or Related Property that is in the Asset Pool and the Seller shall
defend the right, title and interest of the Deal Agent as agent for the Secured
Parties in, to and under any Loan and the Related Property that is in the Asset
Pool, against all claims of third parties, provided, however, that nothing in
-------- -------
this Section 5.2(a) shall prevent or be deemed to prohibit the Seller from
suffering to exist Permitted Liens upon any Loan or any Related Property that is
in the Asset Pool.
(b) Delivery of Collections. The Seller agrees to pay to the Servicer
-----------------------
promptly (but in no event later than two Business Days after receipt) all
Collections (including any Deemed Collections) received by Seller in respect of
the Loans that are in the Asset Pool.
(c) Compliance with the Law. The Seller hereby agrees to comply in all
-----------------------
respects with all Requirements of Law applicable to the Seller, the Loans that
are in the Asset Pool and the Related Property, if the failure to do so would
have a material adverse effect on the Seller, the Loans that are in the Asset
Pool or the Related Property.
44
<PAGE>
(d) Activities of Seller. The Seller shall not engage in any business or
--------------------
activity of any kind, or enter into any transaction or indenture, mortgage,
instrument, agreement, contract, lease or other undertaking, which is not
authorized by or related to the transactions contemplated by the Transaction
Documents.
(e) Indebtedness. The Seller shall not create, incur, assume or suffer to
------------
exist any Indebtedness or other liability whatsoever, except (i) obligations
incurred under this Agreement or the Purchase Agreement and instruments related
thereto, or under any Hedging Agreement required by Section 5.4(a), or (ii)
liabilities incident to the maintenance of its corporate existence in good
standing.
(f) Guarantees. The Seller shall not become or remain liable, directly or
----------
indirectly, in connection with any Indebtedness or other liability of any other
Person, whether by guarantee, endorsement (other than endorsements of negotiable
instruments for deposit or collection in the ordinary course of business),
agreement to purchase or repurchase, agreement to supply or advance funds, or
otherwise.
(g) Investments. The Seller shall not make or suffer to exist any loans
-----------
or advances to, or extend any credit to, or make any investments (by way of
transfer of property, contributions to capital, purchase of stock or securities
or evidences of indebtedness, acquisition of the business or assets, or
otherwise) in, any Person except for purchases of Loans and other Assets
pursuant to the Purchase Agreement, or for investments in Permitted Investments
in accordance with the terms of this Agreement.
(h) Merger; Sales. The Seller shall not enter into any transaction of
-------------
merger or consolidation, or liquidate or dissolve itself (or suffer any
liquidation or dissolution), or acquire or be acquired by any Person, or convey,
sell, lease or otherwise dispose of all or substantially all of its property or
business, except as provided for in this Agreement.
(i) Distributions. The Seller may, provided it is in compliance with any
-------------
applicable State laws and no Early Amortization Event has occurred or will occur
as a result thereof, declare or pay, directly or indirectly, any dividend or
make any other distribution (whether in cash or other property) with respect to
the profits, assets or capital of the Seller or any Person's interest therein,
or purchase, redeem or otherwise acquire for value any of its capital stock now
or hereafter outstanding.
(j) Agreements. The Seller shall not become a party to, or permit any of
----------
its properties to be bound by, any indenture, mortgage, instrument, contract,
agreement, lease or other undertaking, except this Agreement, the Purchase
Agreement and any Hedging Agreement or amend or modify the provisions of its
operating agreement, without the consent of the Deal Agent, or issue any power
of attorney except to the Deal Agent or the Servicer.
(k) Separate Corporate Existence. The Seller shall:
----------------------------
45
<PAGE>
(i) Maintain its own deposit account or accounts, separate from
those of any Affiliate, with commercial banking institutions. The funds of
the Seller will not be diverted to any other Person or for other than
corporate uses of the Seller.
(ii) Ensure that, to the extent that it shares the same officers
or other employees as any of its stockholders or Affiliates, the salaries
of and the expenses related to providing benefits to such officers and
other employees shall be fairly allocated among such entities, and each
such entity shall bear its fair share of the salary and benefit costs
associated with all such common officers and employees.
(iii) Ensure that, to the extent that it jointly contracts with
any of its stockholders or Affiliates to do business with vendors or
service providers or to share overhead expenses, the costs incurred in so
doing shall be allocated fairly among such entities, and each such entity
shall bear its fair share of such costs. To the extent that the Seller
contracts or does business with vendors or service providers when the goods
and services provided are partially for the benefit of any other Person,
the costs incurred in so doing shall be fairly allocated to or among such
entities for whose benefit the goods and services are provided, and each
such entity shall bear its fair share of such costs. All material
transactions between Seller and any of its Affiliates shall be only on an
arm's length basis.
(iv) Maintain a principal executive and administrative office
through which its business is conducted separate from those of its
Affiliates. To the extent that Seller and any of its stockholders or
Affiliates have offices in the same location, there shall be a fair and
appropriate allocation of overhead costs among them, and each such entity
shall bear its fair share of such expenses.
(v) Conduct its affairs strictly in accordance with its
Certificate of Incorporation and observe all necessary, appropriate and
customary corporate formalities, including, but not limited to, holding all
regular and special stockholders, and directors' meetings appropriate to
authorize all corporate action, keeping separate and accurate minutes of
its meetings, passing all resolutions or consents necessary to authorize
actions taken or to be taken, and maintaining accurate and separate books,
records and accounts, including, but not limited to, payroll and
intercompany transaction accounts.
(vi) Take or refrain from taking, as applicable, each of the
activities specified in the "non-consolidation" opinion of Bingham Dana LLP
delivered on the Closing Date, upon which the conclusions expressed therein
are based.
(l) Location of Seller, Records; Instruments. The Seller (x) shall
----------------------------------------
not move the location of its principal executive office, without 30 days' prior
written notice to the Deal Agent and (y) shall not move, or consent to the
Servicer or Collateral Custodian moving, the Loan Documents without 30 days'
prior written notice to the Deal Agent and (z) will promptly take all
46
<PAGE>
actions required of each relevant jurisdiction in order to continue the first
priority perfected security interest of the Deal Agent as agent for the Secured
Parties (except for Permitted Liens) in all Assets in the Asset Pool, including
delivery of an opinion of counsel acceptable to the Deal Agent.
(m) ERISA Matters. The Seller will not (a) engage or permit any ERISA
-------------
Affiliate to engage in any prohibited transaction for which an exemption is not
available or has not previously been obtained from the United States Department
of Labor; (b) permit to exist any accumulated funding deficiency, as defined in
Section 302(a) of ERISA and Section 412(a) of the Code, or funding deficiency
with respect to any Benefit Plan other than a Multiemployer Plan; (c) fail to
make any payments to a Multiemployer Plan that the Seller or any ERISA Affiliate
may be required to make under the agreement relating to such Multiemployer Plan
or any law pertaining thereto; (d) terminate any Benefit Plan so as to result in
any liability; or (e) permit to exist any occurrence of any reportable event
described in Title IV of ERISA.
(n) Originator Assets. With respect to each Asset acquired by the
-----------------
Seller, the Seller will (i) acquire such Asset pursuant to and in accordance
with the terms of the Purchase Agreement, (ii) take all action necessary to
perfect, protect and more fully evidence the Seller's ownership of such Asset,
including, without limitation, (A) filing and maintaining, effective financing
statements (Form UCC-1) against the Originator in all necessary or appropriate
filing offices, and filing continuation statements, amendments or assignments
with respect thereto in such filing offices and (B) executing or causing to be
executed such other instruments or notices as may be necessary or appropriate,
(iii) perform in accordance with those terms of the Assets requiring performance
thereof by the Seller, and (vi) take all additional action that the Deal Agent
may reasonably request to perfect, protect and more fully evidence the
respective interests of the parties to this Agreement in the Assets and interest
therein represented by the Asset Interests.
(o) Transactions with Affiliates. The Seller will not enter into, or
----------------------------
be a party to, any transaction with any of its Affiliates, except (i) the
transactions permitted or contemplated by this Agreement, the Purchase Agreement
and any Hedging Agreements and (ii) other transactions (including, without
limitation, the lease of office space or computer equipment or software by the
Seller to or from an Affiliate) (A) in the ordinary course of business, (B)
pursuant to the reasonable requirements of the Seller's business, (C) upon fair
and reasonable terms that are no less favorable to the Seller than could be
obtained in a comparable arm's-length transaction with a Person not an Affiliate
of the Seller, and (D) not inconsistent with the factual assumptions set forth
in the "non-consolidation" legal opinion letter issued by Bingham Dana LLP and
delivered to the Deal Agent as a condition to the initial Purchase, as such
assumptions may be modified in any subsequent opinion letters delivered to the
Deal Agent pursuant to Section 3.2 or otherwise. It is understood that any
compensation arrangement for officers shall be permitted under clause (ii)(A)
through (C) above if such arrangement has been expressly approved by the board
of directors of the Seller.
47
<PAGE>
(p) Change in the Purchase Agreement. The Seller will not amend,
--------------------------------
modify, waive or terminate any terms or conditions of the Purchase Agreement,
without the consent of Deal Agent.
(q) Amendment to Certificate of Incorporation. The Seller will not
-----------------------------------------
amend, modify or otherwise make any change to its Certificate of Incorporation
which would delete or otherwise nullify or circumvent the provisions set forth
on Exhibit C hereto.
---------
(r) Credit and Collection Policies. The Seller shall take all actions
------------------------------
necessary to comply with the terms of the Credit and Collection Policies, and
the Seller shall not cause or permit any changes to be made to the Credit and
Collection Policies in any manner that would materially and adversely affect the
collectibility of the Loans that are in the Asset Pool without the prior written
consent of the Deal Agent.
(s) Accounting of Purchases. Other than for federal, state and local
-----------------------
income tax purposes, the Seller will not account for or treat (whether in
financial statements or otherwise) the transactions contemplated hereby in any
manner other than as the sale, or absolute assignment, of Assets by the Seller
to a Purchaser. The Seller will not account for or treat (whether in financial
statements or otherwise) the transaction contemplated by the Purchase Agreement
in any manner other than as the sale, or absolute assignment, of the Originator
Assets by the Originator to the Seller, as the case may be.
(t) AIG Policy. If any AIG Loans are outstanding, (i) on or before
----------
the expiration of the then existing AIG Policy, the Seller will deliver to the
Deal Agent a copy of a renewal or replacement AIG Policy, showing the Seller as
an insured and the Deal Agent as a loss payee, and the Seller will notify the
Deal Agent on or before such expiration date of any Obligor under an AIG Loan
which has been excluded from policy coverage upon such renewal or replacement;
(ii) the Seller will comply with all warranties, covenants and agreements of the
"Insured" under the AIG Policy; and (iii) the Seller will cooperate with the
Servicer and take all actions reasonably required by the Servicer to collect
amounts under the AIG Policy.
(u) FNBNE Existing Account/Establishment of Lock-Box Account. As long
--------------------------------------------------------
as any Collections are held therein, the Seller will not grant, create, incur or
suffer to exist any Adverse Claim with respect to the Collections in the FNBNE
Existing Account. The Seller will promptly notify the Deal Agent of the
existence of any Adverse Claim with respect to any Collections in the FNBNE
Existing Account and the Seller shall defend the right, title and interest of
the Deal Agent as agent for the Secured Parties in such Collections against all
claims of third parties. Upon the request of the Deal Agent, the Seller shall
cause a Lock-Box Account to be established within five (5) Business Days and
shall promptly transfer all Collections in the FNBNE Existing Account into such
Lock-Box Account.
SECTION 5.3 RELEASE OF LIEN.
---------------
At the same time as (i) any Loan in the Asset Pool expires by its
terms and all amounts in respect thereof have been paid by the related Obligor
and deposited in the Collection Account or
48
<PAGE>
(ii) any Loan becomes a Prepaid Loan and all amounts in respect thereof have
been paid by the related Obligor and deposited in the Collection Account, the
Deal Agent as agent for the Purchasers will, to the extent requested by the
Servicer, release its interest in such Loan and Loan Documents.
SECTION 5.4 HEDGING AGREEMENT.
-----------------
(a) On or prior to each Purchase Date for any Purchase, the Seller
shall enter into one or more Hedge Transactions for that Purchase, provided that
each such Hedge Transaction shall:
(i) be entered into with a Hedge Counterparty and governed by a
Hedging Agreement;
(ii) have monthly payment periods the first of which commences on
the Purchase Date of that Purchase and the last of which ends on the last
Scheduled Payment due to occur under the Loans to which that Purchase
relates;
(iii) have an amortizing notional amount such that the Hedge Notional
Amount in effect during any monthly payment period shall be equal to at
least seventy-five percent (75%) but not more than one hundred percent
(100%) of the aggregate Capital outstanding hereunder; provided, however,
-------- -------
that the above percentage shall increase to one hundred percent (100%) for
any period during which the difference between the Portfolio Yield and the
Adjusted Eurodollar Rate is less than 2%; and
(iv) provide for two series of monthly payments to be netted against
each other, one such series being payments to be made by the Seller to a
Hedge Counterparty (solely on a net basis) by reference to a fixed interest
rate, and the other such series being payments to be made by the Hedge
Counterparty to the Deal Agent (solely on a net basis) by reference to the
money market yield of the rate set forth in Federal Reserve Statistical
Release H.15 (519) under the caption "Commercial Paper-Nonfinancial" for a
30-day maturity as in effect on the first day of each monthly payment
period, the net amount of which shall be paid into the Collection Account
(if payable by the Hedge Counterparty) or from the Collection Account to
the extent funds are available under Section 2.7 or 2.9 of this Agreement
(if payable by the Seller).
(b) As additional security hereunder, Seller hereby assigns to the Deal
Agent, as agent for the Secured Parties, all right, title and interest of Seller
in each Hedging Agreement, each Hedge Transaction, and all present and future
amounts payable by a Hedge Counterparty to Seller under or in connection with
the respective Hedging Agreement and Hedge Transaction(s) with that Hedge
Counterparty ("Hedge Collateral"), and grants a security interest to the Deal
Agent, as agent for the Secured Parties, in the Hedge Collateral. Seller
acknowledges that, as a result of that assignment, Seller may not, without the
prior written consent of the Deal Agent, exercise any rights under any Hedging
Agreement or Hedge Transaction, except for Seller's right under any Hedging
Agreement to enter into Hedge Transactions in order to meet the Seller's
obligations
49
<PAGE>
under Section 5.4(a) hereof. Nothing herein shall have the effect of releasing
the Seller from any of its obligations under any Hedging Agreement or any Hedge
Transaction, nor be construed as requiring the consent of the Deal Agent or any
Secured Party for the performance by Seller of any such obligations.
SECTION 5.5 RETRANSFER OF INELIGIBLE LOANS.
------------------------------
In the event of a breach of any representation or warranty set forth
in Section 4.2 with respect to a Loan in the Asset Pool (each such Loan, an
"Ineligible Loan") which breach results in a Trigger Event, or would result in a
Trigger Event at the next Determination Date or other date of determination, no
later than thirty (30) days after the earlier of (i) knowledge by the Seller of
such Loan becoming an Ineligible Loan and causing a Trigger Event or prospective
Trigger Event, and (ii) receipt by the Seller from the Deal Agent or Servicer of
written notice thereof, the Seller shall either (a) accept the retransfer of
each such Ineligible Loan, and the Deal Agent as agent for the Purchasers shall
convey to the Seller, without recourse, representation or warranty, all of its
right, title and interest in such Ineligible Loan; or (b) subject to the
satisfaction of the conditions in Section 2.9, substitute for such Ineligible
Loan a Substitute Loan; provided, however, that no such retransfer shall be
-------- -------
required to be made with respect to such Ineligible Loan (and such Loan shall
cease to be an Ineligible Loan) if, on or before the expiration of such 30-day
period, the representations and warranties in Section 4.2 with respect to such
Loan shall be made true and correct in all material respects with respect to
such Loan as if such Loan had been transferred to the Purchasers on such day.
Notwithstanding anything contained in this Section 5.5 to the contrary, in the
event of breach of any representation and warranty set forth in Section 4.2,
with respect to any interest in each Loan and the Related Property having been
conveyed to the Purchasers free and clear of any Lien of any Person claiming
through or under the Seller and its Affiliates (other than Permitted Liens) and
in compliance in all material respects, with all Requirements of Law applicable
to the Seller, immediately upon the earlier to occur of the discovery of such
breach by the Seller or receipt by the Seller of written notice of such breach
given by the Deal Agent, the Seller shall repurchase and the Deal Agent on
behalf of the Secured Parties shall convey, free and clear of any Lien created
pursuant to this Agreement, all of its right, title and interest in such
Ineligible Loan, and the Deal Agent shall, in connection with such conveyance
and without further action, be deemed to represent and warrant on behalf of the
Secured Parties that it has the corporate authority and has taken all necessary
corporate action to accomplish such conveyance, but without any other
representation or warranty, express or implied. In any of the foregoing
instances, the Seller shall accept the retransfer of each such Ineligible Loan,
and the Aggregate Outstanding Loan Balance shall be reduced by the Outstanding
Loan Balance of each such Ineligible Loan and, if applicable, increased by the
Outstanding Loan Balance of each such Substitute Loan. On and after the date of
retransfer, the Ineligible Loan so retransferred shall not be included in the
Asset Pool and, as applicable, the Substitute Loan shall be included in the
Asset Pool. In consideration of such retransfer without substitution of a
Substitute Loan, the Seller shall, on the date of retransfer of such Ineligible
Loan, make a deposit to the Collection Account (for allocation pursuant to
Section 2.7) in immediately available funds in an amount equal to the
Outstanding Loan Balance of such Ineligible Loan (to the extent that the Deemed
Collections with respect to such Ineligible Loan
50
<PAGE>
have not already been deposited in the Collection Account), plus interest
thereon from the last day of the immediately preceding Fixed Period to and
including the date of repurchase at a rate per annum equal to the weighted
average of the Yield Rates. Upon each retransfer to the Seller of such
Ineligible Loan, the Deal Agent, as agent for the Purchasers, shall
automatically and without further action be deemed to transfer, assign and set-
over to the Seller, without recourse, representation or warranty, all the right,
title and interest of the Deal Agent, as agent for the Purchasers, in, to and
under such Ineligible Loan and all monies due or to become due with respect
thereto, and all proceeds of such Ineligible Loan and Recoveries and Insurance
Proceeds relating thereto and all rights to Related Property and other security
for any such Ineligible Loan, and all proceeds and products of the foregoing.
The Deal Agent, as agent for the Purchasers, shall, at the sole expense of the
Servicer execute such documents and instruments of transfer as may be prepared
by the Servicer on behalf of the Seller and take other such actions as shall
reasonably be requested by the Seller to effect the transfer of such Ineligible
Loan pursuant to this subsection.
SECTION 5.6 RETRANSFER OF ASSETS.
--------------------
In the event of a breach of any representation or warranty set forth in
Section 4.2 hereof which breach could reasonably be expected to have a material
adverse effect on the rights of the Secured Parties or the Deal Agent, as agent
of the Secured Parties, or on the ability of the Seller to perform its
obligations hereunder, by notice then given in writing to the Seller, the Deal
Agent may direct the Seller to accept the retransfer of all of the Assets, in
which case the Seller shall be obligated to accept retransfer of such Assets on
a Payment Date specified by the Seller which date shall be at least thirty (30)
days after the date of such notice (such date, the "Retransfer Date") and to
terminate all Hedge Transactions prior to the Retransfer Date; provided,
--------
however, that no such retransfer shall be required to be made if, on or before
- -------
expiration of such applicable period, the representations and warranties
contained in Section 4.2 shall then be true and correct in all material
respects. The Seller shall deposit on the Retransfer Date an amount equal to
the deposit amount provided below for such Assets in the Collection Account for
distribution to the Secured Parties in accordance with Section 2.7. The deposit
amount (the "Retransfer Amount") for such retransfer will be equal to (A) the
Aggregate Unpaids minus (B) the amount, if any, available in the Collection
-----
Account on such Payment Date. On the Retransfer Date, provided that the full
Retransfer Amount has been deposited into the Collection Account, the Assets
shall be transferred to the Seller; and the Deal Agent as agent for the Secured
Parties shall, at the sole expense of the Servicer, execute and deliver such
instruments of transfer, in each case without recourse, representation or
warranty, as shall be prepared and reasonably requested by the Servicer on
behalf of the Seller to vest in the Seller, or its designee or assignee, all
right, title and interest of the Deal Agent as agent for the Secured Parties in,
to and under the Assets. If the Deal Agent gives a notice directing the Seller
to accept such a retransfer as provided above, the obligation of Seller to
accept a retransfer pursuant to this Section 5.6 shall constitute the sole
remedy respecting a breach of the representations and warranties contained in
Section 4.2 available to the Secured Parties and the Deal Agent on behalf of the
Secured Parties.
51
<PAGE>
SECTION 5.7 YEAR 2000 COMPATIBILITY.
-----------------------
The Seller shall take all action necessary to assure that, prior to January
1, 2000, the Seller's computer system is able to operate and effectively process
data including dates on and after January 1, 2000. At the request of the Deal
Agent, the Seller shall provide assurance acceptable to the Deal Agent of the
Seller's Year 2000 compatibility.
ARTICLE VI
ADMINISTRATION AND SERVICING OF LOANS
SECTION 6.1 APPOINTMENT AND ACCEPTANCE; DUTIES.
----------------------------------
The Seller hereby appoints FNBNE as Servicer pursuant to this Agreement.
FNBNE accepts such appointment and agrees to act as the Servicer pursuant to
this Agreement to service the Transferred Loans and to serve in such capacity
until the termination of its responsibilities pursuant to Section 6.26. Marine
Midland is hereby appointed as Backup Servicer and Collateral Custodian pursuant
to this Agreement. Marine Midland accepts the appointment and agrees to act as
the Backup Servicer and Collateral Custodian pursuant to this Agreement.
SECTION 6.2 DUTIES AND RESPONSIBILITIES OF THE SERVICER AND THE COLLATERAL
--------------------------------------------------------------
CUSTODIAN.
----------
(a) The Servicer shall conduct the servicing, administration and collection
of the Transferred Loans and shall take, or cause to be taken, all such actions
as may be necessary or advisable to service, administer and collect Transferred
Loans from time to time on behalf of the Purchasers. The Servicer will perform
its servicing duties with reasonable care, using that degree of skill and
attention that a prudent person engaging in such activities would exercise, but
in any event shall not act with less care than the Servicer exercises with
respect to all comparable loans that it services for itself or others. Neither
the Secured Parties, the Deal Agent nor the Collateral Custodian shall have any
obligation or liability with respect to any Transferred Loans, nor shall any of
them be obligated to perform any of the obligations of the Servicer hereunder.
(b) The duties of the Servicer, as the Purchasers' agent, shall include,
without limitation:
(i) preparing and submitting of claims to, and post-billing liaison
with, Obligors on Transferred Loans;
(ii) maintaining all necessary Servicing Records with respect to the
Transferred Loans and providing such reports to the Liquidity Agent and the
Deal Agent in respect of the servicing of the Transferred Loans (including
information relating to its
52
<PAGE>
performance under this Facility) as may be required hereunder or as the
Liquidity Agent or the Deal Agent may reasonably request;
(iii) maintaining and implementing administrative and operating
procedures (including, without limitation, an ability to recreate Servicing
Records evidencing the Transferred Loans in the event of the destruction of
the originals thereof) and keeping and maintaining all documents, books,
records and other information reasonably necessary or advisable for the
collection of the Transferred Loans (including, without limitation, records
adequate to permit the identification of each new Transferred Loan and all
Collections of and adjustments to each existing Transferred Loan);
(iv) promptly delivering to the Deal Agent, from time to time, such
information and Servicing Records relating to the Transferred Loans
(including information relating to its performance under this Facility) as
the Deal Agent may from time to time reasonably request;
(v) identifying each Transferred Loan clearly and unambiguously in
its Servicing Records to reflect that such Transferred Loan is owned by the
Purchasers;
(vi) complying in all material respects with the Credit and
Collection Policies in regard to each Transferred Loan;
(vii) complying in all material respects with all applicable laws,
rules, regulations and orders with respect to it, its business and
properties and all Transferred Loans and Collections with respect thereto;
(viii) preserving and maintaining its existence, rights, franchises
and privileges as a National Banking Association and qualifying to and
remaining authorized to perform obligations as Servicer (including
enforcement of collection of Transferred Loans on behalf of the Secured
Parties) in each jurisdiction where the failure to preserve and maintain
such existence, rights, franchises, privileges and qualification would
materially adversely affect (A) the rights or interests of the Secured
Parties in the Transferred Loans, (B) the collectibility of any Transferred
Loan, or (C) the ability of the Servicer to perform its obligations
hereunder;
(ix) immediately, but not later than three (3) Business Days after
such occurrence, notifying the Liquidity Agent and the Deal Agent of the
occurrence of an Early Amortization Event (including, without limitation, a
material adverse change in the financial condition of the Originator);
(x) notifying the Liquidity Agent and the Deal Agent of any
material action, suit, proceeding, dispute, offset deduction, defense or
counterclaim that is or may be (1) asserted by an Obligor with respect to
any Transferred Loan; or (2) reasonably expected to have a material adverse
effect on the Loans as a whole or on the ability of the Servicer
53
<PAGE>
or the Originator to perform its obligations under the Transaction
Documents or on the Servicer or the Seller or any of their respective
property; and
(xi) notifying the Deal Agent of any change in the Credit and
Collections Policies.
(c) Disposition Upon Defaulted Loan. Upon any Loan in the Asset Pool
-------------------------------
becoming a Defaulted Loan, the Servicer will use commercially reasonable efforts
in accordance with the Credit and Collection Policies to dispose of any Related
Property. Without limiting the generality of the foregoing, to the extent
provided by law, the Servicer may dispose of any such Related Property by
purchasing such Related Property or by selling such Related Property to any of
its Affiliates for a purchase price equal to the fair market value thereof, any
such sale to be evidenced by a certificate of a Responsible Officer of the
Servicer delivered to the Deal Agent setting forth the Loan, the Related
Property, the sale price of the Related Property and certifying that such sale
price is the fair market value of such Related Property.
(d) Further Assurances. The Deal Agent will, at the sole expense of the
------------------
Servicer, 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.
(e) Custodial Duties. The Collateral Custodian shall take and retain
----------------
custody of the Required Loan Documents delivered by the Seller in accordance
with the terms and conditions of this Agreement, all for the benefit of the
Purchasers and subject to the Lien thereon in favor of the Deal Agent as agent
for the Secured Parties. Within five Business Days of its receipt of any
Required Loan Document, the Collateral Custodian shall review the related
Required Loan Documents to verify that such Required Loan Documents have been
executed and have no missing or mutilated pages and to confirm that such Loan is
referenced on the related list of Loans delivered in connection with the related
Purchase Certificate. In order to facilitate the foregoing review by the
Collateral Custodian, in connection with each delivery of Required Loan
Documents hereunder to the Collateral Custodian, the Servicer shall provide to
the Collateral Custodian an electronic file (in EXCEL or a comparable format)
that contains the related list of Required Loan Documents or which otherwise
contains the Loan number and the name of the Obligor with respect to each
related Loan. If, at the conclusion of such review, the Collateral Custodian
shall determine that such Required Loan Documents are not executed or in proper
form on its face, or that the respective Loan is not referenced on such list of
Required Loan Documents, the Collateral Custodian shall promptly notify the
Seller and the Deal Agent of such determination by providing a written report to
such Persons setting forth, with particularity, the lack of execution of such
Required Loan Documents, that such Required Loan Documents have missing or
mutilated pages, or the fact that such Loan was not referenced on the related
list. In addition, unless instructed otherwise in writing by the Seller or the
Deal Agent within 10 days of the Collateral Custodian's delivery of such report,
the Collateral Custodian shall return any Required Loan Documents not referenced
on such list of Loans to the Seller. Other than the foregoing, the Collateral
Custodian shall not have any responsibility for reviewing any Required Loan
Documents.
54
<PAGE>
In taking and retaining custody of the Required Loan Documents, the
Collateral Custodian shall be deemed to be acting as the agent of the Deal Agent
as agent for the Purchasers and Secured Parties, provided, however, that the
-------- -------
Collateral Custodian makes no representations as to the existence, perfection or
priority of any Lien on the Required Loan Documents or the instruments therein,
and provided, further, that the Collateral Custodian's duties as agent shall be
-------- -------
limited to those expressly contemplated herein. All Required Loan Documents
shall be kept in fireproof vaults or cabinets at the locations specified on
Schedule V attached hereto, or at such other office as shall be specified to the
Deal Agent by the Collateral Custodian in a written notice delivered at least 45
days prior to such change. All Required Loan Documents shall be placed together
in a separate file cabinet with an appropriate identifying label and maintained
in such a manner so as to permit retrieval and access. All Required Loan
Documents shall be clearly segregated from any other documents or instruments
maintained by the Collateral Custodian. The Collateral Custodian shall clearly
indicate that such Required Loan Documents are the sole property of the
Purchasers and that the Seller has granted an interest therein to the Deal Agent
on behalf of the Secured Parties. In performing its duties, the Collateral
Custodian shall use the same degree of care and attention as it employs with
respect to similar contracts which it holds as Collateral Custodian.
(f) Concerning the Collateral Custodian.
-----------------------------------
(i) The Collateral Custodian may conclusively rely on and shall be
fully protected in acting upon any certificate, instrument, opinion,
notice, letter, telegram or other document delivered to it and which in
good faith it reasonably believes to be genuine and which has been signed
by the proper party or parties. The Collateral Custodian may rely
conclusively on and shall be fully protected by in acting upon (A) the
written instructions of any designated officer of the Deal Agent (and shall
provide a copy thereof to the Seller) or (B) the verbal instructions of the
Deal Agent, which the Collateral Custodian shall promptly confirm in
writing (and shall provide a copy thereof to the Seller).
(ii) The Collateral Custodian may consult counsel satisfactory to it
and the written advice or opinion of such counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in accordance with
the advice or opinion of such counsel.
(iii) The Collateral Custodian shall not be liable for any error of
judgment, or for any act done or step taken or omitted by it, in good
faith, or for any mistakes of fact or law, or for anything which it may do
or refrain from doing in connection herewith except in the case of its
willful misconduct or grossly negligent performance or omission.
(iv) The Collateral Custodian makes no warranty or representation and
shall have no responsibility (except as expressly set forth in this
Agreement) as to the content, enforceability, completeness, validity,
sufficiency, value, genuineness, ownership or
55
<PAGE>
transferability of the Loans, and will not be required to and will not make
any representations as to the validity or value (except as expressly set
forth in this Agreement) of any of the Loans. The Collateral Custodian
shall not be obligated to take any legal action hereunder which might in
its judgment involve any expense or liability unless it has been furnished
with an indemnity reasonably satisfactory to it.
(v) The Collateral Custodian shall have no duties or
responsibilities except such duties and responsibilities as are
specifically set forth in this Agreement and no covenants or obligations
shall be implied in this Agreement against the Collateral Custodian.
(vi) Except for overhead and general administrative expenses,
the Collateral Custodian shall not be required to expend or risk its own
funds in the performance of its duties hereunder.
(vii) It is expressly agreed and acknowledged that the Collateral
Custodian is not guaranteeing performance of or assuming any liability for
the obligations of the other parties hereto or any parties to the Loans.
SECTION 6.3 AUTHORIZATION OF THE SERVICER.
-----------------------------
(a) Each of the Originator, the Seller and the Deal Agent on behalf of the
Secured Parties and each Hedge Counterparty hereby authorizes the Servicer
(including any successor thereto) to take any and all reasonable steps in its
name and on its behalf necessary or desirable and not inconsistent with the sale
of the Transferred Loans to the Purchasers, in the determination of the
Servicer, to collect all amounts due under any and all Transferred Loans,
including, without limitation, endorsing any of their names on checks and other
instruments representing Collections, executing and delivering any and all
instruments of satisfaction or cancellation, or of partial or full release or
discharge, and all other comparable instruments, with respect to the Transferred
Loans and, after the delinquency of any Transferred Loan and to the extent
permitted under and in compliance with applicable law and regulations, to
commence proceedings with respect to enforcing payment thereof, to the same
extent as the Originator could have done if it had continued to own such Loan.
The Originator, the Seller and the Deal Agent on behalf of the Secured Parties
and each Hedge Counterparty shall furnish the Servicer (and any successors
thereto) with any powers of attorney and other documents necessary or
appropriate to enable the Servicer to carry out its servicing and administrative
duties hereunder, and shall cooperate with the Servicer to the fullest extent in
order to ensure the collectibility of the Transferred Loans. In no event shall
the Servicer be entitled to make any Secured Party, any Hedge Counterparty, the
Collateral Custodian or the Deal Agent a party to any litigation without such
party's express prior written consent, or to make the Seller a party to any
litigation (other than any routine foreclosure or similar collection procedure)
without the Deal Agent's consent.
(b) After an Early Amortization Event has occurred and is continuing, at
the Agent's direction the Servicer shall take such action as the Deal Agent may
deem necessary or advisable
56
<PAGE>
to enforce collection of the Transferred Loans; provided, however, that the Deal
--------
Agent may, at any time that an Early Amortization Event has occurred and is
continuing, notify any Obligor with respect to any Transferred Loans of the
assignment of such Transferred Loans, to the Deal Agent and direct that payments
of all amounts due or to become due to any other party thereunder be made
directly to the Deal Agent or any servicer, collection agent or lockbox or other
account designated by the Deal Agent and, upon such notification and at the
expense of the Seller, the Deal Agent may enforce collection of any such
Transferred Loans and adjust, settle or compromise the amount or payment
thereof.
SECTION 6.4 COLLECTION OF PAYMENTS.
----------------------
(a) Collection Efforts, Modification of Loans. The Servicer will make
-----------------------------------------
reasonable efforts to collect all payments called for under the terms and
provisions of the Loans included in the Asset Pool as and when the same become
due, and will follow those collection procedures which it follows with respect
to all comparable Loans that it services for itself or others; provided,
--------
however, that so long as FNBNE or the Servicer Assignee is the Servicer the
- -------
Servicer shall collect all payments in accordance with the Credit and Collection
Policies. The Servicer may not waive, modify or otherwise vary any provision of
a Loan that is included in the Asset Pool other than as permitted in the Credit
and Collection Policies or as permitted by the Deal Agent. The Servicer may in
its discretion waive any late payment charge or any other fees that may be
collected in the ordinary course of servicing any Loan included in the Asset
Pool.
(b) Prepaid Loan. The Servicer may not permit a Loan in the Asset Pool to
------------
become a Prepaid Loan (which shall not include a Loan that becomes a Prepaid
Loan due to a Casualty Loss), unless (x) the Servicer provides an Additional
------
Loan or (y) such prepayment will not result in the Collection Account receiving
an amount (the "Prepayment Amount") less than the sum of (A) the Outstanding
Loan Balance on the date of such prepayment, (B) any outstanding Servicer
Advances thereon, (C) all Hedge Breakage Costs owing to the relevant Hedge
Counterparty for any termination of one or more Hedge Transactions, in whole or
in part, as required by the terms of any Hedging Agreement as the result of any
such Loan becoming a Prepaid Loan, and (D) any accrued and unpaid Yield thereon
and all Breakage Costs arising as a result of such prepayment. After an Early
Amortization Event has occurred, the Servicer may not permit a Loan in the Asset
Pool to become a Prepaid Loan (which shall not include a Loan that becomes a
Prepaid Loan due to a Casualty Loss), unless the Servicer collects an amount
------
equal to the sum of (A) the Outstanding Loan Balance on the date of such
prepayment, (B) any outstanding Servicer Advances thereon, (C) all Hedge
Breakage Costs owing to the relevant Hedge Counterparty for any termination of
one or more Hedge Transactions, in whole or in part, as required by the terms of
any Hedging Agreement as the result of any such Loan becoming a Prepaid Loan,
and (D) any accrued and unpaid Yield thereon and all Breakage Costs arising as a
result of such prepayment.
(c) Acceleration. The Servicer shall accelerate the maturity of all or
------------
any Scheduled Payments under any Loan included in the Asset Pool under which a
default under the terms thereof has occurred and is continuing (after the lapse
of any applicable grace period) promptly after such Loan becomes a Defaulted
Loan; provided, however, that so long as FNBNE or the
57
<PAGE>
Servicer Assignee is the Servicer the Servicer shall collect all Defaulted Loans
in accordance with the Credit and Collections Policies.
(d) Taxes and other Amounts. To the extent provided for in any Loan
-----------------------
included in the Asset Pool, the Servicer will use its best efforts to collect
all payments with respect to amounts due for taxes, assessments and insurance
premiums relating to such Loans or the Related Property and remit such amounts
to the appropriate Governmental Authority or insurer on or prior to the date
such payments are due.
(e) Payments to FNBNE Existing Account and Lock-Box Account. On or before
-------------------------------------------------------
each applicable Purchase Date, the Servicer shall have instructed all
Obligors to make all payments in respect of the Loans in the Asset Pool to the
FNBNE Existing Account; provided, however, notwithstanding the foregoing, upon
-------- -------
the establishment of a Lock-Box Account pursuant to Section 5.2 hereof, the
Servicer shall promptly instruct all Obligors to make all payments in respect of
the Loans in the Asset Pool to a Lock-Box or directly to a Lock-Box Account.
(f) Establishment of the Collection Account. The Servicer shall cause to
---------------------------------------
be established, on or before the Closing Date, and maintained in the name of
the Deal Agent, with a "Qualified Institution" (as hereinafter defined) the
Collection Account. A "Qualified Institution" shall be a depository institution
or trust company that at all times shall be organized under the laws of the
United States or any one of the States thereof or the District of Columbia (or
any domestic branch of a foreign bank), (i) (A) which has either (1) a long-term
unsecured debt rating of A- or better by S&P and A 3 or better by Moody's or (2)
a short-term unsecured debt rating or certificate of deposit rating of A-1 or
better by S&P or P-1 or better by Moody's, (B) the parent corporation of which
has either (1) a long-term unsecured debt rating of A- or better by S&P and A 3
or better by Moody's or (2) a short-term unsecured debt rating or certificate of
deposit rating of A-1 or better by S&P and P-1 or better by Moody's or (C) is
otherwise acceptable to the Deal Agent and (ii) whose deposits are insured by
the Federal Deposit Insurance Corporation.
(g) Establishment of the Cash Collateral Account. On or prior to the date
--------------------------------------------
any AIG Loans are outstanding, the Servicer shall cause to be established,
on or before the Closing Date, and maintained in the name of the Deal Agent,
with a "Qualified Institution" (as defined in subsection (f) above) the Cash
Collateral Account.
SECTION 6.5 SERVICER ADVANCES.
-----------------
For each Collection Period, if the Servicer determines that any Scheduled
Payment (or portion thereof) which was due and payable pursuant to a Loan in the
Asset Pool during such Collection Period was not received prior to the end of
such Collection Period, the Servicer may make an advance in an amount up to the
amount of such delinquent Scheduled Payment (or portion thereof); in addition,
if on any day there are not sufficient funds on deposit in the Collection
Account to pay accrued Yield on any Asset Interest the Fixed Period of which
ends on such day, the Servicer shall make an advance in the amount necessary to
pay such Yield (in either
58
<PAGE>
case, any such advance, a "Servicer Advance"). Notwithstanding the preceding
sentence, (i) the Servicer shall be required to make a Servicer Advance with
respect to any Loan if, and only if, the Servicer determines (such determination
to be conclusive and binding) in good faith that such Servicer Advance will
ultimately be recoverable from future collections on, or the liquidation of, the
Asset Pool and payments by one or more Hedge Counterparties under one or more
Hedging Agreements, (ii) the Servicer's obligation to make a Servicer Advance
for any Loan shall cease on the day such Loan becomes a Defaulted Loan or a
Charged-Off Loan and (iii) any successor Servicer, including the Backup
Servicer, will not be obligated to make any Servicer Advances. The Servicer will
deposit any Servicer Advances into the Collection Account on or prior to 11:00
a.m. (Charlotte, North Carolina time) on the related Payment Date, in
immediately available funds.
SECTION 6.6 REALIZATION UPON DEFAULTED LOANS.
--------------------------------
The Servicer will use reasonable efforts to repossess or otherwise
comparably convert the ownership of any Related Property with respect to a
Defaulted Loan and will act as sales and processing agent for Related Property
which it repossesses. The Servicer will follow such other practices and
procedures as it deems necessary or advisable and as are customary and usual in
its servicing of loans and other actions by the Servicer in order to realize
upon such Related Property, which practices and procedures may include
reasonable efforts to enforce all obligations of Obligors and repossessing and
selling such Related Property at public or private sale in circumstances other
than those described in the preceding sentence, provided, however, that so long
-------- -------
as FNBNE or the Servicer Assignee is Servicer the Servicer shall follow the
practices and procedures with respect to the servicing of loans and the
realization upon any Related Property as are set forth in the Credit and
Collection Policies. Without limiting the generality of the foregoing, the
Servicer may sell any such Related Property with respect to the Servicer or its
Affiliates for a purchase price equal to the then fair market value thereof, any
such sale to be evidenced by a certificate of a Responsible Officer of the
Servicer delivered to the Deal Agent setting forth the Loan, the Related
Property, the sale price of the Related Property and certifying that such sale
price is the fair market value of such Related Property. In any case in which
any such Related Property has suffered damage, the Servicer will not expend
funds in connection with any repair or toward the repossession of such Related
Property unless it reasonably determines that such repair and/or repossession
will increase the Recoveries by an amount greater than the amount of such
expenses. The Servicer will remit to the Collection Account the Recoveries
received in connection with the sale or disposition of Related Property with
respect to a Defaulted Loan.
SECTION 6.7 REPRESENTATIONS AND WARRANTIES OF BACKUP SERVICER AND
-----------------------------------------------------
COLLATERAL CUSTODIAN.
--------------------
Each of the Backup Servicer and the Collateral Custodian represents and
warrants to the Deal Agent, as agent for the Secured Parties, and the Secured
Parties that, as of the Closing Date and on each Purchase Date, insofar as any
of the following affects the Backup Servicer's or the
59
<PAGE>
Collateral Custodian's, as the case may be, ability to perform its obligations
pursuant to this Agreement in any material respect:
(a) Organization and Good Standing. Marine Midland is a New York banking
------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of New York with all requisite corporate power and authority to own
its properties and to conduct its business as presently conducted and to enter
into and perform its obligations pursuant to this Agreement.
(b) Power and Authority. Each of the Backup Servicer and the Collateral
-------------------
Custodian has the corporate power and authority to execute and deliver this
Agreement and to carry out its terms. Each of the Backup Servicer and the
Collateral Custodian has duly authorized the execution, delivery and performance
of this Agreement by all requisite corporate action.
(c) No Violation. The consummation of the transactions contemplated by,
------------
and the fulfillment of the terms of, this Agreement by the Backup Servicer and
the Collateral Custodian will not (i) conflict with, result in any breach of any
of the terms or provisions of, or constitute a default under, the charter or
bylaws of the Backup Servicer or the Collateral Custodian, or any term of any
material agreement, indenture, mortgage, deed of trust or other instrument to
which the Backup Servicer or the Collateral Custodian is a party or by which it
or any of its property is bound, (ii) result in the creation or imposition of
any Lien upon any of its properties pursuant to the terms of any such indenture,
agreement, mortgage, deed of trust or other instrument, or (iii) violate any
law, regulation, order, writ, judgment, injunction, decree, determination or
award of any Governmental Authority applicable to Marine Midland or any of its
properties that might (in the reasonable judgment of the Backup Servicer or the
Collateral Custodian, as the case may be) materially and adversely affect the
performance by the Backup Servicer or the Collateral Custodian of its
obligations under, or the validity or enforceability of, this Agreement.
(d) No Consent. No consent, approval, authorization, order, registration,
----------
filing, qualification, license or permit (collectively, the "Consents") of or
with any Governmental Authority having jurisdiction over the Backup Servicer or
the Collateral Custodian or any of its respective properties is required to be
obtained by or with respect to the Backup Servicer or the Collateral Custodian
in order for the Backup Servicer or the Collateral Custodian, as the case may
be, to enter into this Agreement or perform its obligations hereunder (except
with respect to performance only, such Consents as the Backup Servicer or the
Collateral Custodian, as the case may be, may need to obtain prior to the
commencement of its performance of its duties hereunder in the certain
jurisdictions outside of New York, provided that in lieu of obtaining for itself
the requisite Consents, the Backup Servicer or the Collateral Custodian, as the
case may be, may and shall be permitted to delegate the performance of its
duties to parties having the requisite Consents in such jurisdictions; provided,
--------
however, in the case of such delegation of performance the Backup Servicer or
the Collateral Custodian, as the case may be, shall not be relieved of their
responsibility under this Agreement with respect to such duties).
60
<PAGE>
(e) Binding Obligation. This Agreement constitutes a legal, valid and
------------------
binding obligation of Marine Midland, enforceable against the Backup Servicer
and the Collateral Custodian in accordance with its terms, except as such
enforceability may be limited by (i) applicable Insolvency Laws and (ii) general
principles of equity (whether considered in a suit at law or in equity).
(f) No Proceeding. There are no proceedings or investigations pending or,
-------------
to the best of its knowledge, threatened, against the Backup Servicer or the
Collateral Custodian, before any Governmental Authority (i) asserting the
invalidity of this Agreement, (ii) seeking to prevent the consummation of any of
the transactions contemplated by this Agreement or (iii) seeking any
determination or ruling that might (in the reasonable judgment of the Backup
Servicer or the Collateral Custodian, as the case may be) materially and
adversely affect the performance by the Backup Servicer or the Collateral
Custodian of its obligations under, or the validity or enforceability of, this
Agreement.
SECTION 6.8 MAINTENANCE OF INSURANCE POLICIES.
---------------------------------
The Servicer will require that each Obligor with respect to a Loan
included in the Asset Pool maintains an Insurance Policy with respect to each
Loan and the Related Property, in accordance with the Credit and Collection
Policies. In connection with its activities as Servicer, the Servicer agrees to
present, or to require the Obligor to present, on behalf of the Deal Agent as
agent for the Secured Parties, claims to the insurer under each Insurance Policy
and any such liability policy, and to settle, adjust and compromise such claims,
in each case, consistent with the terms of each related Loan.
SECTION 6.9 REPRESENTATIONS AND WARRANTIES OF SERVICER.
------------------------------------------
The Servicer represents and warrants to the Deal Agent, as agent for the
Secured Parties, each Secured Party, the Liquidity Agent and each Investor that,
as of the Closing Date and on each Purchase Date:
(a) Organization and Good Standing. The Servicer is a National Banking
------------------------------
Association duly organized and validly existing with all requisite corporate
power and authority to own its properties and to conduct its business as
presently conducted and to enter into and perform its obligations pursuant to
this Agreement.
(b) Due Qualification. The Servicer is qualified to do business, is in
-----------------
good standing, and has obtained all licenses and approvals as required under the
laws of all jurisdictions in which the ownership or lease of its property and or
the conduct of its business (other than the performance of its obligations
hereunder) requires such qualification, standing, license or approval, except to
the extent that the failure to so qualify, maintain such standing or be so
licensed or approved would not have a material adverse effect on the interests
of the Seller or of the Purchasers. The Servicer is qualified to do business, is
in good standing, and has obtained all
61
<PAGE>
licenses and approvals as required under the laws of all states in which the
performance of its obligations pursuant to this Agreement requires such
qualification, standing, license or approval and where the failure to qualify or
obtain such license or approval would have material adverse effect on its
ability to perform hereunder.
(c) Power and Authority. The Servicer has the corporate power and
-------------------
authority to execute and deliver this Agreement and to carry out its terms. The
Servicer has duly authorized the execution, delivery and performance of this
Agreement by all requisite corporate action. The execution, delivery and
performance of this Agreement does not contravene the Servicer's Certificate of
Incorporation or by-laws.
(d) No Violation. The consummation of the transactions contemplated by,
------------
and the fulfillment of the terms of, this Agreement by the Servicer (with or
without notice or lapse of time) will not (i) conflict with, result in any
breach of any of the terms or provisions of, or constitute a default under, the
[articles of incorporation] or by-laws of the Servicer, or any term of any
agreement, indenture, mortgage, deed of trust or other instrument to which the
Servicer is a party or by which it or any of its property is bound, (ii) result
in the creation or imposition of any Lien upon any of its properties pursuant to
the terms of any such indenture, agreement, mortgage, deed of trust or other
instrument, or (iii) violate any law, regulation, order, writ, judgment,
injunction, decree, determination or award of any Governmental Authority
applicable to the Servicer or any of its properties.
(e) No Consent. No consent, approval, authorization, order, registration,
----------
filing, qualification, license or permit of or with any
Governmental Authority having jurisdiction over the Servicer or any of its
properties is required to be obtained by or with respect to the Servicer in
order for the Servicer to enter into this Agreement or perform its obligations
hereunder.
(f) Binding Obligation. This Agreement constitutes a legal, valid and
------------------
binding obligation of the Servicer, enforceable against the Servicer in
accordance with its terms, except as such enforceability may be limited by (i)
applicable Insolvency Laws and (ii) general principles of equity (whether
considered in a suit at law or in equity).
(g) No Proceeding. There are no proceedings or investigations pending or
-------------
threatened against the Servicer, before any Governmental Authority (i) asserting
the invalidity of this Agreement, (ii) seeking to prevent the consummation of
any of the transactions contemplated by this Agreement or (iii) seeking any
determination or ruling that might (in the reasonable judgment of the Servicer)
materially and adversely affect the performance by the Servicer of its
obligations under, or the validity or enforceability of, this Agreement.
(h) Reports Accurate. No Servicer Certificate, information, exhibit,
----------------
financial statement, document, book, Servicer Record or report furnished or to
be furnished by the Servicer to the Deal Agent or a Secured Party in connection
with this Agreement is or will be inaccurate in any material respect as of the
date it is or shall be dated or (except as otherwise
62
<PAGE>
disclosed to the Deal Agent or such Secured Party, as the case may be, at such
time) as of the date so furnished.
(i) Investment Company Act.
----------------------
(i) The Servicer represents and warrants that the Servicer has never
been, is not now, and will not in the future be operated in such a manner
as to cause the Servicer to be an "investment company," as such term is
defined in Section 3 of the 1940 Act; and
(ii) The Servicer represents and warrants that the business and other
activities of the Servicer, including but not limited to, the consummation
and conduct of the transactions contemplated by the Transaction Documents
to which the Servicer is a party do not now and will not in the future
result in a violation by the Servicer, the Borrower, or any other person or
entity of the 1940 Act or the rules and regulations promulgated thereunder.
SECTION 6.10 COVENANTS OF SERVICER.
---------------------
The Servicer hereby covenants that:
(a) Compliance with Law. The Servicer will comply with all laws and
-------------------
regulations of any Governmental Authority applicable to the Servicer or the
Loans included in the Asset Pool and Related Property and Loan Documents or any
part thereof.
(b) Obligations with Respect to Loans; Modifications. The Servicer will
------------------------------------------------
duly fulfill and comply with all obligations on the part of the Seller to be
fulfilled or complied with under or in connection with each Loan included in the
Asset Pool and will do nothing to impair the rights of the Deal Agent as agent
for the Secured Parties or of the Secured Parties in, to and under the Assets.
The Servicer will perform its obligations under the Loans included in the Asset
Pool and will not change or modify such Loans other than as permitted in the
Credit and Collection Policies or as approved by the Deal Agent.
(c) Preservation of Security Interest. The Servicer will execute and
---------------------------------
file such financing and continuation statements and any other documents which
may be required by any law or regulation of any Governmental Authority to
preserve and protect fully the interest of the Deal Agent as agent for the
Secured Parties in, to and under the Assets.
(d) No Bankruptcy Petition. Prior to the date that is one year and one
----------------------
day after the payment in full of all amounts owing in respect of all outstanding
commercial paper issued by VFCC, the Servicer will not institute against the
Seller or VFCC, or join any other Person in instituting against the Seller or
VFCC, any bankruptcy, reorganization, arrangement, insolvency or liquidation
proceedings or other similar proceedings under the laws of the United States or
any state of the United States. This Section 6.10(d) will survive the
termination of this Agreement.
63
<PAGE>
(e) Amendments to Credit and Collection Policies. The Servicer, without
--------------------------------------------
the prior written consent of the Deal Agent, will not agree or consent
to or otherwise permit to occur any amendment, modification, change, supplement,
or recission of the Credit and Collection Policies in whole or in part or in any
manner that could have a material adverse effect upon the Loans or the interests
of the Deal Agent or the Secured Parties.
(f) Year 2000 Compatibility. The Servicer shall take all action necessary
-----------------------
to assure that, prior to January 1, 2000, the Servicer's computer
system is able to operate and effectively process data including dates on and
after January 1, 2000. At the request of the Deal Agent, the Servicer shall
provide assurance acceptable to the Deal Agent of the Servicer's Year 2000
compatibility.
(g) Backup Servicer and Collateral Custodian Fee Letter. The Servicer
---------------------------------------------------
will not amend, modify, waive or terminate any terms or provisions of the Backup
Servicer and Collateral Custodian Fee Letter without the prior written consent
of the Deal Agent.
SECTION 6.11 COVENANTS OF BACKUP SERVICER AND COLLATERAL CUSTODIAN.
-----------------------------------------------------
Each of the Backup Servicer and the Collateral Custodian hereby covenants
that:
(a) Loan Files. The Collateral Custodian will not dispose of any
----------
documents constituting the Loan Files in any manner which is inconsistent with
the performance of its obligations as the Collateral Custodian pursuant to this
Agreement and will not dispose of any Loan Files except as contemplated by this
Agreement.
(b) Compliance with Law. Each of the Backup Servicer and the Collateral
-------------------
Custodian will comply with all laws and regulations of any Governmental
Authority applicable to the Backup Servicer and the Collateral Custodian.
(c) No Bankruptcy Petition. Prior to the date that is one year and one
----------------------
day after the payment in full of all amounts owing in respect of all outstanding
commercial paper issued by VFCC, neither the Backup Servicer nor the Collateral
Custodian will institute against the Seller or VFCC, or join any other Person in
instituting against the Seller or VFCC, any bankruptcy, reorganization,
arrangement, insolvency or liquidation proceedings or other similar proceedings
under the laws of the United States or any state of the United States. This
Section 6.11(c) will survive the termination of this Agreement.
(d) Location of Loan Files. The Loan Files shall remain at all times in
----------------------
the possession of the Collateral Custodian at the address set forth herein
unless notice of a different address is given in accordance with the terms
hereof.
(e) No Changes in Backup Servicer and Collateral Custodian Fee. The
----------------------------------------------------------
Backup Servicer and Collateral Custodian will not make any changes to the fees
set forth in the Backup
64
<PAGE>
Servicer and Collateral Custodian Fee Letter without the prior written approval
of the Deal Agent.
(f) Year 2000 Compatibility. The Backup Servicer and Collateral Custodian
-----------------------
shall take all action necessary to assure that, prior to January 1, 2000, the
Backup Servicer and Collateral Custodian's computer system is able to operate
and effectively process data including dates on and after January 1, 2000. At
the request of the Deal Agent, the Backup Servicer and Collateral Custodian
shall provide assurance acceptable to the Deal Agent of the Backup Servicer and
Collateral Custodian's Year 2000 Compatibility.
SECTION 6.12 SERVICING COMPENSATION.
----------------------
As compensation for its servicing activities hereunder and reimbursement
for its expenses, the Servicer shall be entitled to receive a servicing fee (the
"Servicing Fee") in respect of each Collection Period (or portion thereof) equal
to one-twelfth of the product of (A) the Servicing Fee Rate and (B) the
Aggregate Outstanding Loan Balance as on the most recent Determination Date,
such Servicing Fee to be payable monthly in arrears on each Payment Date to the
extent of funds available therefor pursuant to the provisions of Section 2.7.
SECTION 6.13 CUSTODIAL COMPENSATION.
----------------------
As compensation for its custodial activities hereunder and reimbursement
for its expenses, the Collateral Custodian shall be entitled to receive a
custodial fee (the "Custodial Fee") as provided in the Backup Servicer and
Collateral Custodian Fee Letter.
SECTION 6.14 PAYMENT OF CERTAIN EXPENSES BY SERVICER.
---------------------------------------
The Servicer will be required to pay all expenses incurred by it in
connection with its activities under this Agreement, including fees and
disbursements of legal counsel and independent accountants, Taxes imposed on the
Servicer, expenses incurred in connection with payments and reports pursuant to
this Agreement, and all other fees and expenses not expressly stated under this
Agreement for the account of the Seller, but excluding Liquidation Expenses. The
Servicer will be required to pay all reasonable fees and expenses owing to any
bank or trust company in connection with the maintenance of the FNBNE Existing
Account, the Collection Account and the Lock-Box Account. The Servicer shall be
required to pay such expenses for its own account and shall not be entitled to
any payment therefor other than the Servicing Fee.
SECTION 6.15 REPORTS.
-------
(a) Monthly Report. With respect to each Determination Date and the
--------------
related Collection Period, the Servicer will provide to the Seller and the Deal
Agent and the Backup Servicer, on the related Reporting Date, a monthly
statement (a "Monthly Report"), signed by a Responsible Officer of the Servicer
and substantially in the form of Exhibit E.
---------
65
<PAGE>
(b) Servicer's Certificate. Together with each Monthly Report, the
----------------------
Servicer shall submit to the Seller, the Deal Agent and the Backup Servicer a
certificate (a "Servicer's Certificate"), signed by a Responsible Officer of the
Servicer and substantially in the form of Exhibit F.
---------
(c) Financial Statements. The Servicer will submit to the Deal Agent,
--------------------
within 45 days of the end of each of the Servicer's fiscal quarters, commencing
March 31, 1999 unaudited consolidated financial statements of the Servicer (or,
so long as FNBNE or the Servicer Assignee is the Servicer, First International
Bancorp, Inc.) (including an analysis of delinquencies and losses for each
fiscal quarter) as of the end of each such fiscal quarter. The Servicer shall
submit to the Deal Agent, within 90 days of the end of the Servicer's fiscal
year, commencing December 31, 1999, annual consolidated audited financial
statements of the Servicer (or, so long as the Originator is the Servicer, First
International Bancorp, Inc.) as of the end of such fiscal year.
SECTION 6.16 ANNUAL STATEMENT AS TO COMPLIANCE.
---------------------------------
The Servicer will provide to the Deal Agent, on or prior to March 31 of
each year, commencing March 31, 1999, an annual report signed by a Responsible
Officer of the Servicer certifying that (a) a review of the activities of the
Servicer, and the Servicer's performance pursuant to this Agreement, for the
period ending on the last day of the preceding fiscal year has been made under
such Person's supervision and (b) the Servicer has performed or has caused to be
performed in all material respects all of its obligations under this Agreement
throughout such year and no Servicer Termination Event has occurred and is
continuing (or if a Servicer Termination Event has so occurred and is
continuing, specifying each such event, the nature and status thereof and the
steps necessary to remedy such event, and, if a Servicer Termination Event
occurred during such year and no notice thereof has been given to the Deal
Agent, specifying such Servicer Termination Event and the steps taken to remedy
such event).
SECTION 6.17 ANNUAL INDEPENDENT PUBLIC ACCOUNTANT'S SERVICING REPORTS.
--------------------------------------------------------
The Servicer will cause a firm of nationally recognized independent public
accountants (who may also render other services to the Servicer) to furnish to
the Deal Agent, on or prior to March 31 of each year, commencing March 31, 1999,
(i) a report relating to the previous fiscal year to the effect that (A) such
firm has reviewed certain documents and records relating to the servicing of the
Loans included in the Asset Pool, and (B) based on such examination, such firm
is of the opinion that the Monthly Reports for such year were prepared in
compliance with this Agreement, except for such exceptions as it believes to be
immaterial and such other exceptions as will be set forth in such firm's report
and (ii) a report covering the preceding fiscal year to the effect that such
accountants have applied certain agreed-upon procedures to certain documents and
records relating to the servicing of Loans under this Agreement, compared the
information contained in the Servicer's Certificates delivered during the period
covered by such report with such documents and records and that no matters came
to the attention of such accountants that caused them to believe that such
servicing was not conducted in compliance with this Article VI
66
<PAGE>
of this Agreement, except for such exceptions as such accountants shall believe
to be immaterial and such other exceptions as shall be set forth in such
statement.
SECTION 6.18 ADJUSTMENTS.
-----------
If (i) the Servicer makes a deposit into the Collection Account in respect
of a Collection of a Loan included in the Asset Pool and such Collection was
received by the Servicer in the form of a check which is not honored for any
reason or (ii) the Servicer makes a mistake with respect to the amount of any
Collection and deposits an amount that is less than or more than the actual
amount of such Collection, the Servicer shall appropriately adjust the amount
subsequently deposited into the Collection Account to reflect such dishonored
check or mistake. Any Scheduled Payment in respect of which a dishonored check
is received shall be deemed not to have been paid.
SECTION 6.19 MERGER OR CONSOLIDATION OF THE SERVICER.
---------------------------------------
The Servicer shall not consolidate with or merge into any other Person or
convey or transfer its properties and assets substantially as an entirety to any
Person, unless the Servicer is the surviving entity and unless:
(i) the Servicer has delivered to the Deal Agent and the Backup
Servicer an Officer's Certificate and an Opinion of Counsel each stating
that any consolidation, merger, conveyance or transfer and such
supplemental agreement comply with this Section 6.19 and that all
conditions precedent herein provided for relating to such transaction have
been complied with and, in the case of the Opinion of Counsel, that such
supplemental agreement is legal, valid and binding with respect to the
Servicer and such other matters as the Deal Agent may reasonably request;
(ii) the Servicer shall have delivered notice of such consolidation,
merger, conveyance or transfer to the Deal Agent; and
(iii) after giving effect thereto, no Early Amortization Event or
event which with notice or lapse of time would constitute an Early
Amortization Event shall have occurred.
Notwithstanding anything to the contrary contained herein, so long as the
Servicer and the Originator are the same Person, the Servicer is permitted as
part of a Conversion to assign its rights hereunder to, and the Servicer's
obligations hereunder can be assumed by, another wholly-owned subsidiary of
First International Bancorp, Inc. (the "Servicer Assignee") (in which case all
of the provisions of this Agreement shall, to the same extent as they apply to
the Servicer hereunder, apply to the Servicer Assignee rather than to the
Servicer) on the condition that (a) the Servicer Assignee acquires substantially
all of the Servicer's assets relating to its commercial lending business, (b)
the Servicer Assignee assumes substantially all of the Servicer's liabilities
relating to its commercial lending business, but expressly excluding the
Servicer's deposits, (c)
67
<PAGE>
Deal Agent receives such documents evidencing (a) and (b) above as Deal Agent
shall reasonably request, and (d) the Servicer Assignee executes and deliver to
Deal Agent such amendments to this Agreement and such opinions of counsel as
Deal Agent may deem necessary including, but not limited to opinions to evidence
that the Servicer Assignee has assumed all of the Servicer's rights and
obligations, and is bound by all of the Servicer's agreements, set forth herein.
Upon such conversion, the Commitment Termination Date may be accelerated
pursuant to the provisions of Section 2.1(c).
SECTION 6.20 LIMITATION ON LIABILITY OF THE SERVICER AND OTHERS.
--------------------------------------------------
Except as provided herein, neither the Servicer nor any of the directors or
officers or employees or agents of the Servicer shall be under any liability to
the Deal Agent, the Secured Parties or any other Person for any action taken or
for refraining from the taking of any action pursuant to this Agreement whether
arising from express or implied duties under this Agreement; provided, however,
-------- -------
that this provision shall not protect the Servicer or any such Person against
any liability which would otherwise be imposed by reason of its willful
misfeasance, bad faith or gross negligence in the performance of duties or by
reason of its willful misconduct hereunder.
SECTION 6.21 INDEMNIFICATION OF THE SELLER, THE DEAL AGENT, THE LIQUIDITY
------------------------------------------------------------
AGENT AND THE SECURED PARTIES.
-----------------------------
The Servicer shall indemnify and hold harmless the Seller, the Deal Agent,
the Liquidity Agent and each Secured Party and their respective officers,
directors, employees and agents (collectively, the "Indemnified Persons") from
and against any loss, liability, expense, damage or injury suffered or sustained
by any Indemnified Person by reason of any acts, omissions or alleged acts or
omissions of the Servicer, including, but not limited to any judgment, award,
settlement, reasonable attorneys' fees and other costs or expenses incurred in
connection with the defense of any actual or threatened action, proceeding or
claim, but excluding allocations of overhead expenses of any such Indemnified
Party or other non-monetary damages of any such Indemnified Party.
Notwithstanding the foregoing, the Servicer shall not indemnify an Indemnified
Person if such loss, liability, expense, damage or injury results or arises (i)
as a result of fraud, gross negligence or willful misconduct by any Indemnified
Person; and (ii) under any federal, state or local income or franchise taxes or
any other Tax imposed on or measured by income (or any interest or penalties
with respect thereto or arising from a failure to comply therewith) required to
be paid by the Seller, the Deal Agent, the Liquidity Agent or the Secured
Parties in connection herewith to any taxing authority. The provisions of this
indemnity shall run directly to and be enforceable by an injured party subject
to the limitations hereof. If the Servicer has made any indemnity payment
pursuant to this Section 6.21 and such payment fully indemnified the recipient
thereof and the recipient thereafter collects any payments from others in
respect of such Indemnified Amounts, the recipient shall repay to the Servicer
an amount equal to the amount it has collected from others in respect of such
indemnified amounts.
If for any reason the indemnification provided above in this Section 6.21
is unavailable to the Indemnified Person or is insufficient to hold an
Indemnified Person harmless, then Servicer
68
<PAGE>
shall contribute to the amount paid or payable by such Indemnified Person as a
result of such loss, claim, damage or liability in such proportion as is
appropriate to reflect not only the relative benefits received by such
Indemnified Person on the one hand and Servicer on the other hand but also the
relative fault of such Indemnified Person as well as any other relevant
equitable considerations.
The parties hereto agree that the provisions of this Section 6.21 shall not
be interpreted to provide recourse to the Seller against loss by reason of the
bankruptcy or insolvency (or other credit condition) of, or default by, related
Obligor on, any Loan.
Any indemnification pursuant to this Section shall not be payable from the
Assets.
Any indemnification pursuant to this Section shall not be in duplication of
any other indemnification for the same loss under Section 8.1.
The obligations of the Servicer under this Section 6.21 shall survive the
resignation or removal of the Deal Agent and the Liquidity Agent, and the
termination of this Agreement.
SECTION 6.22 THE SERVICER AND BACKUP SERVICER NOT TO RESIGN.
----------------------------------------------
Neither the Servicer nor the Backup Servicer shall resign from the
obligations and duties hereby imposed on it except upon such Person's
determination that (i) the performance of its duties hereunder is or becomes
impermissible under applicable law and (ii) there is no reasonable action which
such Person could take to make the performance of its duties hereunder
permissible under applicable law. Any such determination permitting the
resignation of the Servicer or Backup Servicer shall be evidenced as to clause
(i) above by an Opinion of Counsel to such effect delivered to the Deal Agent.
No such resignation shall become effective until a Successor Servicer shall have
assumed the responsibilities and obligations of the Servicer in accordance with
Section 6.27, or a successor Backup Servicer shall have assumed the
responsibilities and obligations of the Backup Servicer, respectively.
SECTION 6.23 ACCESS TO CERTAIN DOCUMENTATION AND INFORMATION REGARDING
---------------------------------------------------------
THE LOANS.
---------
The Servicer shall provide to the Deal Agent access to the Loan Documents
and all other documentation regarding the Loans included in the Asset Pool and
the Related Property in such cases where the Deal Agent is required in
connection with the enforcement of the rights or interests of the Secured
Parties, or by applicable statutes or regulations, to review such documentation,
such access being afforded without charge but only (i) upon two Business Days'
prior written request, (ii) during normal business hours and (iii) subject to
the Servicer's normal security and confidentiality procedures. Prior to the
Closing Date and periodically thereafter at the discretion of the Deal Agent,
the Deal Agent may review the Servicer's collection and administration of the
Loans in order to assess compliance by the Servicer with the Servicer's written
policies and procedures, as well as with this Agreement and may conduct an audit
of the
69
<PAGE>
Loans, Loan Documents and Records in conjunction with such a review. Such review
shall be reasonable in scope and shall be completed in a reasonable period of
time. The Seller shall bear the cost of up to four of such audits per calendar
year in an amount not to exceed $5,000 per audit.
SECTION 6.24 BACKUP SERVICER.
---------------
(a) On or before the date on which the initial Purchase occurs, until the
receipt by the Servicer of a Termination Notice, the Backup Servicer shall
perform, on behalf of the Deal Agent and the Secured Parties, the following
duties and obligations:
(i) On or before the Closing Date, the Backup Servicer shall
accept from the Servicer delivery of the information required to be set
forth in the Monthly Reports in hard copy and on computer tape; provided,
--------
however, the computer tape is in an MS-DOS, PC readable ASCII format or
-------
format to be agreed upon by the Backup Servicer and the Servicer on or
prior to closing.
(ii) Not later than 12:00 noon New York time two Business Days prior
to each Reporting Date, the Backup Servicer shall accept delivery of tape
from the Servicer, which shall include but not be limited to the following
information: the name, number and name of the related Obligor for each
Loan, the collection status, the contract status, the principal balance and
the Aggregate Outstanding Loan Balance (the "Tape").
The Servicer shall provide the Tape on each Reporting Date as described
above.
(b) On or before the date on which the initial Purchase occurs, and until
the receipt by the Servicer of a Termination Notice, the Backup Servicer shall
perform, on behalf of the Secured Parties and the Deal Agent, the following
duties and obligations:
(i) Prior to the related Payment Date, the Backup Servicer shall
review the Monthly Report to ensure that it is complete on its face and
that the following items in such Monthly Report have been accurately
calculated, if applicable, and reported: (A) the Aggregate Outstanding Loan
Balance, (B) the Backup Servicing Fee, (C) the Loans that are 30-60 days
past due, (D) the Loans that are 61-90 days past due, (E) the Loans that
are 90+ days past due, (F) the Loans that are Defaulted Loans, (G) the
Average Default Rate, and (H) the Average Net Loss Ratio. The Backup
Servicer shall notify the Deal Agent and the Servicer of any disagreements
with the Monthly Report based on such review not later than the Business
Day preceding such Payment Date to such Persons.
(ii) If the Servicer disagrees with the report provided under
paragraph (i) above by the Backup Servicer or if the Servicer or any
subservicer has not reconciled such discrepancy, the Backup Servicer agrees
to confer with the Servicer to resolve such disagreement on or prior to the
next succeeding Determination Date and shall settle such discrepancy with
the Servicer if possible, and notify the Deal Agent of the resolution
70
<PAGE>
thereof. The Servicer hereby agrees to cooperate at its own expense, with
the Backup Servicer in reconciling any discrepancies herein. If within 20
days after the delivery of the report provided under paragraph (i) above by
the Backup Servicer, such discrepancy is not resolved, the Backup Servicer
shall promptly notify the Deal Agent of the continued existence of such
discrepancy. Following receipt of such notice by the Deal Agent, the
Servicer shall deliver to the Deal Agent, the Secured Parties, and the
Backup Servicer no later than the related Payment Date a certificate
describing the nature and amount of such discrepancies and the actions the
Servicer proposes to take with respect thereto.
With respect to the foregoing, the Backup Servicer, in the performance of
its duties and obligations hereunder, is entitled to rely conclusively, and
shall be fully protected in so relying, on the contents of each Tape, including,
but not limited to, the completeness and accuracy thereof, provided by the
Servicer.
(c) After the receipt of an effective Termination Notice by the Servicer
in accordance with this Agreement, all authority, power, rights and
responsibilities of the Servicer, under this Agreement, whether with respect to
the Loans or otherwise shall pass to and be vested in the Backup Servicer,
subject to and in accordance with the provisions of Section 6.27, as long as the
Backup Servicer is not prohibited by an applicable provision of law from
fulfilling the same, as evidenced by an Opinion of Counsel.
(d) Any Person (i) into which the Backup Servicer may be merged or
consolidated, (ii) which may result from any merger or consolidation to which
the Backup Servicer shall be a party, or (iii) which may succeed to the
properties and assets of the Backup Servicer substantially as a whole, which
Person in any of the foregoing cases executes an agreement of assumption to
perform every obligation of the Backup Servicer hereunder, shall be the
successor to the Backup Servicer under this Agreement without further act on the
part of any of the parties to this Agreement.
(e) As compensation for its back-up servicing obligations hereunder, the
Backup Servicer shall be entitled to receive the Backup Servicing Fee in respect
of each Monthly Period (or portion thereof) until the first to occur of the date
on which the Backup Servicer becomes a Successor Servicer, resigns or is removed
as Backup Servicer or termination of this Agreement.
(f) The Backup Servicer may be removed without cause by the Deal Agent by
notice then given in writing to the Servicer, the Seller and the Backup
Servicer. In the event of any such removal, the Backup Servicer may be replaced
by (i) the Servicer, acting with the consent of the Deal Agent or (ii) if no
such replacement is appointed within 30 days following such removal or
resignation, by the Deal Agent.
(g) The Backup Servicer undertakes to perform only such duties and
obligations as are specifically set forth in this Agreement, it being expressly
understood by all parties hereto that there are no implied duties or obligations
of the Backup Servicer hereunder. Without limiting the generality of the
foregoing, the Backup Servicer, except as expressly set forth herein,
71
<PAGE>
shall have no obligation to supervise, verify, monitor or administer the
performance of the Servicer. The Backup Servicer may act through its agents,
attorneys and custodians in performing any of its duties and obligations under
this Agreement, it being understood by the parties hereto that the Backup
Servicer will be responsible for any misconduct or negligence on the part of
such agents, attorneys or custodians acting on the routine and ordinary day-to-
day operations for and on behalf of the Backup Servicer. Neither the Backup
Servicer nor any of its officers, directors, employees or agents shall be
liable, directly or indirectly, for any damages or expenses arising out of the
services performed under this Agreement other than damages or expenses which
result from the gross negligence or willful misconduct of it or them or the
failure to perform materially in accordance with this Agreement.
(h) The Backup Servicer shall not be liable for any obligation of the
Servicer contained in this Agreement or for any errors of the Servicer contained
in any computer tape, certificate or other data or document delivered to the
Backup Servicer hereunder or on which the Backup Servicer must rely in order to
perform its obligations hereunder, and the Seller, Secured Parties, Deal Agent,
Liquidity Agent, Collateral Custodian and Backup Servicer, shall look only to
the Servicer to perform such obligations. The Backup Servicer and the Collateral
Custodian shall have no responsibility and shall not be in default hereunder or
incur any liability for any failure, error, malfunction or any delay in carrying
out any of their respective duties under this Agreement if such failure or delay
results from the Backup Servicer acting in accordance with information prepared
or supplied by a Person other than the Backup Servicer or the failure of any
such other Person to prepare or provide such information.
SECTION 6.25 IDENTIFICATION OF RECORDS.
-------------------------
The Servicer shall clearly and unambiguously identify each Loan that is in
the Asset Pool and the Related Property in its computer or other records to
reflect that the Asset Interests in such Loans and Related Property have been
transferred to and are owned by the Purchasers and that the Deal Agent has the
interest therein granted by the Seller pursuant to this Agreement.
SECTION 6.26 SERVICER TERMINATION EVENTS.
---------------------------
(a) If any one of the following events (a "Servicer Termination Event")
shall occur and be continuing on any day:
(i) any failure by the Servicer to make any payment, transfer or
deposit on or before the date occurring two (2) Business Days after the
date such payment, transfer or deposit is required to be made, or any
failure by the Servicer to give instructions or notice to the Deal Agent as
required by this Agreement or to deliver any Required Reports hereunder and
such failure continues unremedied more than two (2) Business Days after
notice thereof to the Servicer.
(ii) any failure on the part of the Servicer duly to observe or
perform in any material respect any other covenants or agreements of the
Servicer set forth in this
72
<PAGE>
Agreement or any other Transaction Document which continues unremedied for
a period of 30 days after the first to occur of (i) the date on which
written notice of such failure requiring the same to be remedied shall have
been given to the Servicer by the Deal Agent and (ii) the date on which the
Servicer becomes aware thereof;
(iii) any representation, warranty or certification made
by the Servicer in this Agreement or in any certificate delivered pursuant
to this Agreement shall prove to have been incorrect when made, and which
continues to be unremedied for a period of 30 days after the first to occur
of (i) the date on which written notice of such incorrectness requiring the
same to be remedied shall have been given to the Servicer by the Deal Agent
and (ii) the date on which the Servicer becomes aware thereof;
(iv) the Servicer shall fail in any material respect to service the
Loans in accordance with the Credit and Collection Policies;
(v) an Insolvency Event shall occur with respect to the Servicer; or
(vi) (x) the Servicer ceases to be a wholly-owned subsidiary of First
International Bancorp., Inc., or (y) the Servicer's principal place of
business and chief executive office ceases to be located in the United
States, without the prior written consent of the Deal Agent, VFCC and the
Required Investors.
Notwithstanding anything herein to the contrary, so long as any such Servicer
Termination Events shall not have been remedied at the expiration of any
applicable cure period, the Deal Agent, by written notice to the Servicer (a
"Termination Notice"), may, subject to the provisions of Section 6.27, terminate
all of the rights and obligations of the Servicer as Servicer under this
Agreement. The Seller shall pay all reasonable set-up and conversion costs
associated with the transfer of servicing rights to the Successor Servicer.
SECTION 6.27 APPOINTMENT OF SUCCESSOR SERVICER.
---------------------------------
(a) On and after the receipt by the Servicer of a Termination Notice
pursuant to Section 6.26, the Servicer shall continue to perform all servicing
functions under this Agreement until the date specified in the Termination
Notice or otherwise specified by the Deal Agent in writing or, if no such date
is specified in such Termination Notice or otherwise specified by the Deal
Agent, until a date mutually agreed upon by the Servicer and the Deal Agent.
The Deal Agent may at the time described in the immediately preceding sentence
in its sole discretion, appoint the Backup Servicer as the Servicer hereunder,
and the Backup Servicer shall on such date assume all obligations of the
Servicer hereunder, and all authority and power of the Servicer under this
Agreement shall pass to and be vested in the Backup Servicer (the Backup
Servicer or such other successor, the "Successor Servicer"); provided, however,
-------- -------
that the Successor Servicer shall not be responsible or liable for any past
actions or omissions of the outgoing Servicer. In the event that a Successor
Servicer has not been appointed and has not accepted its appointment at the time
when the Servicer ceases to act as Servicer, the Deal Agent shall petition a
court of
73
<PAGE>
competent Jurisdiction to appoint any established financial institution having a
net worth of not less than U.S. $25,000,000 and whose regular business includes
the servicing of Loans as the Successor Servicer hereunder.
(b) Upon its appointment, the Backup Servicer (subject to 6.27(a)) or
the Successor Servicer, as applicable, shall be the successor in all respects to
the Servicer with respect to servicing functions under this Agreement and shall
be subject to all the responsibilities, duties and liabilities relating thereto
placed on the Servicer by the terms and provisions hereof, and all references in
this Agreement to the Servicer shall be deemed to refer to the Backup Servicer
or the Successor Servicer, as applicable.
(c) All authority and power granted to the Servicer under this Agreement
shall automatically cease and terminate upon termination of this Agreement and
shall pass to and be vested in the Seller and, without limitation, the Seller is
hereby authorized and empowered to execute and deliver, on behalf of the
Servicer, as attorney-in-fact or otherwise, all documents and other instruments,
and to do and accomplish all other acts or things necessary or appropriate to
effect the purposes of such transfer of servicing rights. The Servicer agrees to
cooperate with the Seller in effecting the termination of the responsibilities
and rights of the Servicer to conduct servicing with respect to the Loans
included in the Asset Pool.
(d) Upon the Backup Servicer receiving notice that it is required to serve
as Servicer hereunder pursuant to the foregoing provisions of this Section 6.27,
the Backup Servicer will promptly begin the transition to its role as Servicer.
SECTION 6.28 NOTIFICATION.
------------
Upon the Servicer becoming aware of the occurrence of any Servicer
Termination Event, the Servicer shall promptly give written notice thereof to
the Deal Agent.
SECTION 6.29 PROTECTION OF RIGHT, TITLE AND INTEREST IN ASSETS.
-------------------------------------------------
The Servicer shall cause this Agreement, all amendments hereto and/or all
financing statements and continuation statements and any other necessary
documents covering the right, title and interest of the Deal Agent as agent for
the Secured Parties and of the Secured Parties to the Assets to be promptly
recorded, registered and filed, and at all times to be kept recorded, registered
and filed, all in such manner and in such places as may be required by law fully
to preserve and protect the right, title and interest of the Deal Agent as agent
for the Secured Parties hereunder to all property comprising the Asset Pool. The
Servicer shall deliver to the Deal Agent file-stamped copies of, or filing
receipts for, any document recorded, registered or filed as provided above, as
soon as available following such recording, registration or filing. The Seller
shall cooperate fully with the Servicer in connection with the obligations set
forth above and will execute any and all documents reasonably required to
fulfill the intent of this Section.
74
<PAGE>
SECTION 6.30 RELEASE OF LOAN FILES.
---------------------
The Seller may, with the prior written consent of the Deal Agent (such
consent not to be unreasonably withheld), require that the Collateral Custodian
release each Loan File (a) delivered to the Collateral Custodian in error, (b)
for which a Substitute Loan has been substituted in accordance with Section 2.9,
(c) as to which the lien on the Related Property has been so released pursuant
to Section 5.3, (d) which has been retransferred to the Seller pursuant to
Section 5.5 or 5.6, or (e) which is required to be redelivered to the Seller in
connection with the termination of this Agreement, in each case by submitting to
the Collateral Custodian and the Deal Agent a written request (signed by both
the Seller and the Deal Agent) specifying the Loans to be so released and
reciting that the conditions to such release have been met (and specifying the
section or sections of this Agreement being relied upon for such release). The
Collateral Custodian shall upon its receipt of each such request for release
executed by the Seller and the Deal Agent promptly, but in any event within 5
Business Days, release the Loan Files so requested to the Seller.
ARTICLE VII
EARLY AMORTIZATION EVENTS
SECTION 7.1 EARLY AMORTIZATION EVENTS.
-------------------------
If any of the following events (each, an "Early Amortization Event") shall
occur and be continuing:
(a) the Seller or the Servicer shall default in the payment of any amount
required to be made under the terms of this Facility and such failure continues
unremedied for a period of three (3) Business Days after written notice thereof
shall have been given by the Deal Agent or the Collateral Custodian to the
Seller or Servicer; or
(b) the amount of outstanding Capital shall exceed the Capital Limit for
more than three (3) Business Days; or
(c) termination of the then existing AIG Policy without simultaneous
renewal or replacement thereof, unless at such time no AIG Loans are
Outstanding; or
(d) (i) the Seller or the Originator shall fail to perform or observe in
any material respect any other covenant or other agreement of the Seller or the
Originator set forth in this Facility, or (ii) the Originator shall fail to
perform or observe in any material respect any term, covenant or agreement of
such Originator set forth in the Purchase Agreement, in each case when such
failure continues unremedied for more than thirty (30) days after the earlier of
(x) the date written notice thereof shall have been given by the Deal Agent or
the Collateral Custodian to such Person or (y) the date of actual knowledge
thereof by the Seller; or
75
<PAGE>
(e) any representation or warranty made or deemed made hereunder shall
prove to be incorrect in any material respect as of the time when the same shall
have been made, and such incorrect representation or warranty shall not have
been eliminated or otherwise cured within a period of thirty (30) days after
written notice thereof shall have been given by the Deal Agent or the Collateral
Custodian to the Seller; or
(f) an Insolvency Event shall occur with respect to the Seller or
the Originator; or
(g) a Servicer Termination Event occurs; or
(h) any Change in Control of the Seller or Originator occurs; or
(i) the Seller or the Originator defaults in making any payment required
to be made under any material agreement for borrowed money to which either is a
party and such default gives the relevant lender a right to accelerate the
Seller's or Originator's obligations thereunder and is not cured within the
relevant cure period; or
(j) the Deal Agent, as agent for the Secured Parties, shall fail for any
reason to have a valid and perfected first priority security interest in any of
the Assets; or
(k) (i) a final judgment for the payment of money in excess of $5,000,000
shall have been rendered against the Originator or $1,000,000 against the Seller
by a court of competent jurisdiction and, if such judgment relates to the
Originator, the Originator shall not have either: (1) discharged or provided for
the discharge of such judgment in accordance with its terms, or (2) perfected a
timely appeal of such judgment and caused the execution thereof to be stayed (by
supersedes or otherwise during the pendency of such appeal or (ii) the Seller,
shall have made payments of amounts in excess of $100,000 in settlement of any
litigation; or
(l) the Seller or Originator agrees or consents to, or otherwise permits
to occur, any amendment, modification, change, supplement or recission of or to
the Credit and Collection Policies in whole or in part that could have a
material adverse effect upon the Loans or interest of any Purchaser, without the
prior consent of the Deal Agent or the Purchaser; or
(m) any failure to comply with Section 5.4 and such failure continues for
a period of fifteen (15) days; or
(n) on any Determination Date, the Net Portfolio Yield does not equal or
exceed the Minimum Net Portfolio Yield and such failure continues for a period
of fifteen (15) consecutive days; or
(o) As of any Determination Date, the Average Default Ratio is greater
than four percent (4.0%); or
76
<PAGE>
(p) As of any Determination Date, the Average Net Loss Ratio is greater
than one and one-half percent (1.5%); or
(q) [Reserved]
(r) the Originator ceases to be a wholly-owned subsidiary of First
International Bancorp., Inc.; or
(s) the Seller ceases to be a "bankruptcy-remote entity" under customary
criteria; or
(t) the Seller shall become an "investment company" within the meaning of
the 1940 Act; or
(u) the noncompliance at any time of the composition of the Asset Pool
with the concentration and mix requirements set forth on Schedule II hereof and
such noncompliance is not cured within five (5) Business Days; or
(v) the business and other activities of the Seller or the Servicer (if
the Originator is the Servicer), including but not limited to, the Purchases
made by the Purchasers, the application and use of the proceeds thereof by the
Seller and the consummation and conduct of the transactions contemplated by the
Transaction Documents to which the Seller or Servicer is a party do not now and
will not in the future result in a violation by the Servicer, the Seller, or any
other person or entity of the 1940 Act or the rules and regulations promulgated
thereunder,
then, and in any such event, the Deal Agent shall, at the request, or may with
the consent, of the Required Investors, by notice to the Seller declare the
Termination Date to have occurred, without demand, protest or future notice of
any kind, all of which are hereby expressly waived by the Seller, and all
Aggregate Unpaids and all other amounts owing by the Seller under this Facility
shall be accelerated and become immediately due and payable, provided, that in
--------
the event that the Termination Event described in subsection (f) herein has
occurred, the Termination Date shall automatically occur, without demand,
protest or any notice of any kind, all of which are hereby expressly waived by
the Seller.
ARTICLE VIII
INDEMNIFICATION
SECTION 8.1 INDEMNITIES BY THE SELLER.
-------------------------
Without limiting any other rights which the Deal Agent, the Liquidity
Agent, any Secured Party or its assignee, or any of their respective Affiliates
may have hereunder or under applicable law, the Seller hereby agrees to
indemnify the Deal Agent, the Liquidity Agent, any Secured Party or its assignee
and each of their respective Affiliates and officers, directors, employees and
agents thereof (collectively, the "Indemnified Parties") from and against any
and all damages,
77
<PAGE>
losses, claims, liabilities and related costs and expenses, including reasonable
attorneys' fees and disbursements (all of the foregoing being collectively
referred to as "Indemnified Amounts") awarded against or incurred by, any such
Indemnified Party or other non-monetary damages of any such Indemnified Party
any of them arising out of or as a result of this Agreement, excluding, however,
Indemnified Amounts to the extent resulting from gross negligence or willful
misconduct on the part of any Indemnified Party. Without limiting the foregoing,
the Seller shall indemnify the Indemnified Parties for Indemnified Amounts
relating to or resulting from:
(i) any Loan treated as or represented by the Seller to be an
Eligible Loan which is not at the applicable time an Eligible Loan;
(ii) reliance on any representation or warranty made or deemed made
by the Seller, the Servicer (or one of its Affiliates) or any of their
respective officers under or in connection with this Agreement, which shall
have been false or incorrect in any material respect when made or deemed
made or delivered;
(iii) the failure by the Seller or the Servicer (or one of its
Affiliates) to comply with any term, provision or covenant contained in
this Agreement or any agreement executed in connection with this Agreement,
or with any applicable law, rule or regulation with respect to any Loan
comprising a portion of the Assets Pool, the Related Property, or the
nonconformity of any Loan, the Related Property with any such applicable
law, rule or regulation or any failure by the Originator, the Seller or any
Affiliate thereof to perform its respective duties under the Loans included
as a part of the Assets;
(iv) the failure to vest and maintain vested in the relevant
Purchaser or to transfer to such Purchaser, an undivided ownership interest
in the Assets, together with all Collections, free and clear of any Adverse
Claim whether existing at the time of any Purchase or at any time
thereafter;
(v) the failure to file, or any delay in filing, financing
statements or other similar instruments or documents under the UCC of any
applicable jurisdiction or other applicable laws with respect to any Asset
whether at the time of any Purchase or at any subsequent time and as
required by the Transaction Documents;
(vi) any dispute, claim, offset or defense (other than the discharge
in bankruptcy of the Obligor) of the Obligor to the payment of any Loan
included in the Asset Pool which is, or is purported to be, an Eligible
Loan (including, without limitation, a defense based on the Loan not being
a legal, valid and binding obligation of such Obligor enforceable against
it in accordance with its terms);
(vii) any failure of the Seller or the Servicer (if the Originator or
one of its Affiliates) to perform its duties or obligations in accordance
with the provisions of this
78
<PAGE>
Agreement or any failure by the Originator, the Seller or any Affiliate
thereof to perform its respective duties under the Loans;
(viii) any products liability claim or personal injury or property
damage suit or other similar or related claim or action of whatever sort
arising out of or in connection with merchandise or services which are the
subject of any Loan included in the Asset Pool or the Related Property
included in the Asset Pool;
(ix) the failure by Seller to pay when due any Taxes for which the
Seller is liable, including without limitation, sales, excise or personal
property taxes payable in connection with the Assets Pool;
(x) any repayment by the Deal Agent, the Liquidity Agent or a
Secured Party of any amount previously distributed in reduction of Capital
or payment of Yield or any other amount due hereunder or under any Hedging
Agreement, in each case which amount the Deal Agent, the Liquidity Agent or
a Secured Party believes in good faith is required to be repaid;
(xi) any investigation, litigation or proceeding related to this
Agreement or the use of proceeds of Purchases or in respect of any Loan
included in the Asset Pool or the Related Property included in the Asset
Pool;
(xii) any failure by the Seller to give reasonably equivalent value
to the Originator in consideration for the transfer by the Originator to
the Seller of any Loan or the Related Property or any attempt by any Person
to void or otherwise avoid any such transfer under any statutory provision
or common law or equitable action, including, without limitation, any
provision of the Bankruptcy Code;
(xiii) the failure of the Seller, the Originator or any of their
respective agents or representatives to remit to the Servicer or the Deal
Agent, Collections on the Pool Assets remitted to the Seller or any such
agent or representative; or
(xiv) the failure to maintain, as of the close of business on each
Business Day prior to the Termination Date, an amount of Capital
outstanding which is less than or equal to the lesser of (x) the Purchase
Limit on such Business Day, or (y) the Capital Limit on such Business Day.
Any amounts subject to the indemnification provisions of this Section 8.1 shall
be paid by the Seller solely pursuant to the provisions of Sections 2.7 and 2.9
hereof as the case may be to the Deal Agent within two Business Days following
the Deal Agent's demand therefor.
Any indemnification pursuant to this Section 8.1 shall not be in
duplication of any other indemnification for the same loss under Section 6.21.
79
<PAGE>
ARTICLE IX
THE DEAL AGENT AND THE LIQUIDITY AGENT
SECTION 9.1 AUTHORIZATION AND ACTION.
------------------------
(a) Each Secured Party hereby designates and appoints the Deal Agent as
Deal Agent hereunder, and authorizes the Deal Agent to take such actions as
agent on its behalf and to exercise such powers as are delegated to the Deal
Agent by the terms of this Agreement together with such powers as are reasonably
incidental thereto. The Deal Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Purchaser, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities on the part of the Deal
Agent shall be read into this Agreement or otherwise exist for the Deal Agent.
In performing its functions and duties hereunder, the Deal Agent shall act
solely as agent for the Secured Parties and does not assume nor shall be deemed
to have assumed any obligation or relationship of trust or agency with or for
the Seller or any of its successors or assigns. The Deal Agent shall not be
required to take any action which exposes the Deal Agent to personal liability
or which is contrary to this Agreement or applicable law. The appointment and
authority of the Deal Agent hereunder shall terminate at the indefeasible
payment in full of the Aggregate Unpaids.
(b) Each Investor hereby designates and appoints First Union as Liquidity
Agent hereunder, and authorizes the Liquidity Agent to take such actions as
agent on its behalf and to exercise such powers as are delegated to the
Liquidity Agent by the terms of this Agreement together with such powers as are
reasonably incidental thereto. The Liquidity Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Investor, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities on the part of the
Liquidity Agent shall be read into this Agreement or otherwise exist for the
Liquidity Agent. In performing its functions and duties hereunder, the Liquidity
Agent shall act solely as agent for the Investors and does not assume nor shall
be deemed to have assumed any obligation or relationship of trust or agency with
or for the Seller or any of its successors or assigns. The Liquidity Agent shall
not be required to take any action which exposes the Liquidity Agent to personal
liability or which is contrary to this Agreement or applicable law. The
appointment and authority of the Liquidity Agent hereunder shall terminate at
the indefeasible payment in full of the Aggregate Unpaids.
SECTION 9.2 DELEGATION OF DUTIES.
--------------------
(a) The Deal Agent may execute any of its duties under this Agreement by
or through agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Deal Agent shall
not be responsible for the negligence or misconduct of any agents or attorneys-
in-fact selected by it with reasonable care.
80
<PAGE>
(b) The Liquidity Agent may execute any of its duties under this Agreement
by or through agents or attorneys-in-fact and shall be entitled to advice of
counsel concerning all matters pertaining to such duties. The Liquidity Agent
shall not be responsible for the negligence or misconduct of any agents or
attorneys-in-fact selected by it with reasonable care.
SECTION 9.3 EXCULPATORY PROVISIONS.
----------------------
(a) Neither the Deal Agent nor any of its directors, officers, agents or
employees shall be (i) liable for any action lawfully taken or omitted to be
taken by it or them under or in connection with this Agreement (except for its,
their or such Person's own gross negligence or willful misconduct or, in the
case of the Deal Agent, the breach of its obligations expressly set forth in
this Agreement), or (ii) responsible in any manner to any of the Secured Parties
for any recitals, statements, representations or warranties made by the Seller
contained in this Agreement or in any certificate, report, statement or other
document referred to or provided for in, or received under or in connection
with, this Agreement for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other document furnished
in connection herewith, or for any failure of the Seller to perform its
obligations hereunder, or for the satisfaction of any condition specified in
Article III. The Deal Agent shall not be under any obligation to any Secured
Party to ascertain or to inquire as to the observance or performance of any of
the agreements or covenants contained in, or conditions of, this Agreement, or
to inspect the properties, books or records of the Seller. The Deal Agent shall
not be deemed to have knowledge of any Early Amortization Event unless the Deal
Agent has received notice from the Seller or a Secured Party.
(b) Neither the Liquidity Agent nor any of its directors, officers, agents
or employees shall be (i) liable for any action lawfully taken or omitted to be
taken by it or them under or in connection with this Agreement (except for its,
their or such Person's own gross negligence or willful misconduct or, in the
case of the Liquidity Agent, the breach of its obligations expressly set forth
in this Agreement), or (ii) responsible in any manner to the Deal Agent or any
of the Secured Parties for any recitals, statements, representations or
warranties made by the Seller contained in this Agreement or in any certificate,
report, statement or other document referred to or provided for in, or received
under or in connection with, this Agreement or for the value, validity,
effectiveness, genuineness, enforceability or sufficiency of this Agreement or
any other document furnished in connection herewith, or for any failure of the
Seller to perform its obligations hereunder, or for the satisfaction of any
condition specified in Article III. The Liquidity Agent shall not be under any
obligation to the Deal Agent or any Secured Party to ascertain or to inquire as
to the observance or performance of any of the agreements or covenants contained
in, or conditions of, this Agreement, or to inspect the properties, books or
records of the Seller. The Liquidity Agent shall not be deemed to have knowledge
of any Early Amortization Event unless the Liquidity Agent has received notice
from the Seller, the Deal Agent or a Secured Party.
81
<PAGE>
SECTION 9.4 RELIANCE.
--------
(a) The Deal Agent shall in all cases be entitled to rely, and shall be
fully protected in relying, upon any document or conversation believed by it to
be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including,
without limitation, counsel to the Seller), independent accountants and other
experts selected by the Deal Agent. The Deal Agent shall in all cases be fully
justified in failing or refusing to take any action under this Agreement or any
other document furnished in connection herewith unless it shall first receive
such advice or concurrence of VFCC or the Required Investors or all of the
Secured Parties, as applicable, as it deems appropriate or it shall first be
indemnified to its satisfaction by the Secured Parties; provided, that, unless
-------- ----
and until the Deal Agent shall have received such advice, the Deal Agent may
take or refrain from taking any action, as the Deal Agent shall deem advisable
and in the best interests of the Secured Parties. The Deal Agent shall in all
cases be fully protected in acting, or in refraining from acting, in accordance
with a request of VFCC or the Required Investors or all of the Secured Parties,
as applicable, and such request and any action taken or failure to act pursuant
thereto shall be binding upon all the Secured Parties.
(b) The Liquidity Agent shall in all cases be entitled to rely, and shall
be fully protected in relying, upon any document or conversation believed by it
to be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including,
without limitation, counsel to the Seller), independent accountants and other
experts selected by the Liquidity Agent. The Liquidity Agent shall in all cases
be fully justified in failing or refusing to take any action under this
Agreement or any other document furnished in connection herewith unless it shall
first receive such advice or concurrence of Required Investors as it deems
appropriate or it shall first be indemnified to its satisfaction by the
Investors, provided that unless and until the Liquidity Agent shall have
--------
received such advice, the Liquidity Agent may take or refrain from taking any
action, as the Liquidity Agent shall deem advisable and in the best interests of
the Investors. The Liquidity Agent shall in all cases be fully protected in
acting, or in refraining from acting, in accordance with a request of the
Required Investors and such request and any action taken or failure to act
pursuant thereto shall be binding upon all the Investors.
SECTION 9.5 NON-RELIANCE ON DEAL AGENT, LIQUIDITY AGENT AND OTHERS.
------------------------------------------------------
Each Secured Party expressly acknowledges that neither the Deal Agent, the
Liquidity Agent nor any of their respective officers, directors, employees,
agents, attorneys-in-fact or affiliates has made any representations or
warranties to it and that no act by the Deal Agent or the Liquidity Agent
hereafter taken, including, without limitation, any review of the affairs of the
Seller, shall be deemed to constitute any representation or warranty by the Deal
Agent or the Liquidity Agent. Each Secured Party represents and warrants to the
Deal Agent and to the Liquidity Agent that it has and will, independently and
without reliance upon the Deal Agent, the Liquidity Agent or any other Secured
Party and based on such documents and information as it has deemed appropriate,
made its own appraisal of and investigation into the business,
82
<PAGE>
operations, property, prospects, financial and other conditions and
creditworthiness of the Seller and made its own decision to enter into this
Agreement.
SECTION 9.6 REIMBURSEMENT AND INDEMNIFICATION.
---------------------------------
The Investors agree to reimburse and indemnify VFCC, the Deal Agent, the
Liquidity Agent and each of their respective officers, directors, employees,
representatives and agents ratably according to their pro rata shares, to the
extent not paid or reimbursed by the Seller (i) for any amounts for which VFCC,
the Liquidity Agent, acting in its capacity as Liquidity Agent, or the Deal
Agent, acting in its capacity as Deal Agent, is entitled to reimbursement by the
Seller hereunder and (ii) for any other expenses incurred by VFCC, the Liquidity
Agent, acting in its capacity as Liquidity Agent, or the Deal Agent, in its
capacity as Deal Agent and acting on behalf of the Secured Parties, in
connection with the administration and enforcement of this Agreement.
SECTION 9.7 DEAL AGENT AND LIQUIDITY AGENT IN THEIR INDIVIDUAL CAPACITIES.
-------------------------------------------------------------
The Deal Agent, the Liquidity Agent and each of their respective Affiliates
may make loans to, accept deposits from and generally engage in any kind of
business with the Seller or any Affiliate of the Seller as though the Deal Agent
or the Liquidity Agent, as the case may be, were not the Deal Agent or the
Liquidity Agent, as the case may be, hereunder. With respect to the making of
Purchases pursuant to this Agreement, the Deal Agent, the Liquidity Agent and
each of their respective Affiliates shall have the same rights and powers under
this Agreement as any Purchaser and may exercise the same as though it were not
the Deal Agent or the Liquidity Agent, as the case may be, and the terms
"Investor," "Purchaser," "Investors" and "Purchasers" shall include the Deal
Agent or the Liquidity Agent, as the case may be, in its individual capacity.
SECTION 9.8 SUCCESSOR DEAL AGENT OR LIQUIDITY AGENT.
---------------------------------------
(a) The Deal Agent may, upon 5 days' notice to the Seller and the Secured
Parties, and the Deal Agent will, upon the direction of all of the Secured
Parties (other than the Deal Agent, in its individual capacity) resign as Deal
Agent. If the Deal Agent shall resign, then the Required Investors during such
5-day period shall appoint from among the Secured Parties a successor agent. If
for any reason no successor Deal Agent is appointed by the Required Investors
during such 5-day period, then effective upon the expiration of such 5-day
period, the Secured Parties shall perform all of the duties of the Deal Agent
hereunder and the Seller shall make all payments in respect of the Aggregate
Unpaids or under any fee letter delivered by the Originator to the Deal Agent
and the Secured Parties directly to the applicable Purchaser and for all
purposes shall deal directly with the Secured Parties. After any retiring Deal
Agent's resignation hereunder as Deal Agent, the provisions of Article VIII and
Article IX shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Deal Agent under this Agreement.
(b) The Liquidity Agent may, upon 5 days' notice to the Seller, the Deal
Agent and the Investors, and the Liquidity Agent will, upon the direction of all
of the Investors (other than
83
<PAGE>
the Liquidity Agent, in its individual capacity) resign as Liquidity Agent. If
the Liquidity Agent shall resign, then the Required Investors during such 5-day
period shall appoint from among the Investors a successor Liquidity Agent. If
for any reason no successor Liquidity Agent is appointed by the Required
Investors during such 5-day period, then effective upon the expiration of such
5-day period, the Investors shall perform all of the duties of the Liquidity
Agent hereunder and all payments in respect of the outstanding Capital. After
any retiring Liquidity Agent's resignation hereunder as Liquidity Agent, the
provisions of Article VIII and Article IX shall inure to its benefit as to any
actions taken or omitted to be taken by it while it was Liquidity Agent under
this Agreement.
ARTICLE X
ASSIGNMENTS; PARTICIPATIONS
SECTION 10.1 ASSIGNMENTS AND PARTICIPATIONS.
------------------------------
(a) Each Investor may upon at least 30 days' notice to VFCC, the Deal
Agent and the Liquidity Agent, and prior to the Termination Date with the
consent of the Seller (which consent shall not be unreasonably withheld), assign
to one or more banks or other entities all or a portion of its rights and
obligations under this Agreement; provided, however, that (i) each such
-------- -------
assignment shall be of a constant, and not a varying percentage of all of the
assigning Investor's rights and obligations under this Agreement, (ii) the
amount of the Commitment of the assigning Investor being assigned pursuant to
each such assignment (determined as of the date of the Assignment and Acceptance
with respect to such assignment) shall in no event be less than the lesser of
(A) $10,000,000 or an integral multiple of $1,000,000 in excess of that amount
and (B) the full amount of the assigning Investor's Commitment, (iii) each such
assignment shall be to an Eligible Assignee, (iv) the parties to each such
assignment shall execute and deliver to the Deal Agent, for its acceptance and
recording in the Register, an Assignment and Acceptance, together with a
processing and recordation fee of $3,000 or such lesser amount as shall be
approved by the Deal Agent, (v) the parties to each such assignment shall have
agreed to reimburse the Deal Agent, the Liquidity Agent and VFCC for all
reasonable fees, costs and expenses (including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for each of the Deal
Agent, the Liquidity Agent and VFCC) incurred by the Deal Agent, the Liquidity
Agent and VFCC, respectively, in connection with such assignment and (vi) there
shall be no increased costs, expenses or taxes incurred by the Deal Agent, the
Liquidity Agent or VFCC upon such assignment or participation; and provided,
---------
further, that upon the effective date of such assignment the provisions of
- --------
Section 3.03(f) of the Administration Agreement shall be satisfied. Upon such
execution, delivery and acceptance by the Deal Agent and the Liquidity Agent and
the recording by the Deal Agent, from and after the effective date specified in
each Assignment and Acceptance, which effective date shall be the date of
acceptance thereof by the Deal Agent and the Liquidity Agent, unless a later
date is specified therein, (i) the assignee thereunder shall be a party hereto
and, to the extent that rights and obligations hereunder have been assigned to
it pursuant to such Assignment and Acceptance, have the rights and obligations
of an Investor hereunder and (ii) the Investor assignor thereunder shall, to the
extent that rights
84
<PAGE>
and obligations hereunder have been assigned by it pursuant to such Assignment
and Acceptance, relinquish its rights and be released from its obligations under
this Agreement (and, in the case of an Assignment and Acceptance covering all or
the remaining portion of an assigning Investor's rights and obligations under
this Agreement, such Investor shall cease to be a party hereto).
(b) By executing and delivering an Assignment and Acceptance, the
Investor assignor thereunder and the assignee thereunder confirm to and agree
with each other and the other parties hereto as follows: (i) other than as
provided in such Assignment and Acceptance, such assigning Investor makes no
representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such assigning Investor makes no representation
or warranty and assumes no responsibility with respect to the financial
condition of VFCC or the performance or observance by VFCC of any of its
obligations under this Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy of
this Agreement, together with copies of such financial statements and other
documents and information as it has deemed appropriate to make its own credit
analysis and decision to enter into such Assignment and Acceptance; (iv) such
assignee will, independently and without reliance upon the Deal Agent or the
Liquidity Agent, such assigning Investor or any other Investor and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement; (v) such assigning Investor and such assignee confirm that such
assignee is an Eligible Assignee; (vi) such assignee appoints and authorizes
each of the Deal Agent and the Liquidity Agent to take such action as agent on
its behalf and to exercise such powers under this Agreement as are delegated to
such agent by the terms hereof, together with such powers as are reasonably
incidental thereto; and (vii) such assignee agrees that it will perform in
accordance with their terms all of the obligations which by the terms of this
Agreement are required to be performed by it as an Investor.
(c) The Deal Agent shall maintain at its address referred to herein a
copy of each Assignment and Acceptance delivered to and accepted by it and a
register for the recordation of the names and addresses of the Investors and the
Commitment of, and principal amount of, each Asset Interest owned by each
investor from time to time (the "Register"). The entries in the Register shall
be conclusive and binding for all purposes, absent manifest error, and VFCC, the
Seller and the Investors may treat each Person whose name is recorded in the
Register as an Investor hereunder for all purposes of this Agreement. The
Register shall be available for inspection by VFCC, the Liquidity Agent or any
Investor at any reasonable time and from time to time upon reasonable prior
notice.
(d) Subject to the provisions of Section 10.1(a), upon its receipt of
an Assignment and Acceptance executed by an assigning Investor and an assignee,
the Deal Agent and the Liquidity Agent shall each, if such Assignment and
Acceptance has been completed and is in substantially the form of Exhibit D
---------
hereto, accept such Assignment and Acceptance, and the Deal Agent shall
85
<PAGE>
then (i) record the information contained therein in the Register and (ii) give
prompt notice thereof to VFCC.
(e) Each Investor may sell participations to one or more banks or
other entities in or to all or a portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its
Commitment and each Asset Interest owned by it); provided, however, that (i)
-------- -------
such Investor's obligations under this Agreement (including, without limitation,
its Commitment hereunder) shall remain unchanged, (ii) such Investor shall
remain solely responsible to the other parties hereto for the performance of
such obligations and (iii) the Deal Agent and the other Investors shall continue
to deal solely and directly with such Investor in connection with such
Investor's rights and obligations under this Agreement; and provided, further,
--------- --------
that the Deal Agent shall have confirmed that upon the effective date of such
participation the provisions of Section 3.03(f) of the Administration Agreement
shall be satisfied. Notwithstanding anything herein to the contrary, each
participant shall have the rights of an Investor (including any right to receive
payment) under Sections 2.14 and 2.15; provided, however, that no participant
-------- -------
shall be entitled to receive payment under either such Section in excess of the
amount that would have been payable under such Section by the Seller to the
Investor granting its participation had such participation not been granted, and
no Investor granting a participation shall be entitled to receive payment under
either such Section in an amount which exceeds the sum of (i) the amount to
which such Investor is entitled under such Section with respect to any portion
of any Asset Interest owned by such Investor which is not subject to any
participation plus (ii) the aggregate amount to which its participants are
----
entitled under such Sections with respect to the amounts of their respective
participations. With respect to any participation described in this Section
10.1, the participant's rights as set forth in the agreement between such
participant and the applicable Investor to agree to or to restrict such
Investor's ability to agree to any modification, waiver or release of any of the
terms of this Agreement or to exercise or refrain from exercising any powers or
rights which such Investor may have under or in respect of this Agreement shall
be limited to the right to consent to any of the matters set forth in Section
11.1 of this Agreement.
(f) Each Investor may, in connection with any assignment or
participation or proposed assignment or participation pursuant to this Section
10.1, disclose to the assignee or participant or proposed assignee or
participant any information relating to the Seller or VFCC furnished to such
Investor by or on behalf of the Seller or VFCC, but such Investor shall require
such assignee or participant or proposed assignee or participant to keep all
such information confidential.
(g) In the event (i) an Investor ceases to qualify as an Eligible
Assignee, or (ii) an Investor makes demand for compensation pursuant to Section
2.15 or Section 2.16, VFCC may, and, upon the direction of the Seller and prior
to the occurrence of the Termination Date, shall, in any such case,
notwithstanding any provision to the contrary herein, replace such Investor with
an Eligible Assignee by giving three Business Days' prior written notice to such
Investor. In the event of the replacement of an Investor, such Investor agrees
(i) to assign all of its rights and obligations hereunder to an Eligible
Assignee selected by VFCC upon payment to such Investor
86
<PAGE>
of the amount of such Investor's Asset Interests together with any accrued and
unpaid Yield thereon, all accrued and unpaid commitment fees owing to such
Investor and all other amounts owing to such Investor hereunder and (ii) to
execute and deliver an Assignment and Acceptance and such other documents
evidencing such assignment as shall be necessary or reasonably requested by VFCC
or the Deal Agent. In the event that any Investor ceases to qualify as an
Eligible Assignee, such affected Investor agrees (1) to give the Deal Agent, the
Seller and VFCC prompt written notice thereof and (2) subject to the following
proviso, to reimburse the Deal Agent, the Liquidity Agent, the Seller, VFCC and
the relevant assignee for all fees, costs and expenses (including, without
limitation, the reasonable fees and out-of-pocket expenses of counsel for each
of the Deal Agent, the Liquidity Agent, the Seller and VFCC and such assignee)
incurred by the Deal Agent, the Liquidity Agent, the Seller, VFCC and such
assignee, respectively, in connection with any assignment made pursuant to this
Section 10.1(g) by such affected Investor; provided, however, that such affected
-------- -------
Investor's liability for such costs, fees and expenses shall be limited to the
amount of any up-front fees paid to such affected Investor at the time that it
became a party to this Agreement.
(h) Nothing herein shall prohibit any Investor from pledging or
assigning as collateral any of its rights under this Agreement to any Federal
Reserve Bank in accordance with applicable law and any such pledge or collateral
assignment may be made without compliance with Section 10.1(a) or Section
10.1(b).
(i) In the event any Investor causes increased costs, expenses or
taxes to be incurred by the Deal Agent, Liquidity Agreement or VFCC in
connection with the assignment or participation of such Investor's rights and
obligations under this Agreement to an Eligible Assignee then such Investor
agrees that it will make reasonable efforts to assign such increased costs,
expenses or taxes to such Eligible Assignee in accordance with the provisions of
this Agreement.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1 AMENDMENTS AND WAIVERS.
----------------------
(a) Except as provided in this Section 11.1, no amendment, waiver or other
modification of any provision of this Agreement shall be effective without the
written agreement of the Seller, the Deal Agent, VFCC and the Required
Investors; provided, however, that any amendment of this Agreement which is
-------- -------
solely for the purpose of adding a Purchaser or increasing the Commitment of all
Purchasers may be effected with the written consent of the Deal Agent. Any
waiver or consent shall be effective only in the specific instance and for the
specific purpose for which given.
87
<PAGE>
(b) No amendment, waiver or other modification affecting the rights or
obligations of any Hedge Counterparty shall be effective against such Hedge
Counterparty without the written agreement of such Hedge Counterparty.
(c) No amendment, waiver or other modification adversely affecting the
rights or obligations of the Backup Servicer or Collateral Custodian shall be
effective against such Backup Servicer or Collateral Custodian without their
written agreement.
(d) The Seller shall not agree to any amendment, waiver or other
modification if the effect thereof is to jeopardize the Seller's status as a
qualifying special purpose entity under FASB statement 125, as amended and
interpreted.
SECTION 11.2 NOTICES, ETC.
------------
All notices and other communications provided for hereunder shall, unless
otherwise stated herein, be in writing (including telex communication and
communication by facsimile copy) and mailed, telexed, transmitted or delivered,
as to each party hereto, at its address set forth under its name on the
signature pages hereof or specified in such party's Assignment and Acceptance or
at such other address as shall be designated by such party in a written notice
to the other parties hereto. All such notices and communications shall be
effective, upon receipt, or in the case of (a) notice by mail, five days after
being deposited in the United States mail, first class postage prepaid, (b)
notice by telex, when telexed against receipt of answer back, or (c) notice by
facsimile copy, when verbal communication of receipt is obtained, except that
notices and communications pursuant to Article 11 shall not be effective until
received with respect to any notice sent by mail or telex.
SECTION 11.3 [RESERVED.]
---------
SECTION 11.4 NO WAIVER, RIGHTS AND REMEDIES.
------------------------------
No failure on the part of the Deal Agent, the Liquidity Agent or any
Secured Party or any assignee of any Secured Party to exercise, and no delay in
exercising, any right or remedy hereunder shall operate as a waiver thereof; nor
shall any single or partial exercise of any right or remedy hereunder preclude
any other or further exercise thereof or the exercise of any other right. The
rights and remedies herein provided are cumulative and not exclusive of any
rights and remedies provided by law.
SECTION 11.5 BINDING EFFECT.
--------------
This Agreement shall be binding upon and inure to the benefit of the
Seller, the Deal Agent, the Liquidity Agent, the Secured Parties and their
respective successors and permitted assigns and, in addition, the provisions of
Section 2.7 and 2.9 applicable to the Hedge Counterparty shall inure to the
benefit of each Hedge Counterparty, whether or not that Hedge Counterparty is a
Secured Party.
88
<PAGE>
SECTION 11.6 TERM OF THIS AGREEMENT.
----------------------
This Agreement, including, without limitation, the Seller's obligation to
observe its covenants set forth in Article V, and the Servicer's obligation to
observe its covenants set forth in Article VI, shall remain in full force and
effect until the Collection Date; provided, however, that the rights and
-------- -------
remedies with respect to any breach of any representation and warranty made or
deemed made by the Seller pursuant to Articles III and IV and the
indemnification and payment provisions of Article VIII and Article IX and the
provisions of Section 11.10 and Section 11.11 shall be continuing and shall
survive any termination of this Agreement.
SECTION 11.7 GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF OBJECTION
-----------------------------------------------------------
TO VENUE.
--------
THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
LAWS OF THE STATE OF NEW YORK. EACH OF THE SECURED PARTIES, THE SELLER, THE
LIQUIDITY AGENT AND THE DEAL AGENT HEREBY AGREES TO THE NON-EXCLUSIVE
JURISDICTION OF ANY FEDERAL COURT LOCATED WITHIN THE STATE OF NEW YORK. EACH OF
THE PARTIES HERETO AND EACH SECURED PARTY HEREBY WAIVES ANY OBJECTION BASED ON
FORUM NON CONVENIENS, AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED
HEREUNDER IN ANY OF THE AFOREMENTIONED COURTS AND CONSENTS TO THE GRANTING OF
SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT.
SECTION 11.8 WAIVER OF JURY TRIAL.
--------------------
TO THE EXTENT PERMITTED BY APPLICABLE LAW, EACH OF THE SECURED PARTIES, THE
SELLER AND THE DEAL AGENT WAIVES ANY RIGHT TO HAVE A JURY PARTICIPATE IN
RESOLVING ANY DISPUTE, WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE BETWEEN
THE PARTIES HERETO ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO
THE RELATIONSHIP BETWEEN ANY OF THEM IN CONNECTION WITH THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY. INSTEAD, ANY SUCH DISPUTE RESOLVED IN COURT
WILL BE RESOLVED IN A BENCH TRIAL WITHOUT A JURY.
SECTION 11.9 COSTS, EXPENSES AND TAXES.
-------------------------
(a) In addition to (but without duplication of) the rights of
indemnification granted to the Deal Agent, the Liquidity Agent, the Secured
Parties and its or their Affiliates and officers, directors, employees and
agents thereof under Article VIII hereof, the Seller agrees to pay on demand all
reasonable costs and expenses of the Deal Agent, the Liquidity Agent, and the
Secured Parties incurred in connection with the preparation, execution,
delivery, administration (including periodic auditing), amendment or
modification of, or any waiver or consent issued in
89
<PAGE>
connection with, this Agreement and the other documents to be delivered
hereunder or in connection herewith, including, without limitation, the
reasonable fees and out-of-pocket expenses of counsel for the Deal Agent, the
Liquidity Agent, and the Secured Parties with respect thereto and with respect
to advising the Deal Agent, the Liquidity Agent, and the Secured Parties as to
their respective rights and remedies under this Agreement and the other
documents to be delivered hereunder or in connection herewith in an amount not
to exceed $85,000 (excluding any Hedge Agreement) provided that the transaction
contemplated herein closes on or before December 29, 1998, and the structure
described in the summary of terms does not materially change, and all costs and
expenses, if any (including reasonable counsel fees and expenses), incurred by
the Deal Agent, the Liquidity Agent, or the Secured Parties in connection with
the enforcement of this Agreement and the other documents to be delivered
hereunder or in connection herewith (including any Hedge Agreement); provided,
--------
that the fees above other than legal fees may not exceed $5,000 per occurrence
and per service provider without FNBNE's consent which shall not unreasonably be
withheld.
(b) The Seller shall pay on demand any and all stamp, sales, excise and
other taxes (excluding taxes based on income) and fees payable or determined to
be payable in connection with the execution, delivery, filing and recording of
this Agreement, the other documents to be delivered hereunder or any agreement
or other document providing liquidity support, credit enhancement or other
similar support to the Purchasers in connection with this Agreement or the
funding or maintenance of Capital hereunder.
(c) The Seller shall pay on demand all other costs, expenses and taxes
(excluding income taxes) ("Other Costs"), including, without limitation, all
reasonable costs and expenses incurred by the Deal Agent in connection with
periodic audits of the Seller's or the Servicer's books and records and the cost
of rating VFCC's commercial paper by independent financial rating agencies,
which are incurred as a result of the execution of this Agreement.
SECTION 11.10 NO PROCEEDINGS.
--------------
Each of the Seller, the Deal Agent, the Liquidity Agent and the Secured
Parties hereby agrees that it will not institute against, or join any other
Person in instituting against VFCC any proceedings of the type referred to in
Section 4.1(f) so long as any commercial paper issued by VFCC shall be
outstanding and there shall not have elapsed one year and one day since the last
day on which any such commercial paper shall have been outstanding.
SECTION 11.11 RECOURSE AGAINST CERTAIN PARTIES.
--------------------------------
(a) No recourse under or with respect to any obligation, covenant or
agreement (including, without limitation, the payment of any fees or any other
obligations) of any Secured Party as contained in this Agreement or any other
agreement, instrument or document entered into by it pursuant hereto or in
connection herewith shall be had against any manager or administrator of such
Secured Party or any incorporator, affiliate, stockholder, officer, employee
90
<PAGE>
or director of such Secured Party or of any such manager or administrator, as
such, by the enforcement of any assessment or by any legal or equitable
proceeding, by virtue of any statute or otherwise; it being expressly agreed and
-- ----- --------- ------ ---
understood that the agreements of such Secured Party contained in this Agreement
- ----------
and all of the other agreements, instruments and documents entered into by it
pursuant hereto or in connection herewith are, in each case, solely the
corporate obligations of such Secured Party, and that no personal liability
whatsoever shall attach to or be incurred by any manager or administrator of
such Secured Party or any incorporator, stockholder, affiliate, officer,
employee or director of such Secured Party or of any such manager or
administrator, as such, or any other of them, under or by reason of any of the
obligations, covenants or agreements of such Secured Party contained in this
Agreement or in any other such instruments, documents or agreements, or which
are implied therefrom, and that any and all personal liability of every such
manager or administrator of such Secured Party and each incorporator,
stockholder, affiliate, officer, employee or director of such Secured Party or
of any such administrator, or any of them, for breaches by such Secured Party of
any such obligations, covenants or agreements, which liability may arise either
at common law or at equity, by statute or constitution, or otherwise, is hereby
expressly waived as a condition of and in consideration for the execution of
this Agreement.
(b) Notwithstanding anything in this Agreement or any other Transaction
Document to the contrary, VFCC shall have no obligation to pay any amount
required to be paid by it hereunder or thereunder in excess of any amount
available to VFCC after paying or making provision for the payment of its
Commercial Paper Notes. All payment obligations of VFCC hereunder are contingent
upon the availability of funds in excess of the amounts necessary to pay
Commercial Paper Notes; and each of the Seller, the Servicer, the Backup
Servicer, the Deal Agent, the Liquidity Agent and the Secured Parties agrees
that they shall not have a claim under Section 101(5) of the Bankruptcy Code if
and to the extent that any such payment obligation exceeds the amount available
to VFCC to pay such amounts after paying or making provision for the payment of
its Commercial Paper Notes.
(c) The provisions of this Section 11.11 shall survive the termination of
this Agreement.
SECTION 11.12 PROTECTION OF OWNERSHIP INTEREST; APPOINTMENT OF DEAL AGENT
-----------------------------------------------------------
AS ATTORNEY-IN-FACT.
-------------------
(a) The Seller agrees that from time to time, at its expense, it will
promptly execute and deliver all instruments and documents, and take all
actions, that may reasonably be necessary or desirable, or that the Deal Agent
may reasonably request, to perfect, protect or more fully evidence the Asset
Interests and the undivided ownership interest in the Assets in the Asset Pool
represented by such Asset Interests, or to enable the Deal Agent or the Secured
Parties to exercise and enforce their rights and remedies hereunder.
(b) If the Seller or the Servicer fails to perform any of its obligations
hereunder after five Business Days' notice from the Deal Agent, the Deal Agent
or any Secured Party may (but
91
<PAGE>
shall not be required to) perform, or cause performance of, such obligation; and
the Deal Agent's or such Secured Party's reasonable costs and expenses incurred
in connection therewith shall be payable by the Seller (if the Servicer that
fails to so perform is the Seller or an Affiliate thereof) as provided in
Article VIII, as applicable. The Seller irrevocably authorizes the Deal Agent
and appoints the Deal Agent as its attorney-in-fact to act on behalf of the
Seller (i) to execute on behalf of the Seller as debtor and to file financing
statements necessary or desirable in the Deal Agent's sole discretion to perfect
and to maintain the perfection and priority of the interest of the Secured
Parties in the Asset Pool and (ii) to file a carbon, photographic or other
reproduction of this Agreement or any financing statement with respect to the
Asset Pool as a financing statement in such offices as the Deal Agent in its
sole discretion deems necessary or desirable to perfect and to maintain the
perfection and priority of the interests of the Secured Parties in the Asset
Pool. This appointment is coupled with an interest and is irrevocable.
(c) The parties hereto intend that the conveyance of Asset Interests by
the Seller to the Purchasers shall be treated as sales for all purposes. If,
despite such intention, a determination is made that such transactions shall not
be treated as sales, then the parties hereto intend that this Agreement
constitutes a security agreement and the transactions effected hereby constitute
secured loans by the Purchasers to the Seller under applicable law. For such
purpose, the Seller hereby transfers, conveys, assigns and grants to the Deal
Agent, for the benefit of the Secured Parties, a continuing security interest in
all Assets, all Collections, all Hedging Agreements and the proceeds of the
foregoing to secure the repayment of all Capital, all payments at any time due
or accrued in respect of the Yield on any Asset Interest and all other payments
at any time due (whether accrued or due) by the Seller hereunder (including
without limit any amount owing under Article VIII hereof), under any Hedging
Agreement (including, without limitation, payments in respect of the termination
of any such Hedging Agreement) or under any fee letter to the Deal Agent and
each Purchaser.
SECTION 11.13 CONFIDENTIALITY
---------------
(a) Each of the Deal Agent, the Secured Parties, the Liquidity Agent and
the Seller shall maintain and shall cause each of its employees and officers to
maintain the confidentiality of the Agreement and the other confidential
proprietary information with respect to the other parties hereto and their
respective businesses obtained by it or them in connection with the structuring,
negotiating and execution of the transactions contemplated herein, except that
each such party and its officers and employees may (i) disclose such information
to its external accountants and attorneys and as required by an applicable law
or order of any judicial or administrative proceeding, (ii) disclose the
existence of this Agreement, but not the financial terms thereof and (iii)
disclose the Agreement and such information in any suit, action, proceeding or
investigation (whether in law or in equity or pursuant to arbitration) involving
and of the Transaction Documents or any Hedging Agreement for the purpose of
defending itself, reducing itself, reducing its liability, or protecting or
exercising any of its claims, rights, remedies, or interests under or in
connection with any of the Transaction Documents or any Hedging Agreement.
92
<PAGE>
(b) Anything herein to the contrary notwithstanding, the Seller hereby
consents to the disclosure of any nonpublic information with respect to it (i)
to the Deal Agent, the Liquidity Agent, or the Secured Parties by each other,
(ii) by the Liquidity Agent, the Deal Agent or the Secured Parties to any
prospective or actual Eligible Assignee or participant of any of them or (iii)
by the Deal Agent, the Liquidity Agent or the Secured Parties to any Rating
Agency, commercial paper dealer or provider of a surety, guaranty or credit or
liquidity enhancement to a Secured Party and to any officers, directors,
employees, outside accountants and attorneys of any of the foregoing, provided
each such Person is informed of the confidential nature of such information and
agree to be bound hereby. In addition, the Secured Parties, the Liquidity Agent
and the Deal Agent may disclose any such nonpublic information pursuant to any
law, rule, regulation, direction, request or order of any judicial,
administrative or regulatory authority or proceedings.
SECTION 11.14 EXECUTION IN COUNTERPARTS; SEVERABILITY; INTEGRATION.
----------------------------------------------------
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed shall be deemed to be an original and all of which when taken together
shall constitute one and the same agreement. In case any provision in or
obligation under this Agreement shall be invalid, illegal or unenforceable in
any jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby. This
Agreement contains the final and complete integration of all prior expressions
by the parties hereto with respect to the subject matter hereof and shall
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof, superseding all prior oral or written understandings
other than any fee letter delivered by the Originator to the Deal Agent and the
Purchasers.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
63
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
THE SELLER: FNBNE FUNDING CORP.
By___________________________________
Title:
FNBNE Funding Corp.
c/o First National Bank of New England
280 Trumbull Street
Hartford, CT 06103
Attention: Capital Markets
Facsimile No.: (860) 241-2583
Confirmation No.: (860) 241-2595
THE SERVICER: FIRST NATIONAL BANK OF NEW ENGLAND
By___________________________________
Title:
First National Bank of New England
280 Trumbull Street
Hartford, CT 06103
Attention: Capital Markets
Facsimile No.: (860) 241-2583
Confirmation No.: (860) 241-2595
<PAGE>
THE BACKUP SERVICER: MARINE MIDLAND BANK
By______________________________________
Title: Assistant Vice President
Marine Midland Bank
140 Broadway
Corporate Trust Department, 12th Floor
New York, NY 10005
Attention: Susan Barstock
Facsimile No.: (212) 658-6425
Confirmation No.: (212) 658-2079
THE COLLATERAL CUSTODIAN: MARINE MIDLAND BANK
By______________________________________
Title: Assistant Vice President
Marine Midland Bank
140 Broadway
Corporate Trust Department, 12th Floor
New York, New York 10005
Attention: Susan Barstock
Facsimile No.: (212) 658-6425
Confirmation No.: (212) 658-2079
<PAGE>
THE INVESTORS: FIRST UNION NATIONAL BANK
By_______________________________
Title:
Commitment: $65,000,000
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Mr. Bill A. Shirley
Facsimile No.: (704) 374-3254
Confirmation No: (704) 374-4001
VFCC: VARIABLE FUNDING CAPITAL CORPORATION
By First Union Capital Markets, a division of
Wheat First Securities, Inc., as attorney-in-
fact
By_______________________________
Title:
Variable Funding Capital Corporation
c/o First Union Capital Markets
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Confirmation No.: (704) 383-9343
With a copy to:
Lord Securities Corp.
Attention:
Facsimile No.: (____) __________
Confirmation No.: (____) __________
<PAGE>
THE DEAL AGENT: FIRST UNION CAPITAL MARKETS, a
division of WHEAT FIRST SECURITIES, INC.
By_____________________________________
Title:
First Union Capital Markets
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Conduit Administration
Facsimile No.: (704) 383-6036
Telephone No.: (704) 383-9343
THE LIQUIDITY AGENT: FIRST UNION NATIONAL BANK
By_____________________________________
Title:
First Union National Bank
One First Union Center, TW-9
Charlotte, North Carolina 28288
Attention: Mr. Bill A. Shirley
Facsimile No.: (704) 374-3254
Telephone No.: (704) 374-4001
<PAGE>
EXHIBIT 10.14
POOLING AND SERVICING AGREEMENT
Dated as of May 31, 1998
Marine Midland Bank
(Trustee)
and
FIRST NATIONAL BANK OF NEW ENGLAND
(Seller and Servicer)
First National Bank of New England
SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1, Class A and Class B
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
ARTICLE I
DEFINITIONS
Definitions......................................................................................... I-1
ARTICLE II
SALE AND CONVEYANCE OF THE TRUST FUND
2.01 Sale and Conveyance of Trust Fund............................................................ II-1
2.02 Possession of SBA Files...................................................................... II-1
2.03 Books and Records............................................................................ II-1
2.04 Delivery of SBA Loan Documents............................................................... II-2
2.05 Acceptance by Trustee of the Trust Fund; Certain Substitutions; Certification by Trustee;.... II-5
2.06 [Intentionally Omitted]...................................................................... II-7
2.07 Authentication of Certificates............................................................... II-7
2.08 Fees and Expenses of the Trustee............................................................. II-7
2.09 Sale and Conveyance of the Subsequent SBA Loans.............................................. II-7
2.10 Optional Repurchase of Defaulted SBA Loans................................................... II-10
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.01 Representations of the Bank.................................................................. III-1
3.02 Individual SBA Loans......................................................................... III-4
3.03 Purchase and Substitution of Defective SBA Loans............................................. III-10
ARTICLE IV
THE CERTIFICATES
4.01 The Certificates............................................................................. IV-1
4.02 Registration of Transfer and Exchange of Certificates........................................ IV-1
4.03 Mutilated, Destroyed, Lost or Stolen Certificates............................................ IV-9
4.04 Persons Deemed Owners........................................................................ IV-9
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
ARTICLE V
ADMINISTRATION AND SERVICING OF SBA LOANS
5.01 Duties of the Servicer...................................................................... V-1
5.02 Liquidation of SBA Loans.................................................................... V-5
5.03 Establishment of Principal and Interest Accounts; Deposits in Principal and Interest
Accounts................................................................................ V-6
5.04 Permitted Withdrawals From the Principal and Interest Account............................... V-7
5.05 [Intentionally Omitted]..................................................................... V-9
5.06 Transfer of Accounts........................................................................ V-9
5.07 Maintenance of Hazard Insurance............................................................. V-9
5.08 [Intentionally Omitted]..................................................................... V-10
5.09 Fidelity Bond............................................................................... V-10
5.10 Title, Management and Disposition of Foreclosed Property.................................... V-11
5.11 [Omitted.].................................................................................. V-12
5.12 Collection of Certain SBA Loan Payments..................................................... V-12
5.13 Access to Certain Documentation and Information Regarding the SBA Loans..................... V-12
ARTICLE VI
PAYMENTS TO THE CERTIFICATEHOLDERS
6.01 Establishment of Certificate Account; Deposits in Certificate Account; Permitted
Withdrawals from Certificate Account.................................................... VI-1
6.02 Establishment of Spread Account; Deposits in Spread Account; Permitted Withdrawals from
Spread Account.......................................................................... VI-2
6.03 Establishment of Expense Account; Deposits in Expense Account; Permitted Withdrawals from
Expense Account......................................................................... VI-4
6.04 Pre-Funding Account and Capitalized Interest Account........................................ VI-5
6.05 [Intentionally Omitted]..................................................................... VI-7
6.06 Investment of Accounts...................................................................... VI-7
6.07 Distributions............................................................................... VI-8
6.08 [Omitted]................................................................................... VI-10
6.09 Statements.................................................................................. VI-10
6.10 Advances by the Servicer.................................................................... VI-13
6.11 Compensating Interest....................................................................... VI-14
6.12 Reports of Foreclosure and Abandonment of Mortgaged Property................................ VI-14
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII
GENERAL SERVICING PROCEDURE
7.01 [Omitted]................................................................................... VII-1
7.02 Satisfaction of Mortgages and Collateral and Release of SBA Files........................... VII-1
7.03 Servicing Compensation...................................................................... VII-2
7.04 Annual Statement as to Compliance........................................................... VII-3
7.05 Annual Independent Public Accountants' Servicing Report..................................... VII-3
7.06 SBA's and Trustee's Right to Examine Servicer Records and Audit Operations.................. VII-3
7.07 Reports to the Trustee; Principal and Interest Account Statements........................... VII-4
7.08 Premium Protection Fee and Servicing Fee.................................................... VII-4
ARTICLE VIII
REPORTS TO BE PROVIDED BY SERVICER
8.01 Financial Statements........................................................................ VIII-1
ARTICLE IX
THE SERVICER
9.01 Indemnification; Third Party Claims......................................................... IX-1
9.02 Merger or Consolidation of the Servicer..................................................... IX-2
9.03 Limitation on Liability of the Servicer and Others.......................................... IX-3
9.04 Servicer Not to Resign...................................................................... IX-3
ARTICLE X
DEFAULT
10.01 Events of Default........................................................................... X-1
10.02 Trustee to Act; Appointment of Successor.................................................... X-3
10.03 Waiver of Defaults.......................................................................... X-5
10.04 Control by Majority Certificateholders and Others........................................... X-5
ARTICLE XI
TERMINATION
11.01 Termination................................................................................. XI-1
11.02 Accounting Upon Termination of Servicer..................................................... XI-2
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
ARTICLE XII
THE TRUSTEE
12.01 Duties of Trustee........................................................................... XII-1
12.02 Certain Matters Affecting the Trustee....................................................... XII-2
12.03 Trustee Not Liable for Certificates or SBA Loans............................................ XII-4
12.04 Trustee May Own Certificates................................................................ XII-4
12.05 Servicer To Pay Trustee's Fees and Expenses................................................. XII-5
12.06 Eligibility Requirements for Trustee........................................................ XII-5
12.07 Resignation and Removal of the Trustee...................................................... XII-6
12.08 Successor Trustee........................................................................... XII-7
12.09 Merger or Consolidation of Trustee.......................................................... XII-8
12.10 Appointment of Co-Trustee or Separate Trustee............................................... XII-8
12.11 Authenticating Agent........................................................................ XII-10
12.12 Tax Returns and Reports..................................................................... XII-10
12.13 Protection of Trust Fund.................................................................... XII-11
12.14 Representations, Warranties and Covenants of Trustee........................................ XII-12
ARTICLE XIII
MISCELLANEOUS PROVISIONS
13.01 Acts of Certificateholders.................................................................. XIII-1
13.02 Amendment................................................................................... XIII-1
13.03 Recordation of Agreement.................................................................... XIII-2
13.04 Duration of Agreement....................................................................... XIII-2
13.05 Governing Law............................................................................... XIII-2
13.06 Notices..................................................................................... XIII-2
13.07 Severability of Provisions.................................................................. XIII-3
13.08 No Partnership.............................................................................. XIII-3
13.09 Counterparts................................................................................ XIII-3
13.10 Successors and Assigns...................................................................... XIII-3
13.11 Headings.................................................................................... XIII-3
13.12 Paying Agent................................................................................ XIII-4
13.13 Notification to Rating Agency............................................................... XIII-4
13.14 Third Party Rights.......................................................................... XIII-5
</TABLE>
(iv)
<PAGE>
EXHIBIT INDEX
-------------
EXHIBIT A Contents of SBA File
EXHIBIT B-1 Form of Class A Certificate
EXHIBIT B-2 Form of Class B Certificate
EXHIBIT C Principal and Interest Account
Letter Agreement
EXHIBIT D [Omitted]
EXHIBIT E Wiring Instructions Form
EXHIBIT F-1 Initial Certification
EXHIBIT F-2 Final Certification
EXHIBIT G [Omitted]
EXHIBIT H SBA Loan Schedule
EXHIBIT I Request for Release of Documents
EXHIBIT J Form of Liquidation Report
EXHIBIT K Form of Delinquency Report
EXHIBIT L Servicer's Monthly Computer Diskette Format
EXHIBIT M Multi-Party Agreement
EXHIBIT N Spread Account Agreement
EXHIBIT O-1 Form of Transferee Letter
EXHIBIT O-2 Form of Rule 144A Certification
EXHIBIT P List of SBA Loans with lost SBA Notes
(v)
<PAGE>
Agreement dated as of May 31, 1998, between Marine Midland Bank, as
trustee (the "Trustee"), First National Bank of New England, as Seller (in such
capacity, the "Seller") and as Servicer (in such capacity, the "Servicer", and
collectively or in another capacity, the "Bank"):
PRELIMINARY STATEMENT
The Seller, in the ordinary course of its business, originates and
acquires SBA (S) 7(a) Loans (the "SBA (S) 7(a) Loans") to small businesses in
compliance with the provisions of the Small Business Act and the rules and
regulations thereunder and certain loans originated in connection with such
loans, which SBA (S) 7(a) Loans are evidenced by the SBA Notes in favor of the
Seller.
Pursuant to and in accordance with the provisions of the Small
Business Act and the Loan Guaranty Agreement, a portion of each SBA (S) 7(a)
Loan has been guaranteed by the Small Business Administration (the "SBA").
The Seller has previously sold the Guaranteed Interest (as defined
herein) in the SBA (S) 7(a) Loans to certain Registered Holders pursuant to SBA
Form 1086 Agreements between such Registered Holders, the SBA and the Seller.
The parties hereto acknowledge that the SBA is the party in interest with
respect to the Guaranteed Interest.
Pursuant to and in accordance with policies of the SBA, the Servicer
is required to retain a portion of the interest received on the Guaranteed
Interest of each SBA (S) 7(a) Loan sold to the Trust Fund (such portion, the
"Premium Protection Fee").
To facilitate the sale of the Unguaranteed Interest (as defined
herein) in the SBA (S) 7(a) Loans, net of the Servicing Fee, and the servicing
of the SBA Loans by the Servicer, the Bank is entering into this Agreement with
the Trustee. The Seller is transferring the SBA Loans to the Trustee for the
benefit of the SBA and the Certificateholders under this Agreement, pursuant to
which Certificates are being issued, denominated on the face thereof as First
National Bank of New England SBA Loan-Backed Adjustable Rate Certificates,
Series 1998-1, Class A and Class B, representing in the aggregate a 100%
undivided beneficial ownership interest in the right to receive the principal
portion of the Unguaranteed Interests of the SBA Loans together with interest
thereon at the then applicable Class A or Class B Remittance Rate, as the case
may be. The Unguaranteed Interest of the Initial SBA Loans have an aggregate
outstanding principal balance of $19,901,728.97 as of May 31, 1998 (the "Cut-Off
<PAGE>
Date"), after application of payments received by the Seller on or before such
date.
The parties hereto agree as follows:
-2-
<PAGE>
ARTICLE I
DEFINITIONS
-----------
Whenever used herein, the following words and phrases, unless the
context otherwise requires, shall have the following meanings. This Agreement
relates to a Trust Fund evidenced by First National Bank of New England SBA
Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and Class B.
Unless otherwise provided, all calculations of interest pursuant to this
Agreement including, but not limited to, the Class A and Class B Interest
Distribution Amounts, are based on a 360-day year and twelve 30-day months.
ACCOUNT: The Certificate Account, the Pre-Funding Account and the
-------
Capitalized Interest Account established by the Trustee for the benefit of the
Certificateholders; the Expense Account established by the Trustee for the
benefit of the Trustee; and the Spread Account held by the Spread Account
Custodian pursuant to the Spread Account Agreement. The Trustee's obligation to
establish and maintain the Certificate Account is not delegable.
ACCOUNT NUMBER: The number assigned to each SBA Loan by the Seller,
--------------
as set forth in Exhibit H hereto.
ACCOUNT PROPERTY: has the meaning set forth in Section 3 of the Spread
----------------
Account Agreement.
ADDITION NOTICE: With respect to the transfer of Subsequent SBA Loans
---------------
to the Trust Fund pursuant to Section 2.09 herein, notice, which shall be given
not later than three Business Days prior to the related Subsequent Transfer
Date, of the Seller's designation of Subsequent SBA Loans to be sold to the
Trust Fund and the aggregate Principal Balance of such Subsequent SBA Loans.
ADDITIONAL FEE: With respect to each Additional Fee SBA Loan, the fee
--------------
payable to the SBA by the Seller equal to 40 basis points or 50 basis points per
annum, as the case may be, on the outstanding balance of the Guaranteed Interest
of such Additional Fee SBA Loan.
ADDITIONAL FEE SBA LOAN: An SBA (S) 7(a) Loan sold in the secondary
-----------------------
market on or after September 1, 1993 (unless the related SBA (S) 7(a) Loan was
approved by the SBA on or after October 12, 1995), for which the related
Additional Fee is 40 basis points per annum, or an SBA (S) 7(a) Loan approved by
the SBA on or after October 12, 1995 (regardless of whether it was sold
I-1
<PAGE>
in the secondary market), for which the related Additional Fee is 50 basis
points per annum.
ADJUSTED CLASS A INTEREST DISTRIBUTION AMOUNT: With respect to each
---------------------------------------------
Remittance Date, the product of (A) the aggregate amount of interest payable
with respect to the Unguaranteed Interest of each SBA Loan in accordance with
its terms, net of the Servicing Fee allocable to such SBA Loan, the Extra
Interest and the Annual Expense Escrow Amount allocable to such interest (plus,
for the Remittance Dates occurring in August and September 1998, any amounts
transferred from the Pre-Funding Account and the Capitalized Interest Account
for such Remittance Date to be applied as a payment of interest on the
Certificates) and (B) a fraction, the numerator of which is the amounts set
forth in clauses (i) and (ii) of the definition of Class A Interest Distribution
Amount with respect to such Remittance Date, and the denominator of which is the
sum of the amounts set forth in clauses (i) and (ii) of the definition of Class
A Interest Distribution Amount and the amounts set forth in clauses (i) and (ii)
of the definition of Class B Interest Distribution Amount, each with respect to
such Remittance Date.
ADJUSTED CLASS B INTEREST DISTRIBUTION AMOUNT: With respect to each
---------------------------------------------
Remittance Date, the product of (A) the aggregate amount of interest payable
with respect to the Unguaranteed Interest of each SBA Loan in accordance with
its terms, net of the Servicing Fee allocable to such SBA Loan, the Extra
Interest and the Annual Expense Escrow Amount allocable to such interest (plus,
for the Remittance Dates occurring in August and September 1998, any amounts
transferred from the Pre-Funding Account and the Capitalized Interest Account
for such Remittance Date to be applied as a payment of interest on the
Certificates) and (B) a fraction, the numerator of which is the amounts set
forth in clauses (i) and (ii) of the definition of Class B Interest Distribution
Amount with respect to such Remittance Date, and the denominator of which is the
sum of the amounts set forth in clauses (i) and (ii) of the definition of Class
A Interest Distribution Amount and the amounts set forth in clauses (i) and (ii)
of the definition of Class B Interest Distribution Amount, each with respect to
such Remittance Date.
ADJUSTED SBA LOAN REMITTANCE RATE: With respect to any SBA Loan, a
---------------------------------
percentage per annum equal to the sum of (i) the then applicable weighted
average Class A and Class B Remittance Rates and (ii) .06% per annum, relating
to the Annual Expense Escrow Amount.
ADJUSTMENT DATE: The first Business Day of each Interest Accrual
---------------
Period, commencing August 15, 1998.
I-2
<PAGE>
AGGREGATE CLASS A CERTIFICATE PRINCIPAL BALANCE: As of any date of
-----------------------------------------------
determination, the Original Class A Certificate Principal Balance less the sum
of all amounts previously distributed to the Class A Certificateholders in
respect of principal.
AGGREGATE CLASS B CERTIFICATE PRINCIPAL BALANCE: As of any date of
-----------------------------------------------
determination, the Original Class B Certificate Principal Balance less the sum
of all amounts previously distributed to the Class B Certificateholders in
respect of principal.
AGREEMENT: This Pooling and Servicing Agreement and all amendments
---------
hereof and supplements hereto.
ANNUAL EXPENSE ESCROW AMOUNT: The product of .06% per annum and the
----------------------------
Pool Principal Balance, which is computed and payable on a monthly basis and
represents the estimated annual Trustee's fees and Trust Fund expenses.
ASSIGNMENT OF MORTGAGE: With respect to those SBA Loans secured by a
----------------------
Mortgaged Property, an assignment of the Mortgage, notice of transfer or
equivalent instrument sufficient under the laws of the jurisdiction wherein the
related Mortgaged Property is located to reflect of record the transfer of the
related SBA Loan to the Trustee subject to the Multi-Party Agreement.
AUTHENTICATING AGENT: Initially, Marine Midland Bank and thereafter,
--------------------
any successor appointed pursuant to Section 12.11.
AVAILABLE FUNDS: With respect to each Remittance Date, the sum of (i)
---------------
the Unguaranteed Percentage of all amounts received from any source by the
Servicer or any Subservicer during the preceding calendar month (or with respect
to the "Remittance Date" in August 1998, the two preceding calendar months) with
respect to principal and interest on the SBA Loans (net of the Servicing Fee
allocable to such SBA Loan), (ii) advances by the Servicer, (iii) amounts to be
transferred from the Pre-Funding Account and the Capitalized Interest Account
with respect to the Remittance Dates in August and September 1998, and (iv)
amounts in the Spread Account.
BANK: First National Bank of New England, in its individual capacity
----
or in its capacities as Seller and Servicer hereunder.
BIF: The Bank Insurance Fund, or any successor thereto.
---
I-3
<PAGE>
BUSINESS DAY: Any day other than (i) a Saturday or Sunday, or (ii) a
------------
day on which banking institutions in the States of New York or Connecticut are
authorized or obligated by law or executive order to be closed.
CAPITALIZED INTEREST ACCOUNT: As described in Section 6.04.
----------------------------
CAPITALIZED INTEREST REQUIREMENT: With respect to the Remittance
--------------------------------
Dates in August and September 1998, the excess, if any, of (i) 30 days' interest
(or, with respect to the Remittance Date in August 1998, the actual number of
days from the Closing Date to but not including such Remittance Date) calculated
at the weighted average Class A and Class B Remittance Rates on the excess of
(a) the Aggregate Class A and Class B Certificate Principal Balances for such
Remittance Date over (b) the aggregate Principal Balances of the SBA Loans for
such Remittance Date over (ii) any Pre-Funding Earnings to be transferred to the
Certificate Account on such Remittance Date pursuant to Section 6.04(d). With
respect to the Special Remittance Date, accrued interest calculated at the
weighted average Class A and Class B Remittance Rates on the amount to be
transferred on the Special Remittance Date from the Pre-Funding Account to the
Certificate Account pursuant to Section 6.04(c).
CERTIFICATE: Any Class A or Class B Certificate executed by the
-----------
Servicer and authenticated by the Trustee or the Authenticating Agent
substantially in the form annexed hereto as Exhibits B-1 and B-2.
CERTIFICATE ACCOUNT: As described in Section 6.01.
-------------------
CERTIFICATEHOLDER or HOLDER: Each Person in whose name a Class A or
----------------- ------
Class B Certificate is registered in the Certificate Register, except that,
solely for the purposes of giving any consent, waiver, request or demand
pursuant to this Agreement, any Certificate registered in the name of the
Seller, the Servicer, any Subservicer or any affiliate of any of them, shall be
deemed not to be outstanding and the undivided Percentage Interest evidenced
thereby shall not be taken into account in determining whether the requisite
percentage of Certificates necessary to effect any such consent, waiver, request
or demand has been obtained.
CERTIFICATE REGISTER: As described in Section 4.02.
--------------------
CERTIFICATE REGISTRAR: Initially, Marine Midland Bank, and
---------------------
thereafter, any successor appointed pursuant to Section 4.02.
I-4
<PAGE>
CLASS A CARRY-FORWARD AMOUNT: The amount, if any, by which (i) the
----------------------------
Class A Principal Distribution Amount with respect to any preceding Remittance
Date exceeded (ii) the amount of the actual principal distribution to the Class
A Certificates on such Remittance Date.
CLASS A CERTIFICATE: A Certificate denominated as a Class A
-------------------
Certificate.
CLASS A CERTIFICATEHOLDER: A holder of a Class A Certificate.
-------------------------
CLASS A INTEREST DISTRIBUTION AMOUNT: With respect to each Remittance
------------------------------------
Date, the sum of (i) the interest accrued for the related Interest Accrual
Period at the then applicable Class A Remittance Rate on the Aggregate Class A
Certificate Principal Balance outstanding immediately prior to such Remittance
Date and (ii) the amount of the shortfall, if any, of any interest that the
Class A Certificates were entitled to receive on a preceding Remittance Date but
did not receive plus interest thereon at the then applicable Class A Remittance
Rate compounded monthly; provided, however, that on each Remittance Date the
Class A Interest Distribution Amount will be increased or decreased, as the case
may be, to equal the Adjusted Class A Interest Distribution Amount for such
Remittance Date.
CLASS A PERCENTAGE: With respect to each Remittance Date, 89.9979%,
------------------
representing the beneficial ownership interest of the Class A Certificates in
the Trust Fund.
CLASS A PRINCIPAL DISTRIBUTION AMOUNT: With respect to each
-------------------------------------
Remittance Date, the Class A Percentage multiplied by the sum of, without
duplication, (i) the Unguaranteed Percentage of all payments and other
recoveries of principal of an SBA Loan (net of amounts reimbursable to the
Servicer pursuant to this Agreement) received by the Servicer or any Subservicer
in the related Due Period, excluding amounts received relating to SBA Loans
which have been delinquent 24 months or have been determined to be
uncollectible, in whole or in part, by the Servicer to the extent that the Class
A Certificateholders have previously received the Class A Percentage of the
Principal Balance of such SBA Loans; (ii) the principal portion of any
Unguaranteed Interest actually purchased by the Servicer or the Seller and
actually received by the Trustee as of the related Determination Date; (iii) any
Substitution Adjustments deposited in the Principal and Interest Account and
transferred to the Certificate Account as of the related Determination Date;
(iv) the Unguaranteed Percentage of all losses on SBA Loans which were finally
liquidated during the applicable Due Period; (v) the Unguaranteed Percentage of
the then outstanding principal balance
I-5
<PAGE>
of any SBA Loan which, as of the first day of the related Due Period, has been
delinquent 24 months or has been determined to be uncollectible, in whole or in
part, by the Servicer; and (vi) the amount, if any, released from the Pre-
Funding Account on the August and September 1998 Remittance Dates.
CLASS A REMITTANCE RATE: During the initial Interest Accrual Period
-----------------------
6.50% per annum. During each subsequent Interest Accrual Period, the Prime Rate
in effect on the preceding Adjustment Date minus 2.00% per annum.
CLASS B CARRY-FORWARD AMOUNT: The amount, if any, by which (i) the
----------------------------
Class B Principal Distribution Amount with respect to any preceding Remittance
Date exceeded (ii) the amount of the actual principal distribution to the Class
B Certificates on such Remittance Date.
CLASS B CERTIFICATE: A Certificate denominated as a Class B
-------------------
Certificate.
CLASS B CERTIFICATEHOLDER: A holder of a Class B Certificate.
-------------------------
CLASS B INTEREST DISTRIBUTION AMOUNT: With respect to each Remittance
------------------------------------
Date, the sum of (i) the interest accrued for the related Interest Accrual
Period at the then applicable Class B Remittance Rate on the Aggregate Class B
Certificate Principal Balance outstanding immediately prior to such Remittance
Date and (ii) the amount of the shortfall, if any, of any interest that the
Class B Certificates were entitled to receive on a preceding Remittance Date but
did not receive plus interest thereon at the then applicable Class B Remittance
Rate compounded monthly; provided, however, that on each Remittance Date the
Class B Interest Distribution Amount will be increased or decreased, as the case
may be, to equal the Adjusted Class B Interest Distribution Amount for such
Remittance Date.
CLASS B PERCENTAGE: With respect to each Remittance Date, 10.0021%,
------------------
representing the beneficial ownership interest of the Class B Certificates in
the Trust Fund.
CLASS B PRINCIPAL DISTRIBUTION AMOUNT: With respect to each
-------------------------------------
Remittance Date, the Class B Percentage multiplied by the sum of, without
duplication, (i) the Unguaranteed Percentage of all payments and other
recoveries of principal of an SBA Loan (net of amounts reimbursable to the
Servicer pursuant to this Agreement) received by the Servicer or any Subservicer
in the related Due Period, excluding amounts received relating to SBA Loans
which have been delinquent 24 months or have been determined to be
uncollectible, in whole or in part, by the
I-6
<PAGE>
Servicer to the extent that the Class B Certificateholders have previously
received the Class B Percentage of the Principal Balance of such SBA Loans; (ii)
the principal portion of any Unguaranteed Interest actually purchased by the
Seller for breach of a representation and warranty or other defect and actually
received by the Trustee as of the related Determination Date; (iii) any
Substitution Adjustments deposited in the Principal and Interest Account and
transferred to the Certificate Account as of the related Determination Date;
(iv) the Unguaranteed Percentage of all losses on SBA Loans which were finally
liquidated during the applicable Due Period; (v) the Unguaranteed Percentage of
the then outstanding principal balance of any SBA Loan which, as of the first
day of the related Due Period, has been delinquent 24 months or has been
determined to be uncollectible, in whole or in part, by the Servicer; and (vi)
the amount, if any, released from the Pre-Funding Account on the August and
September 1998 Remittance Dates.
CLASS B REMITTANCE RATE: During the initial Interest Accrual Period
-----------------------
7.50% per annum. During each subsequent Interest Accrual Period, the Prime Rate
in effect on the preceding Adjustment Date minus 1.00% per annum.
CLOSING DATE: June 30, 1998
------------
CODE: The Internal Revenue Code of 1986, as amended, or any successor
----
legislation thereto.
COLLATERAL: All items of property (including a Mortgaged Property),
----------
whether real or personal, tangible or intangible, or otherwise, pledged by an
Obligor or others to the Seller (including guarantees on behalf of the Obligor)
to secure payment under an SBA Loan.
COMMERCIAL PROPERTY: Real property (other than agricultural property
-------------------
or Residential Property) that generally is used by the Obligor in the conduct of
its business.
COMPENSATING INTEREST: As defined in Section 6.11.
---------------------
CONFIDENTIAL PLACEMENT MEMORANDUM: The Confidential Private Placement
---------------------------------
Memorandum dated June 29, 1998 prepared by the Seller in connection with the
offer and sale of the Class A Certificates.
CORPORATE TRUST OFFICE: The principal office of the Trustee at which
-----------------------
at any particular time its corporate trust business shall be administered which
office at the date of the execution of this Agreement is located at Marine
Midland Bank, 140 Broadway, New York, New York 10005, 12/th/ Floor, Attention
I-7
<PAGE>
Corporate Trust Department or at any other time at such other address as the
Trustee may designate from time to time by notice to the parties hereto.
CURTAILMENT: With respect to an SBA Loan, any payment of principal
-----------
received during a Due Period as part of a payment that is in excess of five
times the amount of the Monthly Payment due for such Due Period and which is not
intended to satisfy the SBA Loan in full, nor is intended to cure a delinquency.
CUT-OFF DATE: May 31, 1998.
------------
DEFAULTED SBA LOAN: Any SBA Loan as to which the Obligor has failed
------------------
to make payment in full of three or more consecutive Monthly Payments.
DELETED SBA LOAN: An SBA Loan replaced by a Qualified Substitute SBA
----------------
Loan.
DEPOSITORY: The Depository Trust Company and any successor Depository
----------
hereafter named.
DESIGNATED DEPOSITORY INSTITUTION: With respect to the Principal and
---------------------------------
Interest Account or items of Account Property held in deposit accounts, an
entity which is an institution whose deposits are insured by either the BIF or
SAIF administered by the FDIC, the unsecured and uncollateralized long-term debt
obligations of which shall be rated A2 or better by Moody's, and which is either
(i) a federal savings association duly organized, validly existing and in good
standing under the federal banking laws, (ii) an institution duly organized,
validly existing and in good standing under the applicable banking laws of any
state, (iii) a national banking association duly organized, validly existing and
in good standing under the federal banking laws, or (iv) a principal subsidiary
of a bank holding company, in each case acting or designated by the Servicer as
the depository institution for the Principal and Interest Account or the Spread
Account Depositor with respect to items of Account Property, as the case may be.
DETERMINATION DATE: That day of each month which is the third
------------------
Business Day prior to the Remittance Date.
DIRECT PARTICIPANT: Any broker-dealer, bank or other financial
------------------
institution for which the Depository holds Certificates from time to time as a
securities depository.
DUE DATE: The day of the month on which the Monthly Payment is due
--------
from the Obligor on an SBA Loan.
I-8
<PAGE>
DUE PERIOD: With respect to each Remittance Date, the calendar month
----------
preceding the month in which such Remittance Date occurs.
ERISA: The Employee Retirement Income Security Act of 1974, as
-----
amended, or any successor legislation thereto.
EVENT OF DEFAULT: As described in Section 10.01.
----------------
EXCESS PAYMENTS: With respect to a Due Period, any amounts received
---------------
on an SBA Loan in excess of the Monthly Payment due on the Due Date relating to
such Due Period which does not constitute either a Curtailment or a Principal
Prepayment or payment with respect to an overdue amount. Excess Payments are
payments of principal for purposes of this Agreement.
EXCESS PROCEEDS: As of any Remittance Date, with respect to any
---------------
Liquidated SBA Loan, the excess, if any, of (a) the Unguaranteed Percentage of
the total Net Liquidation Proceeds, over (b) the Principal Balance of such SBA
Loan as of the date such SBA Loan became a Liquidated SBA Loan plus 30 days
interest thereon at the then applicable Adjusted SBA Loan Remittance Rate;
provided, however, that such excess shall be reduced by the amount by which
interest accrued on the advance, if any, made by the Servicer at the related SBA
Loan Interest Rate(s) exceeds interest accrued on such advance at the then
applicable weighted average Class A and Class B Remittance Rates.
EXPENSE ACCOUNT: The expense account established and maintained by
---------------
the Trustee in accordance with Section 6.03 hereof.
EXTRA INTEREST: With respect to each SBA Loan, for each Remittance
--------------
Date the product of (i) the principal portion of the Unguaranteed Interest of
such SBA Loan for such Remittance Date and (ii) one-twelfth of the Extra
Interest Percentage.
EXTRA INTEREST PERCENTAGE: With respect to each SBA Loan, the excess
-------------------------
of (i) the SBA Loan Interest Rate that would be in effect for such SBA Loan as
of the Cut-Off Date without giving effect to any applicable lifetime floors or
caps over (ii) the sum of the rates used in determining the Servicing Fee and
the Annual Expense Escrow Amount and 6.6% per annum (i.e., the initial weighted
----
average Class A and Class B Remittance Rates without giving effect to any
applicable lifetime floors or caps on the SBA Loans).
FDIC: The Federal Deposit Insurance Corporation and any successor
----
thereto.
I-9
<PAGE>
FHLMC: The Federal Home Loan Mortgage Corporation and any successor
-----
thereto.
FIDELITY BOND: As described in Section 5.09.
-------------
FNMA: The Federal National Mortgage Association and any successor
----
thereto.
FORECLOSED PROPERTY: As described in Section 5.10.
-------------------
FORECLOSED PROPERTY DISPOSITION: The final sale of a Foreclosed
-------------------------------
Property acquired in foreclosure or by deed in lieu of foreclosure or of
Repossessed Collateral acquired by legal process. The proceeds of any
Foreclosed Property Disposition constitute part of the definition of Liquidation
Proceeds.
FTA: Colson Services Corp., in its capacity as the Fiscal and
---
Transfer Agent of the SBA under the Multi-Party Agreement, or any successor
thereto appointed by the SBA.
FUNDING PERIOD: The period commencing on the Closing Date and ending
--------------
on the earliest to occur of (i) the date on which the amount on deposit in the
Pre-Funding Account is less than $100,000, (ii) the date on which an Event of
Default occurs or (iii) at the close of business on September 10, 1998.
GLOBAL CERTIFICATE: Any Certificate registered in the name of the
------------------
Depository or its nominee, beneficial interests of which are reflected on the
books of the Depository or on the books of a Person maintaining any account with
such Depository (directly or as an indirect participant in accordance with the
rules of such Depository).
GUARANTEED INTEREST: As to any SBA (S) 7(a) Loan, the right to
-------------------
receive the guaranteed portion of the principal balance thereof together with
interest thereon at the then applicable SBA Loan Interest Rate.
Certificateholders have no right or interest in the Guaranteed Interest.
INDIRECT PARTICIPANT: Any financial institution for whom any Direct
--------------------
Participant holds an interest in any Certificate.
INDIVIDUAL CERTIFICATE: Any Certificate registered in the name of a
----------------------
holder other than the Depository or its nominee.
INITIAL SPREAD ACCOUNT DEPOSIT: A deposit of $807,051.87 required to
------------------------------
be made by the Spread Account Depositor into the Spread Account on the Closing
Date, such deposit being equal to 3.0% of the sum of (i) the Original Pool
Principal Balance and (ii) the Original Pre-Funded Amount.
I-10
<PAGE>
INITIAL SBA LOANS: THE SBA Loans listed on Exhibit H hereto and
-----------------
delivered to the Trustee on the Closing Date.
INSTITUTIONAL ACCREDITED INVESTOR: Any Person satisfying the
---------------------------------
definition of "Accredited Investor" within the meaning of Rule 501(a)(1), (2),
(3) or (7) of Regulation D under the Securities Act.
INSURANCE PROCEEDS: Proceeds paid by any insurer pursuant to any
------------------
insurance policy covering an SBA Loan, Collateral, Repossessed Collateral or
Foreclosed Property, including but not limited to title, hazard, life, health
and/or accident insurance policies.
INTEREST ACCRUAL PERIOD: With respect to each Remittance Date, the
-----------------------
period commencing on the 15th day of the month preceding such Remittance Date
and ending on the 14th day of the month of such Remittance Date. However, for
the Remittance Date occurring in August 1998, the period commencing on the
Closing Date and ending on August 14, 1998.
LIQUIDATED SBA LOAN: Any defaulted SBA Loan, Repossessed Collateral
-------------------
or Foreclosed Property as to which the Servicer has determined that all amounts
which it reasonably and in good faith expects to recover have been recovered
from or on account of such SBA Loan.
LIQUIDATION PROCEEDS: Cash, including Insurance Proceeds, proceeds of
--------------------
any Foreclosed Property Disposition, revenues received with respect to the
conservation and disposition of a Foreclosed Property or Repossessed Collateral,
and any other amounts received in connection with the liquidation of defaulted
SBA Loans, whether through trustee's sale, foreclosure sale or otherwise.
LOAN GUARANTY AGREEMENT: Collectively, one or more Loan Guaranty
-----------------------
Agreements (Deferred Participation) (SBA Form 750), between the SBA and the
Servicer, as such agreements may be amended from time to time, or such Loan
Guaranty Agreement as applicable to a successor to the Servicer, as the case may
be.
LOAN-TO-VALUE RATIO OR LTV: With respect to any SBA Loan, (a) the sum
--------------------------
of (i) the original principal amount of such SBA Loan as of origination and (ii)
the principal balance of any Prior Lien as of the date of origination of the
related SBA Loan, divided by (b) the total discounted net collateral value (as
determined by the Seller in accordance with its underwriting criteria) of the
primary and secondary Collateral securing such SBA Loan at the time of
origination.
I-11
<PAGE>
MAJORITY CERTIFICATEHOLDERS: The Holder or Holders of Class A and
---------------------------
Class B Certificates evidencing an Aggregate Class A Certificate Principal
Balance and Aggregate Class B Certificate Principal Balance in excess of 50% of
the Aggregate Class A Certificate Principal Balance and Aggregate Class B
Certificate Principal Balance.
MONTHLY ADVANCE: An advance made by the Servicer pursuant to Section
---------------
6.10 hereof.
MONTHLY PAYMENT: The monthly payment of principal and/or interest
---------------
required to be made by an Obligor on the related SBA Loan, as adjusted pursuant
to the terms of the related SBA Note.
MOODY'S: Moody's Investors Service, Inc. or any successor thereto.
-------
MORTGAGE: The mortgage, deed of trust or other instrument creating a
--------
lien on a Mortgaged Property.
MORTGAGED PROPERTY: The underlying real property, if any, securing an
------------------
SBA Loan, consisting of a Commercial Property or Residential Property and any
improvements thereon.
MULTI-PARTY AGREEMENT: That certain Multi-Party Agreement dated as of
---------------------
May 31, 1998 among the Seller, the Trustee, the SBA and the FTA, substantially
in the form of Exhibit M hereto, as amended from time to time by the parties
thereto.
NET LIQUIDATION PROCEEDS: Liquidation Proceeds net of (i) any
------------------------
reimbursements to the Servicer made therefrom pursuant to Section 5.04(b) and
(ii) amounts required to be released to the related Obligor pursuant to
applicable law.
OBLIGOR: The obligor on an SBA Note.
-------
OCC: The Office of the Comptroller of the Currency.
---
OFFICER'S CERTIFICATE: A certificate delivered to the Trustee signed
---------------------
by the Chairman of the Board, the President, an Executive Vice President, a Vice
President, an Assistant Vice President, the Treasurer, the Secretary, or one of
the Assistant Secretaries of the Bank as required by this Agreement.
OPINION OF COUNSEL: A written opinion of counsel, who may, without
------------------
limitation, be counsel for the Bank, reasonably acceptable to the Trustee and
experienced in matters relating thereto.
I-12
<PAGE>
ORIGINAL CLASS A CERTIFICATE PRINCIPAL BALANCE: $24,211,000.00.
----------------------------------------------
ORIGINAL CLASS B CERTIFICATE PRINCIPAL BALANCE:$2,690,728.97.
----------------------------------------------
ORIGINAL POOL PRINCIPAL BALANCE: $19,901,728.97.
-------------------------------
ORIGINAL PRE-FUNDED AMOUNT: $7,000,000.00, representing the amount
--------------------------
deposited in the Pre-Funding Account on the Closing Date.
OVERFUNDED INTEREST AMOUNT:
--------------------------
With respect to each Subsequent Transfer Date occurring in August
1998, the difference between (i) two-months' interest on the aggregate Principal
Balances of the Subsequent SBA Loans acquired by the Trust Fund on such
Subsequent Transfer Date, calculated at the weighted average Class A and Class B
Remittance Rates, and (ii) two-months' interest on the aggregate Principal
Balances of the Subsequent SBA Loans acquired by the Trust Fund on such
Subsequent Transfer Date, calculated at the rate at which Pre-Funding Account
moneys are invested as of such Subsequent Transfer Date.
With respect to each Subsequent Transfer Date occurring in September
1998, the difference between (i) one-month's interest on the aggregate Principal
Balances of the Subsequent SBA Loans acquired by the Trust Fund on such
Subsequent Transfer Date, calculated at the weighted average Class A and Class B
Remittance Rates, and (ii) one-month's interest on the aggregate Principal
Balances of the Subsequent SBA Loans acquired by the Trust Fund on such
Subsequent Transfer Date, calculated at the rate at which Pre-Funding Account
moneys are invested as of such Subsequent Transfer Date.
PAYING AGENT: Initially, Marine Midland Bank, and thereafter, any
------------
other Person that meets the eligibility standards for the Paying Agent specified
in Section 13.12 hereof and is authorized by the Trustee to make payments on the
Certificates on behalf of the Trustee.
PERCENTAGE INTEREST: With respect to a Class A or Class B
-------------------
Certificate, the portion of the Trust Fund evidenced by such Class A or Class B
Certificate, expressed as a percentage, the numerator of which is the
denomination represented by such Class A or Class B Certificate and the
denominator of which is the Original Class A Certificate Principal Balance or
Original Class B Certificate Principal Balance, as the case may be. The
I-13
<PAGE>
Certificates are issuable only in the minimum Percentage Interest corresponding
to a minimum denomination of $100,000 and integral multiples of $1,000 in excess
thereof, except for one Certificate of each Class which may be issued in a
different denomination to equal the remainder of the Original Class A
Certificate Principal Balance or Original Class B Certificate Principal Balance,
as the case may be.
PERMITTED INSTRUMENTS: As used herein, Permitted Instruments shall
---------------------
include the following:
(i) direct general obligations of, or obligations fully and
unconditionally guaranteed as to the timely payment of principal and
interest by, the United States or any agency or instrumentality thereof,
provided such obligations are backed by the full faith and credit of the
United States, FHA debentures, Federal Home Loan Bank consolidated senior
debt obligations, and FNMA senior debt obligations, but excluding any of
such securities whose terms do not provide for payment of a fixed dollar
amount upon maturity or call for redemption;
(ii) federal funds, certificates of deposit, time deposits and
banker's acceptances (having original maturities of not more than 365 days)
of any bank or trust company incorporated under the laws of the United
States or any state thereof, provided that the short-term debt obligations
of such bank or trust company at the date of acquisition thereof have been
rated Prime-1 or better by Moody's;
(iii) deposits of any bank or savings and loan association which has
combined capital, surplus and undivided profits of at least $3,000,000
which deposits are held only up to the limits insured by the BIF or SAIF
administered by the FDIC, provided that the unsecured long-term debt
obligations of such bank or savings and loan association have been rated A3
or better by Moody's;
(iv) commercial paper (having original maturities of not more than
365 days) rated Prime-1 or better by Moody's;
(v) debt obligations rated Aaa by Moody's (other than any such
obligations that do not have a fixed par value and/or whose terms do not
promise a fixed dollar amount at maturity or call date);
(vi) investments in money market funds rated Aaa or better by
Moody's, the assets of which are invested solely in instruments described
in clauses (i)-(v) above
I-14
<PAGE>
(including, without limitation, any fund which the Trustee or an affiliate
of the Trustee serves as an investment advisor, administrator, shareholder,
servicing agent and/or custodian or sub-custodian, notwithstanding that (a)
the Trustee or an affiliate of the Trustee charges and collects fees and
expenses from such funds for services rendered, (b) the Trustee charges and
collects fees and expenses for services rendered pursuant to this
Agreement, and (c) services performed for such funds and pursuant to this
Agreement may converge at any time (the parties hereto specifically
authorizes the Trustee or an affiliate of the Trustee to charge and collect
all fees and expenses from such funds for services rendered to such funds,
in addition to any fees and expenses the Trustee may charge and collect for
services rendered pursuant to this Agreement));
(vii) guaranteed investment contracts or surety bonds providing for
the investment of funds in an account or insuring a minimum rate of return
on investments of such funds, which contract or surety bond shall:
(a) be an obligation of an insurance company or other corporation
whose debt obligations or insurance financial strength or claims
paying ability are rated "Aaa" by Moody's; and
(b) provide that the Trustee may exercise all of the rights of
the Seller under such contract or surety bond without the necessity of
the taking of any action by the Seller;
(viii) A repurchase agreement that satisfies the following criteria:
(a) Must be between the Trustee and a dealer bank or securities
firm described in 1. or 2. below:
1. Primary dealers on the Federal Reserve reporting dealer
list which are rated "Aa" or better by Moody's, or
2. Banks rated "Aa" or better by Moody's.
(b) The written repurchase agreement must include the following:
1. Securities which are acceptable for the transfer are:
I-15
<PAGE>
A. Direct U.S. government securities, or
B. Securities of Federal Agencies backed by the full
faith and credit of the U.S. government (and FNMA &
FHLMC),
2. the term of the repurchase agreement may be up to 60
days,
3. the collateral must be delivered to the Trustee or third
party custodian acting as agent for the Trustee by
appropriate book entries and confirmation statements
must have been delivered before or simultaneous with
payment (perfection by possession of certificated
securities),
4. Valuation of collateral:
The securities must be valued weekly, marked-to-
market at current market price plus accrued
interest. The value of the collateral must be equal
to at least 104% of the amount of cash transferred
by the Trustee or custodian for the Trustee to the
dealer bank or security firm under the repurchase
agreement plus accrued interest. If the value of
securities held as collateral slips below 104% of
the value of the cash transferred by the Trustee
plus accrued interest, then additional cash and/or
acceptable securities must be transferred. If,
however, the securities used as collateral are FNMA
or FHLMC, then the value of collateral must equal at
least 105%; and
(ix) any other investment acceptable to the Rating Agency, written
confirmation of which shall be furnished to the Trustee prior to any such
investment.
PERSON: Any individual, corporation, partnership, limited liability
------
company, joint venture, association, joint-stock company, trust, national
banking association, unincorporated organization or government or any agency or
political subdivision thereof.
I-16
<PAGE>
POOL PRINCIPAL BALANCE: The aggregate Principal Balances as of any
----------------------
date of determination.
PRE-FUNDED AMOUNT: With respect to any date of determination, the
-----------------
amount on deposit in the Pre-Funding Account.
PRE-FUNDING ACCOUNT: The Pre-Funding Account established in accordance
-------------------
with Section 6.04 hereof and maintained by the Trustee.
PRE-FUNDING EARNINGS: With respect to the Remittance Date in August
--------------------
1998, the actual investment earnings earned during the period from the Closing
Date through the Business Day immediately preceding the Determination Date in
August 1998 (inclusive) on the Pre-Funded Amount. With respect to the
Remittance Date in September 1998, the actual investment earnings earned during
the period from the Determination Date in August 1998 through the Business Day
immediately preceding the Determination Date in September 1998 (inclusive), on
the Pre-Funded Amount.
PREMIUM PROTECTION FEE: As to any SBA Loan and any date of
----------------------
determination, an amount equal to 0.60% per annum of the then outstanding
principal balance of the related Guaranteed Interest.
PRIME RATE: With respect to any date of determination, the lowest
----------
prime lending rate published in the Money Rate Section of The Wall Street
---------------
Journal, on the next succeeding Business Day.
- -------
PRINCIPAL AND INTEREST ACCOUNT: The principal and interest account
------------------------------
established by the Servicer pursuant to Section 5.03 hereof.
PRINCIPAL BALANCE: With respect to any SBA Loan or related Foreclosed
-----------------
Property or Repossessed Collateral, at any date of determination, (i) the
Unguaranteed Percentage of the principal balance of the SBA Loan outstanding as
of the Cut-Off Date (or applicable Subsequent Cut-Off Date with respect to
Subsequent SBA Loans), after application of principal payments received on or
before such date, minus (ii) the sum of (a) the Unguaranteed Percentage of the
principal portion of the Monthly Payments received during each Due Period ending
prior to the most recent Remittance Date, which were distributed pursuant to
Section 6.07 on any previous Remittance Date, and (b) the Unguaranteed
Percentage of all Principal Prepayments, Curtailments, Excess Payments,
Insurance Proceeds, Released Mortgaged Property Proceeds, Net Liquidation
Proceeds and net income from a Foreclosed Property or Repossessed Collateral to
the extent applied by the Servicer as recoveries of principal in
I-17
<PAGE>
accordance with the provisions hereof, which were distributed pursuant to
Section 6.07 on any previous Remittance Date. The Principal Balance of any
Liquidated SBA Loan or any SBA Loan that has been paid off will equal $0.
PRINCIPAL PREPAYMENT: Any payment or other recovery of principal on
--------------------
an SBA Loan equal to the outstanding principal balance thereof, received in
advance of the final scheduled Due Date which is intended to satisfy an SBA Loan
in full.
PRIOR LIEN: With respect to any SBA Loan secured by a lien on a
----------
Mortgaged Property or on other Collateral which is not a first priority lien,
each lien relating to the corresponding Mortgaged Property or other Collateral
having a prior priority lien.
QUALIFIED INSTITUTIONAL BUYER: As used herein, has the meaning
-----------------------------
ascribed to such term in Rule 144A under the Securities Act.
QUALIFIED SUBSTITUTE SBA LOAN: An SBA loan or SBA loans substituted
-----------------------------
for a Deleted SBA Loan pursuant to Section 2.05 or 3.03 hereof, which (i) has or
have an SBA Loan interest rate or rates of not less than (and not more than two
percentage points more than) the SBA Loan Interest Rate for the Deleted SBA
Loan, (ii) substantially relates or relate to the same type of Collateral as the
Deleted SBA Loan, (iii) matures or mature no later than (and not more than one
year earlier than) the Deleted SBA Loan, (iv) has or have a Loan-to-Value Ratio
or Loan-to-Value Ratios at the time of such substitution no higher than the
Loan-to Value Ratio of the Deleted SBA Loan at such time, (v) has or have a
principal balance or principal balances relating to an unguaranteed interest or
unguaranteed interests (after application of all payments received on or prior
to the date of substitution) equal to or less than the Principal Balance of the
Unguaranteed Interest or Unguaranteed Interests as of such date of the Deleted
SBA Loan, (vi) has or have the same Unguaranteed Percentage at the time of
substitution as the Deleted SBA Loan; (vii) was or were originated under the
same program type as the Deleted SBA Loan; and (viii) complies or comply as the
date of substitution with each representation and warranty set forth in Section
3.02.
RATING AGENCY: Moody's.
-------------
RATING AGENCY CONDITION: With respect to any specified action, that
-----------------------
the Rating Agency shall have notified the Servicer and the Trustee, orally or in
writing, that such action will not result in a reduction or withdrawal of the
rating assigned by the respective Rating Agency to either Class of Certificates.
I-18
<PAGE>
RECORD DATE: With respect to any Remittance Date, the close of
-----------
business on the last day of the month immediately preceding the month of the
related Remittance Date. With respect to the Special Remittance Date, August
31, 1998.
REGISTERED HOLDER: With respect to any SBA (S) 7(a) Loan, the Person
-----------------
identified as such in the applicable SBA Form 1086, and any permitted assignees
thereof.
REIMBURSABLE AMOUNTS: As of any date of determination, an amount
--------------------
payable to the Bank, in its capacity as either Seller or Servicer, with respect
to (i) the Monthly Advances and Servicing Advances reimbursable pursuant to
Section 5.04(b), (ii) any advances reimbursable pursuant to Section 9.01 and not
previously reimbursed pursuant to Section 6.03(c)(i), and (iii) any other
amounts reimbursable to the Seller or Servicer pursuant to this Agreement.
RELEASED MORTGAGED PROPERTY PROCEEDS: As to any SBA Loan secured by a
------------------------------------
Mortgaged Property, proceeds received by the Servicer in connection with (a) a
taking of an entire Mortgaged Property by exercise of the power of eminent
domain or condemnation or (b) any release of part of the Mortgaged Property from
the lien of the related Mortgage, whether by partial condemnation, sale or
otherwise, which are not released to the Obligor in accordance with applicable
law, the SBA or the Registered Holder in accordance with the SBA Rules and
Regulations, the Servicer's customary SBA loan servicing procedures and this
Agreement.
REMITTANCE DATE: The 15th day of any month or if such 15th day is not
---------------
a Business Day, the first Business Day immediately following, commencing in
August 1998.
REO PROPERTY: Real Estate property owned by the Trust Fund as a
------------
result of foreclosure on an Obligor's SBA Loan.
REPOSSESSED COLLATERAL: Items of Collateral owned by the Trust as a
----------------------
result of legal action enforcing the lien on the Collateral resulting from a
default on the related Obligor's SBA Loan.
RESIDENTIAL PROPERTY: Any one or more of the following, (i) single
--------------------
family dwelling unit not attached in any way to another unit, (ii) row house,
(iii) two-family house, (iv) low-rise condominium, (v) planned unit development,
(vi) three- or four-family house, (vii) high-rise condominium, (viii) mixed use
building or (ix) manufactured home (as defined in the
I-19
<PAGE>
FNMA/FHLMC Seller-Servicers' Guide) to the extent that it constitutes real
property in the state in which it is located.
RESPONSIBLE OFFICER: When used with respect to the Trustee, any
-------------------
officer assigned to the Corporate Trust Office, including any Vice President,
Assistant Vice President, any Assistant Secretary, any trust officer or any
other officer of the Trustee customarily performing functions similar to those
performed by any of the above designated officers and also, with respect to a
particular matter, any other officer to whom such matter is referred because of
such officer's knowledge of and familiarity with the particular subject. When
used with respect to the Bank, the President, any Vice President, Assistant Vice
President, or any Secretary or Assistant Secretary.
RULE 144A CERTIFICATION: A letter substantially in the form attached
-----------------------
hereto as Exhibit O-2.
SAIF: The Savings Association Insurance Fund, or any successor
----
thereto.
SBA: The United States Small Business Administration, an agency of
---
the United States Government.
SBA FILE: As described in Exhibit A.
--------
SBA Form 1086: The Secondary Participation Guaranty and Certification
-------------
Agreement on SBA Form 1086, pursuant to which investors purchase the Guaranteed
Interest.
SBA LOAN: An individual loan, the Unguaranteed Interest of which is
--------
transferred to the Trust Fund pursuant to this Agreement, together with the
rights and obligations of a holder thereof and payments thereon and proceeds
therefrom, the SBA Loans originally subject to this Agreement being identified
on the SBA Loan Schedule as set forth on Exhibit H. Any loan which, although
intended by the parties hereto to have been, and which purportedly was,
transferred and assigned to the Trust Fund by the Seller (as indicated by the
SBA Loan Schedule), in fact was not transferred and assigned to the Trust Fund
for any reason whatsoever, including, without limitation, the incorrectness of
the statement set forth in Section 3.02(h) hereof with respect to the loan,
shall nevertheless be considered an "SBA Loan" for all purposes of this
Agreement. For the purposes of this Agreement, references to SBA Loans are
equivalent to references to SBA (S) 7(a) Loans.
SBA LOAN INTEREST RATE: With respect to any date of determination,
----------------------
the then applicable annual rate of interest borne
I-20
<PAGE>
by an SBA Loan, pursuant to its terms, which, as of the Cut-Off Date, is shown
on the SBA Loan Schedule.
SBA LOAN SCHEDULE: The schedule of SBA Loans listed on Exhibit H
-----------------
attached hereto and delivered to the Trustee on the Closing Date or Subsequent
Transfer Date, as the case may be, such schedule identifying each SBA Loan by
address of the related premises, and the name of the Obligor and setting forth
as to each SBA Loan the following information: (i) the Principal Balance as of
the close of business on the Cut-Off Date, (ii) the Account Number, (iii) the
original principal amount of the SBA Loan, (iv) the SBA Loan date and original
number of months to maturity, in months, (v) the SBA Loan Interest Rate as of
the Cut-Off Date or Subsequent Cut-Off Date, as the case may be, and guaranteed
rate payable to the Registered Holder and the FTA, (vi) when the first Monthly
Payment was due, (vii) the Monthly Payment as of the Cut-Off Date or Subsequent
Cut-Off Date, as the case may be, (viii) the remaining number of months to
maturity as of the Cut-Off Date or Subsequent Cut-Off Date, as the case may be,
(ix) the Unguaranteed Percentage, (x) the SBA loan number, (xi) the margin which
is added to the Prime Rate to determine the SBA Loan Interest Rate or, in the
case of fixed rate SBA Loans, the rate of interest specified in the related SBA
Note, and (xii) the lifetime minimum and maximum SBA Loan Interest Rates, if
applicable.
SBA NOTE: The note or other evidence of indebtedness evidencing the
--------
indebtedness of an Obligor under an SBA Loan.
SBA RULES AND REGULATIONS: The Small Business Act, as amended,
-------------------------
codified at 15 U.S.C. 631 et. seq., all rules and regulations promulgated from
--------
time to time thereunder, the Loan Guaranty Agreement and SBA Standard Operating
Procedures and official notices as from time to time are in effect.
SBA (S) 7(a) LOAN: An SBA Loan originated pursuant to Section 7(a) of
-----------------
the SBA Rules and Regulations. For purposes of this Agreement, references to
SBA (S) 7(a) Loans are equivalent to references to SBA Loans.
SECURITIES ACT: The Securities Act of 1933, as amended.
--------------
SECURITIES LEGEND: "THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE
-----------------
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR UNDER ANY STATE SECURITIES OR BLUE SKY LAW OF ANY STATE. THE HOLDER HEREOF,
BY PURCHASING THIS CERTIFICATE, AGREES THAT THIS CERTIFICATE MAY BE REOFFERED,
RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES
ACT AND OTHER APPLICABLE LAWS AND ONLY (1) (A)
I-21
<PAGE>
PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO A PERSON THAT
THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE
MEANING OF RULE 144A (A "QIB"), PURCHASING FOR ITS OWN ACCOUNT OR A QIB
PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED THAT THE
REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A, OR (B) IN CERTIFICATED FORM TO AN INSTITUTIONAL "ACCREDITED INVESTOR"
(WITHIN THE MEANING OF RULE 501(a)(1)-(3) OR (7) UNDER THE SECURITIES ACT)
PURCHASING FOR INVESTMENT AND NOT FOR DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, IN EACH CASE, SUBJECT TO (X) THE RECEIPT BY THE TRUSTEE OF A
LETTER SUBSTANTIALLY IN THE FORM PROVIDED IN THE AGREEMENT AND (Y) THE RECEIPT
BY THE TRUSTEE OF SUCH OTHER EVIDENCE ACCEPTABLE TO THE TRUSTEE THAT SUCH
REOFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND
OTHER APPLICABLE LAWS OR IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE UNITED STATES AND SECURITIES AND BLUE SKY LAWS OF ANY
STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION, (2) PURSUANT
TO ANOTHER EXEMPTION AVAILABLE UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH
ANY APPLICABLE STATE SECURITIES LAWS, OR (3) PURSUANT TO A VALID REGISTRATION
STATEMENT. "
SELLER: First National Bank of New England, and its successors and
------
assigns as Seller hereunder.
SERIES: 1998-1.
------
SERVICER: First National Bank of New England, and its successors and
--------
assigns as Servicer hereunder.
SERVICER'S CERTIFICATE: The certificate as defined in Section 6.09.
----------------------
SERVICING ADVANCES: All reasonable and customary "out-of-pocket"
------------------
costs and expenses incurred in the performance by the Servicer of its servicing
obligations, including, but not limited to, the cost of (i) the preservation,
restoration and protection of the Mortgaged Property or other Collateral, (ii)
any enforcement or judicial proceedings, including foreclosures, (iii) the
management and liquidation of the Foreclosed Property or Repossessed Collateral,
(iv) compliance with the obligations under clause (iv) of Section 5.01(a) and
Sections 5.02 and 5.07, which Servicing Advances are reimbursable to the
Servicer to the extent provided in Section 5.04(b) and (v) in connection with
the liquidation of an SBA Loan, expenditures relating to the purchase or
maintenance of any Prior Lien, for all of which costs and expenses the Servicer
is entitled to reimbursement thereon up to a maximum rate per annum equal to the
related SBA Loan Interest Rate, except that any amount of such interest accrued
at a rate in excess of the weighted average Class A and Class B Remittance
I-22
<PAGE>
Rates with respect to the Remittance Date on or prior to which the Unguaranteed
Percentage of the Net Liquidation Proceeds will be distributed shall be
reimbursable only from Excess Proceeds.
SERVICING FEE: As to each SBA Loan, the annual fee payable to the
-------------
Servicer. Such fee shall be calculated and payable monthly from the amounts
received in respect of interest on the Guaranteed Interest and the Unguaranteed
Interest of such SBA Loan, shall accrue at the rate of 0.40% per annum of the
entire principal balance of such SBA Loan and shall be computed on the basis of
the same principal amount and for the period respecting which any related
interest payment on an SBA Loan is computed. The Servicing Fee is payable
solely from the interest portion of related (i) Monthly Payments, (ii)
Liquidation Proceeds or (iii) Released Mortgaged Property Proceeds collected by
the Servicer, or as otherwise provided in Section 5.04. The Servicing Fee
includes any servicing fees owed or payable to any Subservicer.
SERVICING OFFICER: Any officer of the Servicer involved in, or
-----------------
responsible for, the administration and servicing of the SBA Loans whose name
appears on a list of servicing officers furnished to the Trustee by the Servicer
on the Closing Date hereof and as such list may from time to time be amended.
SPECIAL REMITTANCE DATE: September 15, 1998.
-----------------------
SPECIFIED SPREAD ACCOUNT REQUIREMENT: The maximum amount of Spread
------------------------------------
Account Balance required to be on deposit at any time in the Spread Account
which, with respect to any Remittance Date, shall be equal to the sum of (i) the
then outstanding Principal Balance with respect to all SBA Loans 180 days or
more delinquent and (ii) the greater of (a) 7.0% of the then outstanding Pool
Principal Balance or (b) 2.0% of the Original Pool Principal Balance; provided,
however, that for purposes of clauses (i) and (ii)(a), there shall be excluded
the Principal Balance of SBA Loans which have been delinquent 24 months or have
been determined to be uncollectible, in whole or in part, by the Servicer, to
the extent that the Certificateholders have previously received the Principal
Balance of such SBA Loans; provided, however, that in no event shall the Spread
Account Balance exceed the then outstanding Pool Principal Balance.
SPREAD ACCOUNT: The Spread Account established in accordance with the
--------------
terms of the Spread Account Agreement and maintained by the Spread Account
Custodian for distribution in accordance with the provisions of Section 6.02
hereof.
SPREAD ACCOUNT AGREEMENT: The Agreement dated as of June 30, 1998 by
------------------------
and among the Spread Account Depositor and the
I-23
<PAGE>
Spread Account Custodian, substantially in the form attached hereto as Exhibit
N, as amended from time to time by the parties thereto.
SPREAD ACCOUNT CUSTODIAN: Marine Midland Bank, in its capacity as
------------------------
Spread Account Custodian under the Spread Account Agreement, or any successor
thereto.
SPREAD ACCOUNT DEPOSITOR: FNBNE SBA Holdings, Inc., a wholly-owned
------------------------
subsidiary of the Bank.
SPREAD ACCOUNT BALANCE: As of any date of determination, the sum of
----------------------
the aggregate amount then on deposit in the Spread Account.
SPREAD ACCOUNT EXCESS: As defined in Section 6.02(b)(iii).
---------------------
SUBSEQUENT CUT-OFF DATE: The beginning of business on each date
-----------------------
specified in a Subsequent Transfer Agreement with respect to those Subsequent
SBA Loans which are transferred and assigned to the Trust Fund pursuant to the
related Subsequent Transfer Agreement.
SUBSEQUENT SBA LOANS: The SBA Loans sold to the Trust Fund pursuant
--------------------
to Section 2.09, which shall be listed on the Schedule of SBA Loans attached to
the related Subsequent Transfer Agreement.
SUBSEQUENT TRANSFER AGREEMENT: Each Subsequent Transfer Agreement
-----------------------------
dated as of a Subsequent Transfer Date executed by the Trustee and the Seller,
by which Subsequent SBA Loans are sold and assigned to the Trust Fund.
SUBSEQUENT TRANSFER DATE: The date specified as such in each
------------------------
Subsequent Transfer Agreement.
SUBSERVICER: Any person with whom the Servicer has entered into a
-----------
Subservicing Agreement and who satisfies any requirements set forth in Section
5.01(b) hereof in respect of the qualification of a Subservicer.
SUBSERVICING AGREEMENT: Any agreement between the Servicer and any
----------------------
Subservicer relating to subservicing and/or administration of certain SBA Loans
as provided in Section 5.01(b), a copy of which shall be delivered, along with
any modifications thereto, to the Trustee and the SBA.
SUBSTITUTION ADJUSTMENT: As to any date on which a substitution
-----------------------
occurs pursuant to Sections 2.05 or 3.03, the amount
I-24
<PAGE>
(if any) by which the aggregate unguaranteed portions of the principal balances
(after application of principal payments received on or before the date of
substitution) of any Qualified Substitute SBA Loans as of the date of
substitution are less than the aggregate of the Principal Balance of the related
Deleted SBA Loans.
TAX RETURN: The federal income tax return to be filed on behalf of
----------
the Trust Fund together with any and all other information reports or returns
that may be required to be furnished to the Certificateholders or filed with the
Internal Revenue Service or any other governmental taxing authority under any
applicable provision of federal, state or local tax laws.
TERMINATION PRICE: The price defined in Section 11.01
-----------------
hereof.
TRANSFEREE LETTER: A letter substantially in the form attached hereto
-----------------
as Exhibit O-1.
TRUST FUND: The segregated pool of assets subject hereto,
----------
constituting the trust created hereby and to be administered hereunder,
consisting of: (i) the Unguaranteed Interest of such SBA Loans as from time to
time are subject to this Agreement, together with, subject to the Multi-Party
Agreement, the SBA Files relating thereto and all proceeds thereof, (ii) the
Unguaranteed Interest of such assets (including any Permitted Instruments) as
from time to time are identified as Foreclosed Property, Repossessed Collateral
or are deposited in or constitute the Certificate Account, (iii) the
Unguaranteed Interests of any Insurance Proceeds under all insurance policies
with respect to the SBA Loans required to be maintained pursuant to this
Agreement, (iv) the Unguaranteed Interest of any Liquidation Proceeds and (v)
the Unguaranteed Interest of any Released Mortgaged Property Proceeds, including
all earnings thereon and proceeds thereof. Amounts deposited in the Principal
and Interest Account, Spread Account, Pre-Funding Account and Capitalized
Interest Account shall be held by the Trustee or the Spread Account Custodian,
as the case may be, but shall not constitute part of the Trust Fund. Also,
neither the Servicing Fee nor the Premium Protection Fee shall constitute part
of the Trust Fund.
TRUSTEE: Marine Midland Bank, or its successor in interest, or any
-------
successor trustee appointed as herein provided.
TRUSTEE'S DOCUMENT FILE: The documents delivered pursuant to Section
-----------------------
2.04.
I-25
<PAGE>
UNGUARANTEED INTEREST: That portion of an SBA Loan not guaranteed by
---------------------
the SBA pursuant to the SBA Rules and Regulations.
UNGUARANTEED PERCENTAGE: With respect to any SBA (S) 7(a) Loan, the
-----------------------
quotient, expressed as a percentage, the numerator of which shall be the
principal portion of the Unguaranteed Interest of such SBA (S) 7(a) Loan as of
the Cut-Off Date (or, in the case of a Subsequent SBA Loan, as of the Subsequent
Cut-Off Date) and the denominator of which shall be the sum of the principal
portion of the Unguaranteed Interest and the principal portion of the Guaranteed
Interest of such SBA (S) 7(a) Loan as of the Cut-Off Date (or, in the case of a
Subsequent SBA Loan, as of the Subsequent Cut-Off Date).
I-26
<PAGE>
ARTICLE II
SALE AND CONVEYANCE OF THE TRUST FUND
-------------------------------------
Section 2.01 Sale and Conveyance of Trust Fund.
---------------------------------
(a) The Seller hereby sells, transfers, assigns, sets over and
conveys to the Trustee without recourse and for the benefit of the SBA and the
Certificateholders, as their interests may appear, subject to the terms of this
Agreement and the Multi-Party Agreement, all of the right, title and interest of
the Seller in and to the Unguaranteed Interests of the Initial SBA Loans and the
Subsequent SBA Loans and all other assets included or to be included in the
Trust Fund.
(b) The rights of the Certificateholders to receive payments with
respect to the SBA Loans in respect of the Certificates, and all ownership
interests of the Certificateholders in such payments, shall be as set forth in
this Agreement. The Servicing Fee shall not constitute part of the Trust Fund
and Certificateholders shall have no interest in, and are not entitled to
receive any portion of, the Servicing Fee.
Section 2.02 Possession of SBA Files.
-----------------------
(a) Upon the issuance of the Certificates, the ownership of each SBA
Note, the Mortgage and the contents of the related SBA File relating to the
Initial SBA Loans is, and upon each Subsequent Transfer Date the ownership of
each Mortgage Note, the Mortgage and the contents of the related Mortgage File
relating to the applicable Subsequent SBA Loans will be, vested in the Trustee
for the benefit of the SBA and the Certificateholders, as their interests may
appear.
(b) Pursuant to Section 2.04, with respect to the Initial SBA Loans,
the Seller has delivered or caused to be delivered, and, on each Subsequent
Transfer Date, the Seller will deliver or cause to be delivered, each SBA Note
relating to an SBA (S) 7(a) Loan to the FTA.
Section 2.03 Books and Records.
-----------------
The sale of the Unguaranteed Interest of each SBA Loan shall be
reflected on the Seller's balance sheets and other financial statements as a
sale of assets by the Seller and Seller shall respond to any third-party inquiry
that such transfer is so reflected as a sale. The Seller shall be responsible
for maintaining, and shall maintain, a complete set of books and records for
each SBA Loan which shall be clearly marked to
II-1
<PAGE>
reflect the ownership of the Unguaranteed Interest in each SBA Loan by the
Trustee for the benefit of the Certificateholders.
Section 2.04 Delivery of SBA Loan Documents.
------------------------------
The Seller, (i) contemporaneously with the delivery of this Agreement,
has delivered or caused to be delivered to the Trustee or, with respect to the
SBA Notes relating to the SBA (S) 7(a) Loans being delivered pursuant to (a)
below, to the FTA, each of the following documents for each Initial SBA Loan and
(ii) on each Subsequent Transfer Date, will deliver or cause to be delivered to
the Trustee, or with respect to the SBA Notes relating to the SBA (S) 7(a) Loans
being delivered pursuant to paragraph (a) below, to the FTA, each of the
following documents for each Subsequent SBA Loan:
(a) The original SBA Note, endorsed by means of an allonge as
follows: "Pay to the order of Marine Midland Bank, and its successors and
assigns, as trustee under that certain Pooling and Servicing Agreement dated as
of May 31, 1998, for the benefit of the United States Small Business
Administration and holders of First National Bank of New England SBA Loan-Backed
Certificates, Series 1998-1, Class A and Class B, as their respective interests
may appear, without recourse" and signed, by facsimile or manual signature, in
the name of the Seller by a Responsible Officer, with all prior and intervening
endorsements showing a complete chain of endorsement from the originator to the
Seller, if the Seller was not the originator; provided, however, that in lieu of
-------- -------
the original SBA Note relating to one SBA Loan, with an aggregate Principal
Balance as of the Cut-Off Date of approximately $136,997.25, as identified in
the list delivered to the Trustee by the Seller on the Closing Date and set
forth on Exhibit P hereto, the Seller may deliver a lost note affidavit and, if
a copy exists, a copy of the original SBA Note.
(b) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Mortgage, with evidence of recording thereon, (ii) a
copy of the Mortgage certified as a true copy by a Responsible Officer of the
Seller where the original has been transmitted for recording until such time as
the original is returned by the public recording office or duly licensed title
or escrow officer or (iii) a copy of the Mortgage certified by the public
recording office in those instances where the original recorded Mortgage has
been lost.
(c) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Assignment of Mortgage from the Seller endorsed as
follows: "Marine Midland Bank, ("Assignee") its successors and assigns, as
trustee under the Pooling and Servicing Agreement dated as of May 31, 1998
II-2
<PAGE>
subject to the Multi-Party Agreement dated as of May 31, 1998" with evidence of
recording thereon (provided, however, that where permitted under the laws of the
jurisdiction wherein the Mortgaged Property is located, the Assignment of
Mortgage may be effected by one or more blanket assignments for SBA Loans
secured by Mortgaged Properties located in the same county), or (ii) a copy of
such Assignment of Mortgage certified as a true copy by a Responsible Officer of
the Seller where the original has been transmitted for recording (provided,
--------
however, that where the original Assignment of Mortgage is not being delivered
- -------
to the Trustee, such Responsible Officer may complete one or more blanket
certificates attaching copies of one or more Assignments of Mortgage relating to
the Mortgages originated by the Seller);
(d) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of all intervening assignments, if any, showing a
complete chain of title from the originator to the Seller, including warehousing
assignments, with evidence of recording thereon if such assignments were
recorded, (ii) copies of any assignments certified as true copies by a
Responsible Officer of the Seller where the originals have been submitted for
recording until such time as the originals are returned by the public recording
officer, or (iii) copies of any assignments certified by the public recording
office in any instances where the original recorded assignments have been lost;
(e) With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of all title insurance policies relating to the Mortgaged
Properties to the extent the Seller obtained such policies or (ii) copies of any
title insurance policies or other evidence of lien position, including but not
limited to Policy Insurance Record of Title ("PIRT") policies, limited liability
reports and lot book reports, to the extent the Seller obtains such policies or
other evidence of lien position, certified as true by the Seller;
(f) With respect to those SBA Loans secured by other items of
Collateral, the original or a certified copy of all filed UCC financing
statements securing such Collateral naming the Seller as "Secured Party;"
(g) For all SBA Loans, blanket assignment of all Collateral securing
the SBA Loan, including without limitation, all rights under applicable
guarantees and insurance policies;
(h) For all SBA Loans, irrevocable power of attorney of the Seller to
the Trustee to execute, deliver, file or record and otherwise deal with the
Collateral for the SBA Loans in accordance with the Agreement. The power of
attorney will be delegable by the Trustee to the Servicer and any successor
II-3
<PAGE>
Servicer and will permit the Trustee or its delegate to prepare, execute and
file or record UCC financing statements and notices to insurers; and
(i) For all SBA Loans, blanket UCC-1 financing statements identifying
by type all Collateral for the SBA Loans in the SBA Loan Pool and naming the
Trustee as "Secured Party" and the Seller as the "Debtor". The UCC-1 financing
statements will be filed promptly following the Closing Date in Connecticut and
will be in the nature of protective notice filings rather than true financing
statements.
The Seller shall, within ten Business Days after the receipt thereof,
and in any event, within one year of the Closing Date (or with respect to the
Subsequent SBA Loans, within one year of the related Subsequent Transfer Date),
unless such documents have been lost, deliver or cause to be delivered to the
Trustee: (i) the original recorded Mortgage in those instances where a copy
thereof certified by the Seller was delivered to the Trustee; (ii) the original
recorded Assignment of Mortgage from the Seller to the Trustee, which, together
with any intervening assignments of Mortgage, evidences a complete chain of
title from the originator to the Trustee in those instances where copies thereof
certified by the Seller were delivered to the Trustee; and (iii) any intervening
assignments of Mortgage in those instances where copies thereof certified by the
Seller were delivered to the Trustee. Notwithstanding anything to the contrary
contained in this Section 2.04, in those instances where the public recording
office retains the original Mortgage, Assignment of Mortgage or the intervening
assignments of the Mortgage after it has been recorded, or if such document has
been lost, the Seller shall be deemed to have satisfied its obligations
hereunder upon delivery to the Trustee of a copy of such Mortgage, Assignment of
Mortgage or assignments of Mortgage certified by the public recording office to
be a true copy of the recorded original thereof. All SBA Loan documents held by
the Trustee or the FTA, as the case may be, as to each SBA Loan are referred to
herein as the "Trustee's Document File."
Although it is the intent of the parties to this Agreement that the
conveyance of the Seller's right, title and interest in and to the Unguaranteed
Interests of the SBA Loans and other assets in the Trust Fund pursuant to this
Agreement shall constitute a purchase and sale and not a loan, in the event that
such conveyance is deemed to be a loan, it is the intent of the parties to this
Agreement that the Seller shall be deemed to have granted, and hereby does
grant, to the Trustee a first priority perfected security interest in all of the
Seller's right, title and interest in, to and under the Unguaranteed Interests
of the SBA Loans and other assets in the Trust Fund,
II-4
<PAGE>
and that this Agreement shall constitute a security agreement under applicable
law.
All recording required pursuant to this Section 2.04 shall be
accomplished by and at the expense of the Servicer.
Section 2.05 Acceptance by Trustee of the Trust Fund; Certain
------------------------------------------------
Substitutions; Certification by Trustee.
---------------------------------------
(a) The SBA shall cause the FTA to execute and deliver on the Closing
Date (or, with respect to the Subsequent SBA Loans, on the related Subsequent
Closing Date), for each SBA (S) 7(a) Loan, an acknowledgment of receipt of the
SBA Note by the FTA in the form attached as Exhibit 1 to the Multi-Party
Agreement, and declares that the FTA will hold such documents and any
amendments, replacements or supplements thereto, as agent for the benefit of the
SBA and the Certificateholders. The Trustee agrees, for the benefit of the SBA
and the Certificateholders, to review each Trustee's Document File within 90
days after the Closing Date or Subsequent Closing Date, as the case may be (or,
with respect to any Qualified Substitute SBA Loan, within 45 days after the
assignment thereof), and to deliver to the Certificateholders, the Seller, the
Servicer and the SBA a certification in the form attached hereto as Exhibit F-1.
Within 360 days after the Closing Date (or, with respect to any Qualified
Substitute SBA Loan, within 360 days after the assignment thereof), the Trustee
shall deliver to the Seller, the Servicer, the SBA, the Rating Agency and any
Certificateholder who requests a copy from the Trustee a final certification in
the form attached hereto as Exhibit F-2 evidencing the completeness of the
Trustee's Document Files.
(b) If the Trustee or the SBA, as the case may be, during the process
of reviewing the Trustee's Document Files finds any document constituting a part
of a Trustee's Document File which is not properly executed, has not been
received, is unrelated to an SBA Loan identified in the SBA Loan Schedule, or
does not conform in a material respect to the requirements of Section 2.04 or
the description thereof as set forth in the SBA Loan Schedule, the Trustee or
the SBA, as the case may be, shall promptly so notify the Seller and the
Servicer. In performing any such review, the Trustee or the SBA, as the case
may be, may conclusively rely on the Seller as to the purported genuineness of
any such document and any signature thereon. It is understood that the scope of
the Trustee's and the SBA's review of the SBA Files is limited solely to
confirming that the documents listed in Section 2.04 have been executed and
received and relate to the SBA Loans identified in the SBA Loan Schedule. The
Seller agrees to use reasonable efforts to remedy a material defect in a
II-5
<PAGE>
document constituting part of an SBA File of which it is so notified by the
Trustee or the SBA, as the case may be. If, however, within 60 days after the
Trustee's or the SBA's notice to it respecting such material defect the Seller
has not remedied the defect and such defect materially and adversely affects the
value of the related SBA Loan, the Seller will (i) substitute in lieu of such
SBA Loan a Qualified Substitute SBA Loan in the manner and subject to the
conditions set forth in Section 3.03 or (ii) purchase the Unguaranteed Interest
of such SBA Loan at a purchase price equal to the Principal Balance of such
Unguaranteed Interest as of the date of purchase, plus 30 days' interest on such
Principal Balance, computed at the Adjusted SBA Loan Remittance Rate as of the
next succeeding Determination Date, plus any accrued unpaid Servicing Fees,
Monthly Advances and Servicing Advances reimbursable to the Servicer, which
purchase price shall be deposited in the Principal and Interest Account on the
next succeeding Determination Date.
(c) Upon receipt by the Trustee and the SBA of a certification of a
Servicing Officer of the Servicer of such purchase and the deposit of the
amounts described above in the Principal and Interest Account (which
certification shall be in the form of Exhibit I hereto), the Trustee and the SBA
shall release to the Servicer for release to the Seller the related Trustee's
Document File and the Trustee and the SBA shall execute, without recourse, and
deliver such instruments of transfer necessary to transfer such SBA Loan to the
Seller. All costs of any such transfer shall be borne by the Servicer.
(d) If in connection with taking any action the Servicer requires any
item constituting part of the Trustee's Document File, or the release from the
lien of the related SBA Loan of all or part of any Mortgaged Property or other
Collateral, the Servicer shall deliver to the Trustee and the SBA a certificate
to such effect in the form attached as Exhibit I hereto. Upon receipt of such
certification, the Trustee or the SBA, as the case may be, shall deliver to the
Servicer the requested documentation and the Trustee shall execute, without
recourse, and deliver such instruments of transfer necessary to release all or
the requested part of the Mortgaged Property or other Collateral from the lien
of the related SBA Loan.
On the Remittance Date in March of each year, the Trustee shall
deliver to the Seller, the SBA and the Servicer a certification detailing all
transactions with respect to the SBA Loans for which the Trustee holds a
Trustee's Document File pursuant to this Agreement during the prior calendar
year. Such certification shall list all Trustee's Document Files which were
released by or returned to the Trustee or the FTA during the
II-6
<PAGE>
prior calendar year, the date of such release or return and the reason for such
release or return.
Section 2.06 [Intentionally Omitted]
Section 2.07 Authentication of Certificates.
------------------------------
The Trustee acknowledges the assignment to it on behalf of the Trust
Fund of the Unguaranteed Interests in the SBA Loans and the delivery to the
Trustee and the FTA of the Trustee's Document Files and, concurrently with such
delivery, has authenticated or caused to be authenticated and delivered to or
upon the order of the Seller, in exchange for the Unguaranteed Interests in the
SBA Loans, the Trustee's Document Files and the other assets included in the
definition of Trust Fund, Certificates duly authenticated by the Trustee in
authorized denominations.
Section 2.08 Fees and Expenses of the Trustee.
--------------------------------
The fees and expenses of the Trustee including (i) the annual fees of
the Trustee, payable quarterly in advance, and subject to rebate to the Servicer
as additional servicing compensation hereunder for any fraction of a calendar
quarter in which this Agreement terminates, (ii) any other fees and expenses to
which the Trustee is entitled pursuant to this Agreement or its written
agreement with the Seller, and (iii) reimbursements to the Servicer for any
advances made by the Servicer to the Expense Account pursuant to Section 6.03
hereof, shall be paid from the Expense Account in the manner set forth in
Section 6.03 hereof; provided, however, that the Seller shall be liable for any
-------- -------
expenses of the Trust Fund incurred prior to the Closing Date. The Servicer and
the Trustee hereby covenant with the Certificateholders that every material
contract or other material agreement entered into by the Trustee, or the
Servicer, acting as attorney-in-fact for the Trustee, on behalf of the Trust
Fund shall expressly state therein that no Certificateholder shall be personally
liable in connection with such contract or agreement.
Section 2.09 Sale and Conveyance of the Subsequent SBA Loans.
-----------------------------------------------
(a) Subject to the conditions set forth in paragraph (b) below, in
consideration of the Trustee's delivery on the related Subsequent Transfer Dates
to or upon the order of the Seller of all or a portion of the balance of funds
in the Pre-Funding Account, the Seller shall on any Subsequent Transfer Date
sell, transfer, assign, set over and otherwise convey without recourse, to the
Trustee all right, title and interest of the Seller in and to the Unguaranteed
Interest of each Subsequent SBA
II-7
<PAGE>
Loan listed on the SBA Loan Schedule delivered by the Seller on such Subsequent
Transfer Date, all their right, title and interest in and to principal collected
and interest accruing on the Unguaranteed Interest of each such Subsequent SBA
Loan on and after the related Subsequent Cut-Off Date and all their right, title
and interest in the Unguaranteed Interest in all insurance policies; provided,
--------
however, that the Seller reserve and retain all their right, title and interest
- -------
in and to principal (including Principal Prepayments) collected and interest
accruing on each such Subsequent SBA Loan prior to the related Subsequent Cut-
Off Date. The transfer by the Seller of the Unguaranteed Interest of the
Subsequent SBA Loans set forth on the SBA Loan Schedule to the Trustee shall be
absolute and shall be intended by all parties hereto to be treated as a sale by
the Seller.
Although it is the intent of the parties to this Agreement that the
conveyance of the Seller's right, title and interest in and to the Unguaranteed
Interests of the SBA Loans and other assets in the Trust Fund pursuant to this
Agreement shall constitute a purchase and sale and not a loan, in the event that
such conveyance is deemed to be a loan, it is the intent of the parties to this
Agreement that the Seller shall be deemed to have granted, and hereby does
grant, to the Trustee a first priority perfected security interest in all of the
Seller's right, title and interest in, to and under the Unguaranteed Interests
of the SBA Loans and other assets in the Trust Fund, and that this Agreement
shall constitute a security agreement under applicable law.
The amount released from the Pre-Funding Account shall be one-hundred
percent (100%) of the aggregate Principal Balances as of the related Subsequent
Transfer Date of the Subsequent SBA Loans so transferred.
(b) The Seller shall transfer to the Trustee the Unguaranteed
Interest of the Subsequent SBA Loans and the other property and rights related
thereto described in paragraph (a) above only upon the satisfaction of each of
the following conditions on or prior to the related Subsequent Transfer Date:
(i) the Seller shall have provided the Trustee with a
timely Addition Notice and shall have provided any information
reasonably requested by it with respect to the Subsequent SBA Loans;
(ii) the Seller shall have delivered to the Trustee a duly
executed written assignment (including an acceptance by the Trustee)
that shall include SBA Loan Schedules, listing the Subsequent SBA
Loans and any other exhibits listed thereon;
II-8
<PAGE>
(iii) the Seller shall have deposited in the Principal and
Interest Account all collections in respect of the Subsequent SBA
Loans received on or after the related Subsequent Cut-Off Date;
(iv) as of each Subsequent Transfer Date, the Bank was not
insolvent nor will it have been made insolvent by such transfer nor is
it aware of any pending insolvency;
(v) such addition will not result in a material adverse
tax consequence to the Trust Fund or the Holders of the Certificates;
(vi) the Pre-Funding Period shall not have terminated;
(vii) the Seller shall have delivered to the Trustee an
Officer's Certificate confirming the satisfaction of each condition
precedent specified in this paragraph (b) and in the related
Subsequent Transfer Agreement;
(viii) the Seller shall have delivered to the Rating Agency
and the Trustee, Opinions of Counsel with respect to the transfer of
the Subsequent SBA Loans substantially in the form of the Opinions of
Counsel delivered to the Trustee on the Closing Date (bankruptcy,
corporate and tax opinions); and
(ix) the FTA shall have delivered, pursuant to Section
2.05(a) hereof, an acknowledgment of receipt of the SBA Note relating
to such SBA (S) 7(a) Loan in the form attached as Exhibit 1 to the
Multi-Party Agreement.
(c) The obligation of the Trust Fund to purchase the Unguaranteed
Interest of a Subsequent SBA Loan on any Subsequent Transfer Date is subject to
the requirement, as evidenced by a certificate from a Responsible Officer of the
Seller, that such Subsequent SBA Loan conforms in all material respects to the
representations and warranties concerning the individual Initial SBA Loans set
forth in Sections 3.01 and 3.02 (except that any reference therein to the Cut-
Off Date shall be deemed a reference to the applicable Subsequent Cut-Off Date)
and that the inclusion of all Subsequent SBA Loans being transferred to the
Trust Fund on such Subsequent Transfer Date will not change, in any material
respect, the characteristics of the Initial SBA Loans, in the aggregate, set
forth in Sections 3.01 and 3.02 or in the
II-9
<PAGE>
Confidential Placement Memorandum under the headings "Summary of Terms -- The
SBA Loan Pool" and "The SBA Loan Pool." Further, each Subsequent SBA Loan must
be an SBA (S) 7(a) Loan.
(d) In connection with the transfer and assignment of the Subsequent
SBA Loans, the Seller agrees to satisfy the conditions set forth in Sections
2.01, 2.02, 2.03, 2.04 and 2.05.
(e) In connection with each Subsequent Transfer Date, on the
Remittance Dates in August and September 1998 and the Special Remittance Date,
the Seller shall determine, and the Trustee shall cooperate with the Seller in
determining (i) the amount and correct dispositions of the Capitalized Interest
Requirements, Overfunded Interest Amounts, and Pre-Funding Earnings and (ii) any
other necessary matters in connection with the administration of the Pre-Funding
Account and of the Capitalized Interest Account. If any amounts are incorrectly
released to the Seller from the Capitalized Interest Account, the Seller shall
immediately repay such amounts to the Trustee.
Section 2.10 Optional Repurchase of Defaulted SBA Loans.
------------------------------------------
The Servicer shall have the right, but not the obligation, to
repurchase the Unguaranteed Interest of any Defaulted SBA Loan for a purchase
price equal to the Principal Balance of such Unguaranteed Interest as of the
date of repurchase, plus 30 days' interest on such Principal Balance, computed
at the Adjusted SBA Loan Remittance Rate as of the next succeeding Determination
Date, plus any accrued unpaid Servicing Fees, Monthly Advances and Servicing
Advances reimbursable to the Servicer, which purchase price shall be deposited
in the Principal and Interest Account on the next succeeding Determination Date.
Any such repurchase shall be accomplished in the manner specified in Section
2.05(b). In no event shall the aggregate Principal Balance of the Unguaranteed
Interests of all Defaulted SBA Loans purchased pursuant to this Section 2.10
exceed 5% of the sum of (i) the Original Pool Principal Balance and (ii) the
Original Pre-Funded Amount.
II-10
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 3.01 Representations of the Bank.
----------------------------
The Bank hereby represents and warrants to the Trustee and the
Certificateholders as of the Closing Date:
(a) The Bank is a nationally chartered 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 and
qualified in each state where the laws of such state require licensing or
qualification in order to conduct business of the type conducted by the Bank and
perform its obligations hereunder; the Bank has all requisite power and
authority to execute and deliver this Agreement and to perform in accordance
herewith and therewith; the execution, delivery and performance of this
Agreement (including all instruments of transfer to be delivered pursuant to
this Agreement) by the Bank and the consummation of the transactions
contemplated hereby and thereby have been duly and validly authorized by all
necessary corporate action; this Agreement evidences the valid, binding and
enforceable obligation of the Bank; and all requisite corporate action has been
taken by the Bank to make this Agreement valid, binding and enforceable upon the
Bank in accordance with its terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally or the application of equitable principles
in any proceeding, whether at law or in equity, none of which will affect the
ownership of the SBA Loans by the Trustee, as trustee.
(b) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to be
taken, given or obtained, as the case may be, by or from any federal, state or
other governmental authority or agency (other than any such actions, approvals,
etc., under any state securities laws, real estate syndication or "Blue Sky"
statutes, as to which the Bank makes no such representation or warranty), that
are necessary or advisable in connection with the purchase and sale of the
Certificates and the execution and delivery by the Bank of the documents to
which it is a party, have been duly taken, given or obtained, as the case may
be, are in full force and effect on the date hereof, are not subject to any
pending proceedings or appeals (administrative, judicial or otherwise) and
either the time within which any appeal therefrom may be taken or review thereof
may be obtained has expired or no review thereof may be obtained or appeal
therefrom taken, and are adequate to authorize
III-1
<PAGE>
the consummation of the transactions contemplated by this Agreement and the
other documents on the part of the Bank and the performance by the Bank of its
obligations under this Agreement and such of the other documents to which it is
a party;
(c) The consummation of the transactions contemplated by this
Agreement will not result in the breach of any terms or provisions of the
articles of association or by-laws of the Bank or result in the breach of any
term or provision of, or conflict with or constitute a default under or result
in the acceleration of any obligation under, any material agreement, indenture
or loan or credit agreement or other material instrument to which the Bank or
its property is subject, or result in the violation of any law, rule,
regulation, order, judgment or decree to which the Bank or its property is
subject;
(d) Neither this Agreement nor any statement, report or other
document furnished or to be furnished pursuant to this Agreement or in
connection with the transactions contemplated hereby and thereby contains any
untrue statement of material fact or omits to state a material fact necessary to
make the statements contained herein or therein not misleading in light of the
circumstances under which they were made;
(e) The Bank 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;
(f) There is no action, suit, proceeding or investigation pending or,
to the best of the Bank's knowledge, threatened against the Bank which, either
in any one instance or in the aggregate, may (i) result in any material adverse
change in the business, operations, financial condition, properties or assets of
the Bank or in any material impairment of the right or ability of the Bank to
carry on its business substantially as now conducted, or in any material
liability on the part of the Bank or of any action taken or to be taken in
connection with the obligations of the Bank contemplated herein, or which would
be likely to impair materially the ability of the Bank to perform under the
terms of this Agreement or (ii) which would draw into question the validity of
this Agreement or the SBA Loans;
(g) The Trust Fund will not constitute an "investment company" within
the meaning of the Investment Company Act of 1940, as amended;
(h) The Bank is not in default with respect to any order or decree of
any court or any order, regulation or demand of any federal, state, municipal or
governmental agency, which default might have consequences that would materially
and
III-2
<PAGE>
adversely affect the condition (financial or other) or operations of the
Bank or its properties or might have consequences that would materially and
adversely affect its performance hereunder;
(i) The statements contained in the Confidential Placement Memorandum
which describe the Bank or the SBA Loans or matters or activities for which the
Bank is responsible in accordance with the Confidential Placement Memorandum,
this Agreement and all documents referred to therein or herein or delivered in
connection therewith or herewith, or which are attributable to the Bank therein
or herein are true and correct in all material respects, and the Confidential
Placement Memorandum does not contain any untrue statement of a material fact
with respect to the Bank or the SBA Loans and does not omit to state a material
fact necessary to make the statements contained therein with respect to the Bank
or the SBA Loans not misleading in light of the circumstances under which they
were made. The Bank is not aware that the Confidential Placement Memorandum
contains any untrue statement of a material fact or omits to state any material
fact necessary to make the statements contained therein not misleading in light
of the circumstances under which they were made. There is no fact peculiar to
the Bank or the SBA Loans and known to the Bank that materially adversely
affects or in the future may (so far as the Bank can now reasonably foresee)
materially adversely affect the Bank or the SBA Loans or the ownership interests
therein represented by the Certificates that has not been set forth in the
Confidential Placement Memorandum;
(j) No Certificateholder is subject to Connecticut state licensing
requirements solely by virtue of holding the Certificates;
(k) The transfer, assignment and conveyance of the SBA Notes and the
Mortgages by the Bank pursuant to this Agreement are not or, with respect to the
Subsequent SBA Loans, will not be, subject to the bulk transfer laws or any
similar statutory provisions in effect in any applicable jurisdiction and do not
violate the SBA Rules and Regulations;
(l) The origination and collection practices used by the Bank with
respect to each SBA Note and Mortgage relating to the Initial SBA Loans have
been, and the origination and collection practices to be used by the Bank with
respect to each SBA Note and Mortgage relating to the Subsequent SBA Loans will
have been, in all material respects legal, proper, prudent and customary in the
SBA loan origination and servicing business;
(m) Each Initial SBA Loan was, and each Subsequent SBA Loan will be,
selected from among the existing SBA loans in the
III-3
<PAGE>
Bank's portfolio at the date hereof or, in the case of the Subsequent SBA Loans,
at the related Subsequent Cut-Off Date, in a manner not designed to adversely
affect the Certificateholders;
(n) The Bank received fair consideration and reasonably equivalent
value or, in the case of the Subsequent SBA Loans, will have received fair
consideration and reasonably equivalent value, in exchange for the sale of the
Unguaranteed Interest of the SBA Loans evidenced by the Certificates;
(o) Neither the Bank nor any of its affiliates sold or, in the case
of the Subsequent SBA Loans, will have sold any interest in any SBA Loan
evidenced by the Certificates with any intent to hinder, delay or defraud any of
their respective creditors;
(p) The Bank is solvent, and the Bank will not be rendered insolvent
as a result of the transfer of the SBA Loans to the Trust Fund or the sale of
the Certificates; and
(q) The chief executive office and legal name of the Bank is as set
forth on the respective UCC-1 financing statement filed on behalf of the Bank
pursuant to Section 2.04(h), such office is the place where the Bank is
"located" for the purposes of Section 9-103(3)(d) of the Uniform Commercial Code
as in effect in the State of New York, and neither the location of such office
nor the legal name of the Bank has changed in the past four months.
Section 3.02 Individual SBA Loans .
--------------------
The Bank hereby represents and warrants to the Trustee, and the
Certificateholders, with respect to each Initial SBA Loan originated or acquired
by the Bank, as of the Closing Date, and with respect to each Subsequent SBA
Loan originated by the Bank, as of the related Subsequent Transfer Date:
(a) The information with respect to each SBA Loan set forth in the
SBA Loan Schedule is true and correct;
(b) All of the original or certified documentation set forth in
Section 2.04 (including all material documents related thereto) has been or will
be delivered to the Trustee or the FTA, on behalf of the Trustee, on the Closing
Date or as otherwise provided in Section 2.04;
(c) Each Mortgaged Property serving as the primary Collateral for an
SBA Loan is improved by a Commercial Property or a Residential Property and does
not constitute other than real property under state law;
III-4
<PAGE>
(d) Except for Initial SBA Loans (and up to 10 Subsequent SBA Loans)
that were purchased and reunderwritten by the Bank, each SBA Loan has been
originated by the Bank, in its capacity as Seller and each SBA Loan is being
serviced by the Bank, in its capacity as Servicer;
(e) Each SBA Loan is an SBA (S) 7(a) Loan;
(f) Except for 3 Initial SBA Loans that bear fixed rates of interest,
the SBA Loan Interest Rates adjust monthly to equal the then applicable Prime
Rate plus the margin set forth in the related SBA Note. Each adjustable rate SBA
Note will, with respect to principal payments, adjust monthly to provide for a
schedule of Monthly Payments which are, if timely paid, sufficient to fully
amortize the principal balance of such SBA Loan on its respective maturity date;
(g) With respect to those SBA Loans secured by a Mortgaged Property,
each Mortgage is a valid and subsisting lien of record on the Mortgaged Property
subject only to any applicable Prior Liens on such Mortgaged Property and
subject in all cases to such exceptions that are generally acceptable to banking
institutions in connection with their regular commercial lending activities, and
such other exceptions to which similar properties are commonly subject and which
do not individually, or in the aggregate, materially and adversely affect the
benefits of the security intended to be provided by such Mortgage;
(h) Immediately prior to the transfer and assignment herein
contemplated, the Bank held good and indefeasible title to, and was the sole
owner of, the Unguaranteed Interest of each SBA Loan conveyed by the Bank
subject to no liens, charges, mortgages, encumbrances or rights of others except
as set forth in Sections 3.02(g) or 3.02(kk) or other liens which will be
released simultaneously with such transfer and assignment; and immediately upon
the transfer and assignment herein contemplated, the Trustee will hold good and
indefeasible title, to, and be the sole owner of, each SBA Loan subject to no
liens, charges, mortgages, encumbrances or rights of others except (i) as set
forth in Sections 3.02(g) or 3.02(kk), (ii) the interests of the SBA or (iii)
other liens which will be released simultaneously with such transfer and
assignment;
(i) As of the Cut-Off Date (or, with respect to any Subsequent SBA
Loan, as of the related Subsequent Cut-Off Date), no SBA Loan is more than 30
days delinquent in payment;
(j) To the best of the Bank's knowledge, there is no delinquent tax
or assessment lien on any Mortgaged Property, and
III-5
<PAGE>
each Mortgaged Property is free of material damage and is in good repair;
(k) No SBA Loan is subject to any right of rescission, set-off,
counterclaim or defense, including the defense of usury, nor will the operation
of any of the terms of the SBA Note or any related Mortgage, or the exercise of
any right thereunder, render either the SBA Note or any related Mortgage
unenforceable in whole or in part, or subject to any right of rescission, set-
off, counterclaim or defense, including the defense of usury, and no such right
of rescission, set-off, counterclaim or defense has been asserted with respect
thereto;
(l) Each SBA Loan at the time it was made complied and, as of the
Closing Date complies, in all material respects with applicable state and
federal laws and regulations, including, without limitation, usury, equal credit
opportunity, disclosure and recording laws and the SBA Rules and Regulations;
(m) Each Initial SBA Loan was (and each Subsequent SBA Loan will be)
originated and underwritten or purchased and reunderwritten by the Bank in
accordance with the underwriting criteria set forth in the Confidential
Placement Memorandum; provided, however, that without the prior written consent
of the SBA, no more than 10 Subsequent SBA Loans may have been purchased by the
Bank from a third party;
(n) Pursuant to the SBA Rules and Regulations, the Bank requires that
the improvements upon each Mortgaged Property are covered by a valid and
existing hazard insurance policy with a generally acceptable carrier that
provides for fire and extended coverage representing coverage described in
Section 5.07;
(o) Pursuant to the SBA Rules and Regulations, the Bank requires that
if a Mortgaged Property is in an area identified in the Federal Register by the
Federal Emergency Management Agency as having special flood hazards, a flood
insurance policy is in effect with respect to such Mortgaged Property with a
generally acceptable carrier in an amount representing coverage described in
Section 5.07;
(p) Each SBA Note, any related Mortgage and any other agreement
pursuant to which Collateral is pledged to the Bank is the legal, valid and
binding obligation of the maker thereof and is enforceable in accordance with
its terms, except only as such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws affecting the
enforcement of creditors' rights generally and by general principles of equity
(whether considered in a proceeding or
III-6
<PAGE>
action in equity or at law), none of which will prevent the ultimate realization
of the security provided by the Collateral or other agreement, and all parties
to each SBA Loan had full legal capacity to execute all SBA Loan documents and
convey the estate therein purported to be conveyed;
(q) The Bank has caused and will cause to be performed any and all
acts reasonably required to be performed to preserve the rights and remedies of
the Trustee in any insurance policies applicable to the SBA Loans including,
without limitation, in each case, any necessary notifications of insurers,
assignments of policies or interests therein, and establishments of co-insured,
joint loss payee and mortgagee rights in favor of the Trustee or the Bank,
respectively;
(r) Each original Mortgage was recorded, and all subsequent
assignments of the original Mortgage have been recorded in the appropriate
jurisdictions wherein such recordation is necessary to perfect the lien thereof
as against creditors of the Bank (or, subject to Section 2.04 hereof, are in the
process of being recorded);
(s) Each SBA Loan conforms, and all such SBA Loans in the aggregate
conform, to the description thereof set forth in the Confidential Placement
Memorandum;
(t) The terms of the SBA Note and the related Mortgage or other
security agreement pursuant to which Collateral was pledged have not been
impaired, altered or modified in any respect, except by a written instrument
which has been recorded, if necessary, to protect the interest of the SBA and
the Certificateholders and which has been delivered to the Trustee;
(u) There are no material defaults in complying with the terms of any
applicable 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;
(v) There is no proceeding pending or threatened for the total or
partial condemnation of any Mortgaged Property, nor is such a proceeding
currently occurring, and such 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 SBA Loan or
the use for which the premises were intended;
III-7
<PAGE>
(w) At the time of origination for an SBA Loan, in all instances
where commercial real property serves as the primary collateral for such SBA
Loan, the related Mortgaged Property was free of contamination from toxic
substances or hazardous wastes requiring action under applicable laws or is
subject to ongoing environmental rehabilitation approved by the SBA, and as of
the Cut-Off Date, the Seller has no knowledge of any such contamination from
toxic substances or hazardous waste material on any Mortgaged Property unless
such items are below action levels or such Mortgaged Property is subject to
ongoing environmental rehabilitation approved by the SBA;;
(x) The proceeds of the SBA Loan have been fully disbursed, and there
is no obligation on the part of the Bank to make future advances thereunder.
Any and all requirements as to disbursements of any escrow funds therefor have
been complied with. All costs, fees and expenses incurred in making or closing
or recording the SBA Loans were paid;
(y) There is no obligation on the part of the Bank or any other party
(except for any guarantor of an SBA Loan) to make Monthly Payments (except for
Monthly Advances) in addition to those made by the Obligor;
(z) No statement, report or other document signed by the Bank
constituting a part of the SBA File contains any untrue statement of a material
fact or omits to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances under which they
were made;
(aa) With respect to each Mortgage constituting a deed of trust, a
trustee, duly qualified under applicable law to serve as such, has been properly
designated and currently so serves and is named in such Mortgage, and no fees or
expenses are or will become payable by the Certificateholders to the trustee
under the deed of trust, except in connection with a trustee's sale after
default by the Obligor;
(bb) No SBA Loan has a shared appreciation feature, or other
contingent interest feature;
(cc) With respect to each SBA Loan secured by a Mortgaged Property or
other Collateral and that is not a first priority lien, either (i) no consent
for the SBA Loan is required by the holder of any related Prior Lien or (ii)
such consent has been obtained;
(dd) Each SBA Loan was originated to a business located in the State
identified in the SBA Loan Schedule;
III-8
<PAGE>
(ee) All parties which have had any interest in the SBA 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 any
Mortgaged Property is located, and (2)(A) organized under the laws of such
state, or (B) qualified to do business in such state, or (C) federal savings and
loan associations or national banks having principal offices in such state, or
(D) not doing business in such state;
(ff) Any related Mortgage contains customary and enforceable
provisions in accordance with the SBA Rules and Regulations which render the
rights and remedies of the holder thereof adequate for the realization against
the Mortgaged Property of the benefits of the security, including, (i) in the
case of a Mortgage designated as a deed of trust, by trustee's sale, and (ii)
otherwise by judicial foreclosure. There is no homestead or other exemption
available to the Mortgagor which would materially interfere with the right to
sell the Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage;
(gg) There is no default, breach, violation or event of acceleration
existing under the SBA Note and no event which, with the passage of time or with
notice and the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration; and the Bank, in its
capacity as either Servicer or Seller, has not waived any default, breach,
violation or event of acceleration;
(hh) All parties to the SBA Note and any related Mortgage or other
document pursuant to which Collateral was pledged had legal capacity to execute
the SBA Note and any such Mortgage or other document and each SBA Note and
Mortgage or other document have been duly and properly executed by such parties;
(ii) The SBA Loan was not selected for inclusion under this Agreement
from the Bank's portfolio of comparable SBA loans on any basis which would have
a material adverse affect on a Certificateholder;
(jj) All amounts received after the Cut-Off Date (or, with respect to
the Subsequent SBA Loans, after the related Subsequent Cut-Off Date) with
respect to the SBA Loans have been, to the extent required by this Agreement,
deposited into the Principal and Interest Account and are, as of the Closing
Date (or with respect to the Subsequent SBA Loans, as of the related
III-9
<PAGE>
Subsequent Closing Date), in the Principal and Interest Account; and
(kk) With respect to those SBA Loans secured by Collateral other than
a Mortgaged Property, the related SBA Note, security agreements, if any, and
UCC-1 filed with respect to such Collateral creates a valid and subsisting lien
of record on such Collateral subject only to any Prior Liens, if any, on such
Collateral and subject in all cases to such exceptions that are generally
acceptable to lending institutions in connection with their regular commercial
lending activities, and such other exceptions to which similar Collateral is
commonly subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be provided by
such SBA Note, security agreement and UCC-1.
Section 3.03 Purchase and Substitution of Defective SBA Loans.
------------------------------------------------
It is understood and agreed that the representations and warranties
set forth in Sections 3.01 and 3.02 shall survive delivery of the Certificates
to the Certificateholders. Upon discovery by the Servicer, any Subservicer or
the Trustee of a breach of any of such representations and warranties which
materially and adversely affects the value of the SBA Loans or the interest of
the Certificateholders or the SBA therein or which materially and adversely
affects the interests of the Certificateholders and the SBA in the related SBA
Loan in the case of a representation and warranty relating to a particular SBA
Loan (notwithstanding that such representation and warranty was made to the
Bank's best knowledge), the party discovering such breach shall give prompt
written notice to the others. Within 60 days of the earlier of its discovery or
its receipt of notice of any breach of a representation or warranty, the Bank,
in its capacity as Seller shall (a) promptly cure such breach in all material
respects, (b) purchase the Unguaranteed Interest of such SBA Loan by depositing
in the Principal and Interest Account, on the next succeeding Determination
Date, an amount and in the manner specified in Section 2.05(b), or (c) if within
two years of the Closing Date, remove such SBA Loan from the Trust Fund (in
which case it shall become a Deleted SBA Loan) and substitute one or more
Qualified Substitute SBA Loans. Any such substitution shall be accompanied by
payment by the Seller of the Substitution Adjustment, if any.
As to any Deleted SBA Loan for which the Seller substitutes a
Qualified Substitute SBA Loan or Loans, the Servicer shall effect such
substitution by delivering to the Trustee and the FTA a certification in the
form attached hereto
III-10
<PAGE>
as Exhibit I, executed by a Servicing Officer, and shall also deliver to the
Trustee and the FTA, as applicable, the documents constituting the Trustee's
Document File for such Qualified Substitute SBA Loan or Loans.
The Servicer shall deposit in the Principal and Interest Account the
Unguaranteed Percentage of all payments of principal received in connection with
such Qualified Substitute SBA Loan or Loans after the date of such substitution
together with all interest (net of the Servicing Fee allocable to such Qualified
Substitute SBA Loan or Loans). Monthly Payments received with respect to
Qualified Substitute SBA Loans on or before the date of substitution will be
retained by the Seller. The Trust Fund will own all payments received with
respect to the Unguaranteed Interest on the Deleted SBA Loan on or before the
date of substitution, and the Seller shall thereafter be entitled to retain all
amounts subsequently received in respect of such Deleted SBA Loan. The Servicer
shall give written notice to the Trustee that such substitution has taken place
and shall amend the SBA Loan Schedule to reflect the removal of such Deleted SBA
Loan from the terms of this Agreement and the substitution of the Qualified
Substitute SBA Loan or Loans. Upon such substitution, such Qualified Substitute
SBA Loan or Loans shall be subject to the terms of this Agreement in all
respects, including Sections 2.04 and 2.05, and the Seller shall be deemed to
have made with respect to such Qualified Substitute SBA Loan or Loans, as of the
date of substitution, the covenants, representations and warranties set forth in
Sections 3.01 and 3.02. On the date of such substitution, the Seller will remit
to the Servicer, and the Servicer will deposit into the Principal and Interest
Account an amount equal to the Substitution Adjustment.
In addition to the cure, purchase and substitution obligation in
Sections 2.04, 2.05 and 3.03, the Bank shall indemnify and hold harmless the
Trust Fund, the Trustee and the Certificateholders against any loss, damages,
penalties, fines, forfeitures, reasonable 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
Bank's representations and warranties contained in this Agreement. It is
understood and agreed that the obligations of the Bank, in its capacity as
Seller set forth in Sections 2.04, 2.05 and 3.03 to cure, purchase or substitute
for a defective SBA Loan and to indemnify the Certificateholders and the Trustee
as provided in Sections 2.04, 2.05 and 3.03 constitute the sole remedies of the
Trustee and the Certificateholders respecting a breach of the foregoing
representations and warranties.
III-11
<PAGE>
Any cause of action against the Bank, in its capacity as either
Servicer or the Seller, relating to or arising out of the breach of any
representations and warranties made in Sections 2.05, 3.01 or 3.02 shall accrue
as to any SBA Loan upon (i) discovery of such breach by any party and notice
thereof to the Seller and or notice thereof by the Seller to the Trustee, (ii)
failure by the Seller to cure such breach or purchase or substitute such SBA
Loan as specified above, and (iii) demand upon the Seller by the Trustee for all
amounts payable hereunder in respect of such SBA Loan.
III-12
<PAGE>
ARTICLE IV
THE CERTIFICATES
----------------
Section 4.01 The Certificates.
----------------
The Class A and Class B Certificates shall be substantially in the
forms annexed hereto as Exhibits B-1 and B-2 and shall, upon original issue, be
executed and delivered by the Servicer to the Trustee for authentication and
redelivery to or upon the order of the Seller, upon receipt by the Trustee and
the FTA of the documents specified in Section 2.04. All Certificates shall be
executed on behalf of the Servicer by a Responsible Officer, in the
denominations specified in the definition of Percentage Interest, and shall be
authenticated on behalf of the Trustee by one of its Responsible Officers.
Certificates bearing the signatures of individuals who were at the time of the
execution or authentication of the Certificates a Responsible Officer of the
Servicer or a Responsible Officer of the Trustee, as the case may be, shall bind
the Servicer or the Trustee, as the case may be, notwithstanding that such
individuals or any of them have ceased to hold such offices prior to the
delivery of such Certificates or did not hold such offices at the date of such
Certificates. All Certificates issued hereunder shall be dated the date of
their authentication.
Section 4.02 Registration of Transfer and Exchange of Certificates.
-----------------------------------------------------
(a) The Trustee shall cause to be kept at the office of the
Certificate Registrar, in New York, New York, a Certificate Register in which,
subject to such reasonable regulations as it may prescribe, it shall provide for
the registration of Certificates and of transfers and exchanges of Certificates
as herein provided. The Certificate Register shall contain the name, remittance
instructions, Class and Percentage Interest of each Certificateholder, as well
as the Series and the number in the Series. Marine Midland Bank is initially
appointed Certificate Registrar for the purpose of registering Certificates and
transfers and exchanges of Certificates as herein provided.
(b) Each Class of Certificates shall be issued in minimum
denominations of $100,000 original principal amount and integral multiples of
$1,000 in excess thereof, except that one Certificate of each Class may be in a
different denomination so that the sum of the denominations of all outstanding
Class A and Class B Certificates shall equal the Original Class A and Class B
Certificate Principal Balance, respectively. On the Closing Date, the Trustee
will execute and authenticate (i) one or more Global Certificates and/or (ii)
Individual Certificates all in an
IV-1
<PAGE>
aggregate principal amount that shall equal the Original Class A and Original
Class B Certificate Principal Balances.
The Global Certificates (i) shall be delivered by the Seller to the
Depository or, pursuant to the Depository's instructions, shall be delivered by
the Seller on behalf of the Depository to and deposited with the Depository's
custodian, and in each case shall be registered in the name of Cede & Co. and
(ii) shall bear a legend substantially to the following effect:
"Unless this certificate is presented by an authorized
representative of The Depository Trust Company, a New York corporation
("DTC"), to the Certificate Registrar or its agent for registration of
transfer, exchange or payment, and any certificate issued is registered in
the name of Cede & Co. or in such other name as is requested by an
authorized representative of DTC (and any payment is made to Cede & Co. or
to such other entity as is requested by an authorized representative of
DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR
TO ANY PERSON IS WRONGFUL inasmuch as the registered owner hereof, Cede &
Co., has an interest herein."
The Global Certificates may be deposited with such other Depository as
the Seller may from time to time designate, and shall bear such legend as may be
appropriate; provided that such successor Depository maintains a book-entry
--------
system that qualifies to be treated as "registered form" under Section 163(f)(3)
of the Code.
The Seller and the Trustee are hereby authorized to and shall execute
and deliver a Letter of Representations, in the form provided by the Depository,
with the Depository relating to the Certificates.
(c) With respect to Certificates registered in the Register in the
name of Cede & Co., as nominee of the Depository, the Seller, the Servicer and
the Trustee shall have no responsibility or obligation to Direct or Indirect
Participants or beneficial owners for which the Depository holds Certificates
from time to time as a Depository and the Trustee and its agents, employees,
officers and directors may treat the Depository as the absolute owner of the
Certificates for all purposes whatsoever. Without limiting the immediately
preceding sentence, the Seller, the Servicer and the Trustee shall have no
responsibility or obligation with respect to (a) the accuracy of the records of
the Depository, Cede & Co., or any Direct or Indirect Participant with respect
to the ownership interest in the Certificates, (b) the delivery to any Direct or
Indirect Participant or any other
IV-2
<PAGE>
Person, other than a registered Holder of a Certificate, (c) the payment to any
Direct or Indirect Participant or any other Person, other than a registered
Holder of a Certificate as shown in the Register, of any amount with respect to
any distribution of principal or interest on the Certificates or (d) the making
of book-entry transfers among Direct and Indirect Participants of the Depository
with respect to Certificates registered in the Register in the name of the
nominee of the Depository. No Person other than a registered Holder of a
Certificate as shown in the Register shall receive a certificate evidencing such
Certificate.
(d) Upon delivery by the Depository to the Trustee of written notice
to the effect that the Depository has determined to substitute a new nominee in
place of Cede & Co., and subject to the provisions hereof with respect to the
payment of distributions by the mailing of checks or drafts to the registered
Holders of Certificates appearing as registered Owners in the Certificate
Register on a Record Date, the name "Cede & Co." in this Agreement shall refer
to such new nominee of the Depository.
(e) In the event that (i) the Depository or the Servicer advises the
Trustee in writing that the Depository is no longer willing or able to discharge
properly its responsibilities as nominee and depository with respect to the
Certificates and the Servicer is unable to locate a qualified successor or (ii)
the Servicer at its sole option elects to terminate the book-entry system
through the Depository, the Certificates shall no longer be restricted to being
registered in the Register in the name of Cede & Co. (or a successor nominee) as
nominee of the Depository. At that time, the Servicer may determine that the
Certificates shall be registered in the name of and deposited with a successor
depository operating a global book-entry system, as may be acceptable to the
Servicer, or such depository's agent or designee but, if the Servicer does not
select such alternative global book-entry system, then upon surrender to the
Certificate Registrar of the Global Certificates by the Depository, accompanied
by the registration instructions from the Depository for registration, the
Trustee shall at the Servicer's expense authenticate Individual Certificates.
Neither the Servicer nor the Trustee shall be liable for any delay in delivery
of such instructions and may conclusively rely on, and shall be fully protected
in relying on, such instructions. Upon the issuance of Individual Certificates,
the Trustee, the Certificate Registrar, the Servicer, any Paying Agent and the
Seller shall recognize the Holders of the Individual Certificates as
Certificateholders hereunder.
(f) Notwithstanding any other provision of this Agreement to the
contrary, so long as any Certificates are
IV-3
<PAGE>
registered in the name of Cede & Co., as nominee of the Depository, all
distributions of principal and interest on such Certificates and all notices
with respect to such Certificates shall be made and given, respectively, in the
manner provided in the Letter of Representations.
(g) Subject to the preceding paragraphs, upon surrender for
registration of transfer of any Certificate at the office of the Certificate
Registrar and, upon satisfaction of the conditions set forth below, the Servicer
shall execute in the name of the designated transferee or transferees, a new
Certificate of the same Percentage Interest and dated the date of authentication
by the Trustee. The Certificate Registrar shall notify the Servicer and the
Trustee of any such transfer.
At the option of the Certificateholders, Certificates may be
exchanged for other Certificates in authorized denominations of a like Class and
aggregate Percentage Interest, upon surrender of the Certificates to be
exchanged at such office. Whenever any Certificates are so surrendered for
exchange, the Servicer shall execute the Certificates which the
Certificateholder making the exchange is entitled to receive. Every Certificate
presented or surrendered for transfer or exchange shall be accompanied by wiring
instructions, if applicable, in the form of Exhibit E.
(h) No service charge shall be made for any transfer or exchange of
Certificates, but prior to transfer the Certificate Registrar may require
payment by the transferor of a sum sufficient to cover any tax or governmental
charge that may be imposed in connection with any transfer or exchange of
Certificates.
All Certificates surrendered for transfer and exchange shall be marked
canceled by the Authenticating Agent and retained for one year and destroyed
thereafter.
(i) By acceptance of an Individual Certificate, whether upon original
issuance or subsequent transfer, each holder of such a Certificate acknowledges
the restrictions on the transfer of such Certificate set forth in the Securities
Legend and agrees that it will transfer such Certificate only as provided
herein. In addition to the provisions of Section 4.02(n), the following
restrictions shall apply with respect to the transfer and registration of
transfer of an Individual Certificate to a transferee that takes delivery in the
form of an Individual Certificate:
(i) The Certificate Registrar shall register the transfer of an
Individual Certificate if the requested
IV-4
<PAGE>
transfer is being made to transferee who has provided the Certificate
Registrar with a Rule 144A Certification.
(ii) The Certificate Registrar shall register the transfer of
any Individual Certificate (other than the initial delivery of the
Class B Certificates to the Spread Account Depositor) if (x) the
transferor has advised the Certificate Registrar in writing that the
Certificate is being transferred to an Institutional Accredited
Investor; and (y) prior to the transfer the transferee furnishes to
the Certificate Registrar a Transferee Letter, provided that, if based
upon an Opinion of Counsel to the effect that the delivery of (x) and
(y) above are not sufficient to confirm that the proposed transfer is
being made pursuant to an exemption from, or in a transaction not
subject to, the registration requirements of the Securities Act and
other applicable laws, the Certificate Registrar may as a condition of
the registration of any such transfer require the transferor to
furnish other certifications, legal opinions or other information
prior to registering the transfer of an Individual Certificate.
(j) Subject to Section 4.02(n), so long as the Global Certificate
remains outstanding and is held by or on behalf of the Depository, transfers of
beneficial interests in the Global Certificate, or transfers by holders of
Individual Certificates to transferees that take delivery in the form of
beneficial interests in the Global Certificate, may be made only in accordance
with this Section 4.02(j) and in accordance with the rules of the Depository.
(i) In the case of a beneficial interest in the Global
Certificate being transferred to an Institutional Accredited Investor,
such transferee shall be required to take delivery in the form of an
Individual Certificate or Certificates and the Certificate Registrar
shall register such transfer only upon compliance with the provisions
of Section 4.02(i)(ii).
(ii) In the case of a beneficial interest in the Global
Certificate being transferred to a transferee that takes delivery in
the form of an Individual Certificate or Certificates, except as set
forth in clause (i) above, the Certificate Registrar shall register
such transfer only upon compliance with the provisions of Section
4.02(i)(i).
IV-5
<PAGE>
(iii) In the case of an Individual Certificate being transferred
to a transferee that takes delivery in the form of a beneficial
interest in a Global Certificate, the Certificate Registrar shall
register such transfer if the transferee has provided the Certificate
Registrar with a Rule 144A Certification.
(iv) No restrictions shall apply with respect to the transfer or
registration of transfer of a beneficial interest in the Global
Certificate to a transferee that takes delivery in the form of a
beneficial interest in the Global Certificate.
(k) Subject to Section 4.02(n), an exchange of a beneficial interest
in the Global Certificate for an Individual Certificate or Certificates, an
exchange of an Individual Certificate or Certificates for a beneficial interest
in the Global Certificate and an exchange of an Individual Certificate or
Certificates for another Individual Certificate or Certificates (in each case,
whether or not such exchange is made in anticipation of subsequent transfer,
and, in the case of the Global Certificate, so long as such Certificate remains
outstanding and is held by or on behalf of the Depository) may be made only in
accordance with this Section 4.02(k) and in accordance with the rules of the
Depository.
(i) A holder of a beneficial interest in the Global Certificate
may at any time exchange such beneficial interest for an Individual
Certificate or Certificates.
(ii) A holder of an Individual Certificate may exchange such
Certificate for a beneficial interest in the Global Certificate if
such holder furnishes to the Registrar a Rule 144A Certification.
(iii) A holder of an Individual Certificate may exchange such
Certificate for an equal aggregate principal amount of Individual
Certificates in different authorized denominations without any
certification.
(l) (i) Upon acceptance for exchange or transfer of an Individual
Certificate for a beneficial interest in the Global Certificate as provided
herein, the Certificate Registrar shall cancel such Individual Certificate and
shall (or shall request the Depository to) endorse on the schedule affixed to
the applicable Global Certificate (or on a continuation of such schedule affixed
to the Global Certificate and made a part thereof) an appropriate notation
evidencing the date of such
IV-6
<PAGE>
exchange or transfer and an increase in the certificate balance of the Global
Certificate equal to the certificate balance of such Individual Certificate
exchanged or transferred therefor.
(ii) Upon acceptance for exchange or transfer of a beneficial
interest in the Global Certificate for an Individual Certificate as
provided herein, the Certificate Registrar shall (or shall request the
Depository to) endorse on the schedule affixed to the Global
Certificate (or on a continuation of such schedule affixed to the
Global Certificate and made a part thereof) an appropriate notation
evidencing the date of such exchange or transfer and a decrease in the
certificate balance of the Global Certificate equal to the certificate
balance of such Individual Certificate issued in exchange therefor or
upon transfer thereof.
(m) The Securities Legend shall be placed on any Individual
Certificate issued in exchange for or upon transfer of another Individual
Certificate or of a beneficial interest in the Global Certificate.
(n) Subject to the restrictions on transfer and exchange set forth in
this Section 4.02, the holder of any Individual Certificate may transfer or
exchange the same in whole or in part (in an initial certificate balance equal
to the minimum authorized denomination or any integral multiple of $1,000 in
excess thereof) by surrendering such Certificate at the Corporate Trust Office,
or at the office of any transfer agent, together with an executed instrument of
assignment and transfer satisfactory in form and substance to the Certificate
Registrar in the case of transfer and a written request for exchange in the case
of exchange. The holder of a beneficial interest in a Global Certificate may,
subject to the rules and procedures of the Depository, cause the Depository (or
its nominee) to notify the Certificate Registrar in writing of a request for
transfer or exchange of such beneficial interest for an Individual Certificate
or Certificates. Following a proper request for transfer or exchange, the
Certificate Registrar shall, within five Business Days of such request made at
such Corporate Trust Office, cause the Trustee to authenticate and the
Certificate Registrar to deliver at such Corporate Trust Office, to the
transferee (in the case of transfer) or holder (in the case of exchange) or send
by first class mail at the risk of the transferee (in the case of transfer) or
holder (in the case of exchange) to such address as the transferee or holder, as
applicable, may request, an Individual Certificate or Certificates, as the case
may require, for a like aggregate Percentage Interest and in such authorized
denomination or denominations as may be requested. The presentation for
transfer
IV-7
<PAGE>
or exchange of any Individual Certificate shall not be valid unless made at the
Corporate Trust Office by the registered holder in person, or by a duly
authorized attorney-in-fact.
(o) No transfer of any Certificate shall be made unless such transfer
is exempt from the registration requirements of the Securities Act and any
applicable state securities laws or is made in accordance with said Act and
laws. In the event of any such transfer, unless such transfer is made in
reliance upon Rule 144A under the Securities Act and except for the initial
issuance of the Class B Certificates to the Spread Account Depositor, (i) the
Trustee may require a written Opinion of Counsel (which may be in-house counsel)
acceptable to and in form and substance reasonably satisfactory to the Trustee
that such transfer may be made pursuant to an exemption, describing the
applicable exemption and the basis therefor, from said Act and laws or is being
made pursuant to said Act and laws, which Opinion of Counsel shall not be an
expense of the Trustee, the Seller, the Servicer or the Trust Fund and (ii) the
Trustee shall require the transferee to execute a Transferee Letter certifying
to the Seller and the Trustee the facts surrounding such transfer, which
Transferee Letter shall not be an expense of the Trustee, the Seller, the
Servicer or the Trust Fund. The holder of a Certificate desiring to effect such
transfer shall, and does hereby agree to, indemnify the Trustee, the Seller and
the Servicer against any liability that may result if the transfer is not so
exempt or is not made in accordance with such federal and state laws. None of
the Seller, the Servicer, the Trustee or the Trust Fund intends or is obligated
to register or qualify any Certificate under the Securities Act or any state
securities laws.
(p) No Certificate may be acquired directly or indirectly, for or on
behalf of an employee benefit plan or other retirement arrangement subject to
ERISA, and/or Section 4975 of the Code, (collectively, a "Plan"). No transfer
of a Certificate representing an Individual Certificate shall be made unless the
Trustee shall have received a certification from the transferee of such
Individual Certificate, acceptable to and in form and substance satisfactory to
the Trustee and the Servicer, to the effect that such transferee is not
acquiring a Certificate, directly or indirectly, for or on behalf of a Plan.
Notwithstanding anything else to the contrary herein, in the event any purported
transfer of any certificate representing an Individual Certificate is made
without delivery of the certification referred to above, such certification
shall be deemed to have been made by the Transferee by its acceptance of such
Individual Certificate. In addition, any purported transfer of a Certificate
representing an Individual Certificate directly or indirectly to or on behalf of
a Plan shall be void and of no
IV-8
<PAGE>
effect. The acquisition of a Certificate representing an interest in a Global
Certificate shall be deemed a representation by the acquirer that it is not
acquiring a Certificate, directly or indirectly, for or on behalf of a Plan.
(q) Notwithstanding any other provision of this Agreement to the
contrary, on the Closing Date, the Trustee shall authenticate in the name of,
and deliver to, the Spread Account Depositor, the Class B Certificate in the
form of a single Individual Certificate in an aggregate principal amount equal
to the Original Class B Principal Balance. The Class B Certificate may not be
sold, pledged, transferred, assigned or otherwise conveyed, in whole or in part,
without the prior written approval of the SBA and a copy of such approval shall
be furnished to the Trustee. A legend to such effect shall be placed on the
Class B Certificate.
Section 4.03 Mutilated, Destroyed, Lost or Stolen Certificates.
-------------------------------------------------
If (i) any mutilated Certificate is surrendered to the Certificate
Registrar, or the Trustee and the Certificate Registrar receives evidence to its
satisfaction of the destruction, loss or theft of any Certificate, and (ii)
there is delivered to the Servicer, the Trustee and the Certificate Registrar
such security or indemnity as may be required by each of them to save each of
them harmless, then, in the absence of notice to the Servicer, the Trustee and
the Certificate Registrar that such Certificate has been acquired by a bona fide
purchaser, the Servicer shall execute and deliver, and the Trustee shall
authenticate, in exchange for or in lieu of any such mutilated, destroyed, lost
or stolen Certificate, a new Certificate of like Class, tenor and Percentage
Interest, but bearing a number not contemporaneously outstanding. Upon the
issuance of any new Certificate under this Section 4.03, the Servicer and the
Trustee may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses connected therewith. Any duplicate Certificate issued pursuant to this
Section 4.03 shall constitute complete and indefeasible evidence of ownership in
the Trust Fund, as if originally issued, whether or not the mutilated,
destroyed, lost or stolen Certificate shall be found at any time.
Section 4.04 Persons Deemed Owners.
---------------------
Prior to due presentation of a Certificate for registration of
transfer, the Servicer, the Seller, the Trustee, the Paying Agent and the
Certificate Registrar may treat the Person in whose name any Certificate is
registered as the owner of such Certificate for the purpose of receiving
remittances
IV-9
<PAGE>
pursuant to Section 6.07 and for all other purposes whatsoever, and the Seller,
the Servicer, the Trustee and the Certificate Registrar shall not be affected by
notice to the contrary.
IV-10
<PAGE>
ARTICLE V
ADMINISTRATION AND SERVICING OF SBA LOANS
-----------------------------------------
Section 5.01 Duties of the Servicer.
----------------------
(a) The Servicer covenants and agrees that it shall act as agent (and
the Servicer is hereby appointed to act as agent) on behalf of the Trust Fund
and that, in such capacity, it shall: (i) prepare and file, or cause to be
prepared and filed, in a timely manner, any Tax Return required to be filed by
the Trust Fund; (ii) prepare and forward, or cause to be prepared and forwarded,
to the Trustee, the Certificateholders and to the Internal Revenue Service and
any other relevant governmental taxing authority all information returns or
reports as and when required to be provided to them in accordance with any
provision of federal, state or local income tax laws; (iii) to the extent that
the affairs of the Trust Fund are within its control, conduct such affairs at
all times that any Certificates are outstanding so as to maintain the status of
the Trust Fund as a grantor trust under any applicable federal, state and local
laws; (iv) pay the amount of any and all federal, state, and local taxes,
imposed on the Trust Fund when and as the same shall be due and payable (but
such obligation shall not prevent the Servicer or any other appropriate Person
from contesting any such tax in appropriate proceedings and shall not prevent
the Servicer from withholding payment of such tax, if permitted by law, pending
the outcome of such proceedings); (v) ensure that any such returns or reports
filed on behalf of the Trust Fund are properly executed by the appropriate
person; and (vi) represent the Trust Fund in any administrative or judicial
proceedings relating to an examination or audit by any governmental taxing
authority, request an administrative adjustment as to any taxable year of the
Trust Fund, enter into settlement agreements with any governmental taxing
agency, extend any statute of limitations relating to any item of the Trust Fund
and otherwise act on behalf of the Trust Fund in relation to any tax matter
involving the Trust Fund. The Servicer shall indemnify the Trustee and the
Trust Fund for any liability it may incur in connection with this Section
5.01(a), which indemnification shall survive the termination of the Trust Fund;
provided, however, that the Servicer shall not indemnify the Trustee for the
- -------- -------
Trustee's negligence, willful misconduct or bad faith.
(b) The Servicer, as independent contract servicer, shall service and
administer the SBA 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 and consistent with the terms
of this Agreement and the Multi-Party Agreement and the SBA
V-1
<PAGE>
Rules and Regulations. The Servicer may enter into Subservicing Agreements for
anyservicing and administration of SBA (S) 7(a) Loans with any entity approved
with prior written consent by the SBA. Any such Subservicing Agreement shall be
consistent with and not violate the provisions of this Agreement and the Multi-
Party Agreement. The Servicer shall be entitled to terminate any Subservicing
Agreement in accordance with the terms and conditions of such Subservicing
Agreement and to either itself directly service the related SBA (S) 7(a) Loans
or enter into a Subservicing Agreement with a successor Subservicer which
qualifies hereunder.
(c) Notwithstanding any Subservicing Agreement, any of the provisions
of this Agreement relating to agreements or arrangements between the Servicer
and a Subservicer or reference to actions taken through a Subservicer or
otherwise, the Servicer shall remain obligated and primarily liable to the
Trustee, for itself and on behalf of the Certificateholders, the SBA and the
Certificateholders for the servicing and administering of the SBA Loans in
accordance with the provisions of this Agreement and the Multi-Party Agreement
and the SBA Rules and Regulations, without diminution of such obligation or
liability by virtue of such Subservicing Agreements or arrangements or by virtue
of indemnification from the Subservicer and to the same extent and under the
same terms and conditions as if the Servicer alone were servicing and
administering the SBA Loans. For purposes of this Agreement, the Servicer shall
be deemed to have received payments on SBA Loans when any Subservicer has
received such payments. The Servicer shall be entitled to enter into any
agreement with a Subservicer for indemnification of the Servicer by such
Subservicer, and nothing contained in this Agreement shall be deemed to limit or
modify such indemnification.
(d) Any Subservicing Agreement that may be entered into and any
transactions or services relating to the SBA Loans involving a Subservicer in
its capacity as such and not as an originator shall be deemed to be between the
Subservicer and the Servicer alone, and the Trustee, the SBA and
Certificateholders shall not be deemed parties thereto and shall have no claims,
rights, obligations, duties or liabilities with respect to the Subservicer
except as set forth in Section 5.01(e).
(e) In the event the Servicer shall for any reason no longer be the
Servicer (including by reason of an Event of Default), the Trustee or its
designee shall, subject to Section 10.02 hereof and the Multi-Party Agreement,
thereupon assume all of the rights and obligations of the Servicer under each
Subservicing Agreement that the Servicer may have entered into, unless the
Trustee is then permitted and elects to terminate any Subservicing Agreement in
accordance with its terms. The
V-2
<PAGE>
Trustee, its designee or the successor servicer for the Trustee shall be deemed
to have assumed all of the Servicer's interest therein and to have replaced the
Servicer as a party to each Subservicing Agreement to the same extent as if the
Subservicing Agreements had been assigned to the assuming party, except that the
Servicer shall not thereby be relieved of any liability or obligations under the
Subservicing Agreements. The Servicer at its expense and without right of
reimbursement therefor, shall, upon request of the Trustee, deliver to the
assuming party all documents and records relating to each Subservicing Agreement
and the SBA Loans then being serviced and an accounting of amounts collected and
held by it and otherwise use its best efforts to effect the orderly and
efficient transfer of the Subservicing Agreements to the assuming party.
(f) So long as it is consistent with the terms of this Agreement and
the Multi-Party Agreement, the SBA Agreement (as defined in the Multi-Party
Agreement) and the SBA Rules and Regulations, the Servicer may waive, modify or
vary any term of any SBA Loan or consent to the postponement of strict
compliance with any such term or in any manner grant indulgence to any Obligor
if in the Servicer's determination such waiver, modification, postponement or
indulgence is not materially adverse to the interests of the SBA and the
Certificateholders, provided, however, that (unless (x) the Obligor is in
-------- -------
default with respect to the SBA Loan, or such default is, in the judgment of the
Servicer, imminent and (y) the Servicer determines that any modification would
not be considered a new loan for federal income tax purposes) the Servicer may
not permit any modification with respect to any SBA Loan that would change the
SBA Loan Interest Rate, defer (subject to Section 5.12), or forgive the payment
of any principal or interest (unless in connection with the liquidation of the
related SBA Loan), or extend the final maturity date on such SBA Loan without
the consent of the SBA, if such consent is then required by the SBA Rules and
Regulations. The Servicer may exercise all unilateral servicing actions
permitted by participating lenders in accordance with the SBA Rules and
Regulations. No costs incurred by the Servicer or any Subservicer in respect of
Servicing Advances shall for the purposes of distributions to Certificateholders
be added to the amount owing under the related SBA Loan. Without limiting the
generality of the foregoing, so long as it is consistent with the SBA Rules and
Regulations, the Servicer shall continue, and is hereby authorized and empowered
to execute and deliver on behalf of the Trustee, the SBA and each
Certificateholder, all instruments of satisfaction or cancellation, or of
partial or full release, discharge and all other comparable instruments, with
respect to the SBA Loans and with respect to any Mortgaged Properties or other
Collateral. If reasonably required by the Servicer, each Certificateholder
and/or the Trustee shall furnish
V-3
<PAGE>
the Servicer, within 5 Business Days of receipt of the Servicer's request, 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. Any such request to the Trustee shall be accompanied by a
certification in the form of Exhibit I attached hereto signed by a Servicing
Officer.
The Servicer, in servicing and administering the SBA Loans, shall
employ or cause to be employed procedures (including collection, foreclosure and
Foreclosed Property and Repossessed Collateral management procedures) and
exercise the same care that it customarily employs and exercises in servicing
and administering SBA Loans for its own account, in accordance with the SBA
Rules and Regulations and giving due consideration to the Certificateholders'
and the SBA's reliance on the Servicer.
(g) On and after such time as the Trustee receives the resignation of,
or notice of the removal of, the Servicer from its rights and obligations under
this Agreement, and with respect to resignation pursuant to Section 9.04, after
receipt of the Opinion of Counsel required pursuant to Section 9.04 addressed to
the SBA and the Trustee, the Trustee or its designee shall assume all of the
rights and obligations of the Servicer, subject to Section 10.02 hereof and the
Multi-Party Agreement. The Servicer shall, upon request of the Trustee but at
the expense of the Servicer, deliver to the Trustee all documents and records
(including computer tapes and diskettes) relating to the SBA Loans and an
accounting of amounts collected and held by the Servicer and otherwise use its
best efforts to effect the orderly and efficient transfer of servicing rights
and obligations to the assuming party.
(h) For so long as any of the Certificates are outstanding and are
"restricted securities" within the meaning of Rule 144(a)(3) of the Securities
Act, (1) the Servicer will provide or cause to be provided to any holder of such
Certificates and any prospective purchaser thereof designated by such a holder,
upon the request of such holder or prospective purchaser, the information
required to be provided to such holder or prospective purchaser by Rule
144A(d)(4) under the Securities Act; and (2) the Servicer shall update such
information from time to time in order to prevent such information from becoming
false and misleading and will take such other actions as are necessary to ensure
that the safe harbor exemption from the registration requirements of the
Securities Act under Rule 144A is and will be available for resales of such
Certificates conducted in accordance with Rule 144A.
V-4
<PAGE>
Section 5.02 Liquidation of SBA Loans.
------------------------
In the event that any payment due under any SBA Loan and not postponed
pursuant to Section 5.01 is not paid when the same becomes due and payable, or
in the event the Obligor fails to perform any other covenant or obligation under
the SBA Loan, the Servicer shall take such action in accordance with the
applicable SBA Rules and Regulations as it shall deem to be in the best
interests of the Certificateholders and the SBA. With respect to any such SBA
(S) 7(a) Loan for which the SBA has expressed to the Servicer the SBA's desire
to assume servicing of such SBA Loan consistent with the SBA Rules and
Regulations, the Trustee shall, upon written direction of the Servicer, deliver
to the SBA or its designee all or any portion of the Trustee's Document File
relating to such SBA (S) 7(a) Loan and the Trustee shall execute such documents,
including but not limited to an endorsement of the related SBA Note and an
assignment of the related Mortgage, as the Servicer or the SBA shall request.
Expenses incurred in connection with any such action shall be the responsibility
of the Servicer and shall not be chargeable to the Principal and Interest
Account or the Certificate Account. Subject to the SBA Rules and Regulations
and with the prior written consent of the SBA (if required by the SBA Rules and
Regulations), the Servicer shall foreclose upon or otherwise comparably effect
the ownership of Mortgaged Properties or other Collateral relating to defaulted
SBA (S) 7(a) Loans for which the related SBA (S) 7(a) Loan is still outstanding,
as to which no satisfactory arrangements can be made for collection of
delinquent payments in accordance with the provisions of Section 5.10. In
connection with such foreclosure or other conversion, the Servicer shall
exercise collection and foreclosure procedures with the same degree of care and
skill in its exercise or use as it would exercise or use under the circumstances
in the conduct of its own affairs. The Unguaranteed Percentage of any amounts
advanced in connection with such foreclosure or other action shall constitute
"Servicing Advances." The Servicer shall take into account the existence of any
hazardous substances, hazardous wastes or solid wastes on Mortgaged Properties
in determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property, and will not foreclose on a Mortgaged
Property where it has cause to believe such substances exist unless it has
received an environmental report and such report reveals no environmental
problems, or such Mortgaged Property is subject to an environmental
rehabilitation for which the Seller is not responsible.
After an SBA Loan has become a Liquidated SBA Loan, the Servicer shall
promptly prepare and forward to the Trustee and the SBA and upon request, any
Certificateholder, a Liquidation
V-5
<PAGE>
Report, in the form attached hereto as Exhibit J, detailing the Liquidation
Proceeds received from the Liquidated SBA Loan, expenses incurred with respect
thereto, and any loss incurred in connection therewith.
Section 5.03 Establishment of Principal and
------------------------------
Interest Accounts; Deposits in
------------------------------
Principal and Interest Accounts.
---------------------------------
(a) The Servicer shall cause to be established and maintained one or
more Principal and Interest Accounts, in one or more Designated Depository
Institutions, in the form of time deposit or demand accounts, which may be
interest-bearing or such accounts may be trust accounts wherein the moneys
therein are invested in Permitted Instruments, titled "First National Bank of
New England, in trust for the registered holders of First National Bank of New
England SBA Loan-Backed Adjustable Rate Certificates, Series 1998-1, Class A and
Class B." Such Principal and Interest Accounts shall be insured by the BIF or
SAIF administered by the FDIC to the maximum extent provided by law. The
creation of any Principal and Interest Account shall be evidenced by a letter
agreement in the form of Exhibit C hereto.
A copy of such letter agreement shall be furnished to the Trustee, the
SBA and, upon request, any Certificateholder.
(b) The Servicer and each Subservicer shall deposit without
duplication (within two Business Days of receipt thereof) in the Principal and
Interest Account and retain therein:
(i) the Unguaranteed Percentage of all payments received after
the Cut-Off Date on account of principal on the SBA Loans, including
the Unguaranteed Percentage of all Excess Payments, Principal
Prepayments and Curtailments collected after the Cut-Off Date, the
Unguaranteed Percentage of all Insurance Proceeds (other than amounts
to be applied to restoration or repair of any related Mortgaged
Property, or to be released to the Obligor in accordance with
customary servicing procedures) and the Unguaranteed Percentage of all
Released Mortgaged Property Proceeds;
(ii) all payments received after the Cut-Off Date on account of
interest on the Unguaranteed Interest of the SBA Loans (net of the
Servicing Fee allocable to such SBA Loans and other servicing
compensation payable to the Servicer as permitted herein);
V-6
<PAGE>
(iii) the Unguaranteed Percentage of all Net Liquidation
Proceeds;
(iv) the Unguaranteed Percentage of all Insurance Proceeds
(other than amounts to be applied to restoration or repair of any
related Mortgaged Property, or to be released to the Obligor in
accordance with customary servicing procedures);
(v) the Unguaranteed Percentage of all Released Mortgaged
Property Proceeds;
(vi) any amounts paid in connection with the repurchase of the
Unguaranteed Interest of any SBA Loan and the amount of any
Substitution Adjustment received pursuant to Sections 2.05 and 3.03;
(vii) any amount required to be deposited in the Principal and
Interest Account pursuant to Section 5.04 or 5.10; and
(viii) the amount of any losses incurred in connection with
investments in Permitted Instruments.
(c) The foregoing requirements for deposit in the Principal and
Interest Account shall be exclusive, it being understood and agreed that,
without limiting the generality of the foregoing, payments with respect to the
Guaranteed Interest, and the Servicing Fee (to the extent received and permitted
by Section 7.03), with respect to each SBA Loan and the Additional Fee with
respect to each Additional Fee SBA Loan, together with the difference between
any Liquidation Proceeds and the related Net Liquidation Proceeds, need not be
deposited by the Servicer in the Principal and Interest Account.
(d) Any interest earnings on funds held in the Principal and Interest
Account paid by a Designated Depository Institution shall be for the account of
the Servicer and may only be withdrawn from the Principal and Interest Account
by the Servicer immediately following its monthly remittance to the Trustee
pursuant to Section 5.04(a). Any reference herein to amounts on deposit in the
Principal and Interest Account shall refer to amounts net of such investment
earnings.
Section 5.04 Permitted Withdrawals From the
------------------------------
Principal and Interest Account
------------------------------
The Servicer shall withdraw funds from the Principal and Interest
Account for the following purposes:
V-7
<PAGE>
(a) to effect the remittance to the Trustee on each Determination Date
for deposit in the Certificate Account, the portion of the Available Funds for
the related Remittance Date that is separate from Compensating Interest, Monthly
Advances and amounts then on deposit in the Spread Account;
(b) to reimburse itself for any accrued unpaid Servicing Fees
allocable to the SBA Loans, unreimbursed Monthly Advances and for unreimbursed
Servicing Advances to the extent deposited in the Principal and Interest Account
(and not netted from Monthly Payments received). The Servicer's right to
reimbursement for unpaid Servicing Fees and, except as provided in the following
sentence, Servicing Advances and Monthly Advances shall be limited to
Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds
and such other amounts as may be collected by the Servicer from the Obligor or
otherwise relating to the SBA Loan in respect of which such unreimbursed amounts
are owed. The Servicer's right to reimbursement for Servicing Advances and
Monthly Advances in excess of such amounts shall be limited to any late
collections of interest received on the SBA Loans generally, including
Liquidation Proceeds, Released Mortgaged Property Proceeds, Insurance Proceeds
and any other amounts;
(c) to withdraw any amount received from an Obligor that is
recoverable and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code in accordance with a
final, nonappealable order of a court having competent jurisdiction;
(d) (i) to make investments in Permitted Instruments and (ii) to pay
to itself, as permitted by Section 5.03(d), interest paid in respect of
Permitted Instruments or by a Designated Depository Institution on funds
deposited in the Principal and Interest Account;
(e) to withdraw any funds deposited in the Principal and Interest
Account that were not required to be deposited therein or were deposited therein
in error;
(f) to pay itself servicing compensation pursuant to Section 7.03
hereof or interest as permitted under the definition of Excess Proceeds; and
(g) to clear and terminate the Principal and Interest Account upon the
termination of this Agreement.
So long as no default or Event of Default shall have occurred and be
continuing, and consistent with any requirements of the Code, the Principal and
Interest Account shall either be
V-8
<PAGE>
maintained with a Designated Depository Institution as an interest-bearing
account meeting the requirements set forth in Section 5.03(a), or the funds held
therein may be invested by the Servicer (to the extent practicable) in Permitted
Instruments, as directed in writing by the Servicer. In either case, funds in
the Principal and Interest Account must be available for withdrawal without
penalty, and any Permitted Instruments must mature not later than the Business
Day immediately preceding the Determination Date next following the date of such
investment (except that if such Permitted Instrument is an obligation of the
institution that maintains such account, then such Permitted Instrument shall
mature not later than such Determination Date) and shall not be sold or disposed
of prior to its maturity. All Permitted Instruments must be held by or
registered in the name of "First National Bank of New England, in trust for the
registered holders of First National Bank of New England SBA Loan-Backed
Adjustable Rate Certificates, Series 1998-1." All interest or other earnings
from funds on deposit in the Principal and Interest Account (or any Permitted
Instruments thereof) shall be the exclusive property of the Servicer, and may be
withdrawn from the Principal and Interest Account pursuant to clause (d) above.
The amount of any losses incurred in connection with the investment of funds in
the Principal and Interest Account in Permitted Instruments shall be deposited
in the Principal and Interest Account by the Servicer from its own funds
immediately as realized without reimbursement therefor.
Section 5.05 [Intentionally Omitted]
Section 5.06 Transfer of Accounts.
--------------------
The Servicer may, upon written notice to the Trustee and the SBA,
transfer any Principal and Interest Account to a different Designated Depository
Institution.
Section 5.07 Maintenance of Hazard Insurance.
-------------------------------
The Servicer shall comply with the SBA Rules and Regulations
concerning the issuance and maintenance of fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is located.
If at origination of an SBA Loan, to the best of the Servicer's knowledge after
reasonable investigation, the related Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available)
consistent with the SBA Rules and Regulations, the Servicer will require the
related Obligor to purchase a flood insurance policy with a generally acceptable
insurance carrier, in an amount representing coverage not less than the least of
(i) the full insurable value of the Mortgaged
V-9
<PAGE>
Property, or (ii) the maximum amount of insurance available under the National
Flood Insurance Act of 1968, as amended. The Servicer shall also maintain, to
the extent such insurance is available, and required by the SBA Rules and
Regulations and the Servicer's policies, on Foreclosed Property constituting
real property, fire and hazard insurance in the amounts described above and
liability insurance. Any amounts collected by the Servicer under any such
policies (other than amounts to be applied to the restoration or repair of the
Mortgaged Property, or to be released to the Obligor in accordance with the SBA
Rules and Regulations) shall be deposited in the Principal and Interest Account,
subject to withdrawal pursuant to Section 5.04. It is understood and agreed that
no earthquake or other additional insurance need be required by the Servicer of
any Obligor or maintained on Foreclosed Property, other than pursuant to such
applicable laws and regulations as shall at any time be in force and as shall
require such additional insurance. All policies required hereunder shall be
endorsed with standard mortgagee clauses with losses payable to the Servicer or
its affiliates.
Section 5.08 [Intentionally Omitted]
Section 5.09 Fidelity Bond.
-------------
The Servicer shall maintain with a responsible company, and at its own
expense, a blanket fidelity bond and an errors and omissions insurance policy,
in a minimum amount equal to $1,500,000, and a maximum deductible of $100,000,
if commercially available, with coverage on all employees acting in any capacity
requiring such persons to handle funds, money, documents or papers relating to
the SBA Loans ("Servicer Employees"). The fidelity bond shall insure the
Trustee, its officers and employees against losses resulting from forgery,
theft, embezzlement or fraud by such Servicer Employees. The errors and
omissions policy shall insure against losses resulting from the errors,
omissions and negligent acts of such Servicer employees. No provision of this
Section 5.09 requiring such fidelity bond and errors and omissions insurance
shall relieve the Servicer from its duties as set forth in this Agreement. Upon
the request of the Trustee, the SBA or any Certificateholder, the Servicer shall
cause to be delivered to the Trustee, the SBA or such Certificateholder a
certified true copy of such fidelity bond and insurance policy. The current
issuer of such fidelity bond and insurance policy is the ITT Hartford Group,
located in Hartford, Connecticut.
V-10
<PAGE>
Section 5.10 Title, Management and Disposition
---------------------------------
of Foreclosed Property
----------------------
In the event that title to a Mortgaged Property or other Collateral is
acquired in foreclosure, by deed in lieu of foreclosure or by other legal
process(a "Foreclosed Property"), the deed or certificate of sale or the
Repossessed Collateral may be taken in the name of the Trustee on behalf of the
Trust for the benefit of the Certificateholders and the SBA, as their interests
may appear.
Unless the servicing of a Foreclosed Property or item of Repossessed
Collateral relating to an SBA (S) 7(a) Loan is assumed by the SBA pursuant to
the SBA Rules and Regulations, the Servicer, subject to Sections 5.01 and 5.02
hereof, shall manage, conserve, protect and operate each Foreclosed Property or
other Repossessed Collateral for the SBA and the Certificateholders solely for
the purpose of its prudent and prompt disposition and sale. The Servicer shall,
either itself or through an agent selected by the Servicer, manage, conserve,
protect and operate the Foreclosed Property or other Repossessed Collateral in
the same manner that it manages, conserves, protects and operates other
foreclosed or repossessed property for its own account, and in the same manner
that similar property in the same locality as the Foreclosed Property or other
Repossessed Collateral is managed. The Servicer shall attempt to sell the same
(and may temporarily rent the same) on such terms and conditions as the Servicer
deems to be in the best interest of the SBA and the Certificateholders.
The Servicer shall cause to be deposited in the Principal and Interest
Account, no later than five Business Days after the receipt thereof, the
Unguaranteed Percentage of all revenues received with respect to the
conservation and disposition of the related Foreclosed Property or other
Repossessed Collateral net of Servicing Advances.
The disposition of Foreclosed Property or other Repossessed Collateral
shall be carried out by the Servicer at such price, and upon such terms and
conditions, as the Servicer, with SBA concurrence (if required by the SBA Rules
and Regulations), deems to be in the best interest of the SBA and the
Certificateholders. The Unguaranteed Percentage of the proceeds of sale of the
Foreclosed Property or other Repossessed Collateral shall promptly, but in no
event later than two Business Days after receipt, be deposited in the Principal
and Interest Account as received from time to time and, as soon as practicable
thereafter, the expenses of such sale shall be paid. The Servicer shall,
subject to Section 5.04, reimburse itself for any related unreimbursed Servicing
Advances, unpaid Servicing
V-11
<PAGE>
Fees and unreimbursed Monthly Advances, and the Servicer shall deposit in the
Principal and Interest Account the Unguaranteed Percentage of the net cash
proceeds of such sale to be distributed to the Certificateholders in
accordance with Section 6.07 hereof.
In the event any Mortgaged Property or other Repossessed Collateral is
acquired as aforesaid or otherwise in connection with a default or imminent
default on an SBA Loan, the Servicer shall dispose of such Mortgaged Property or
other Repossessed Collateral within two years after its acquisition unless the
Servicer and the Trustee shall have received an Opinion of Counsel also
addressed to the SBA to the effect that such longer retention will not cause the
Trust Fund to be subject to Federal income tax.
Section 5.11 [Intentionally Omitted.]
Section 5.12 Collection of Certain SBA
-------------------------
Loan Payments.
-------------
The Servicer shall make reasonable efforts to collect all payments
called for under the terms and provisions of the SBA Loans, and shall cause the
Obligor under the SBA Loan, to the extent such procedures shall be consistent
with this Agreement, to comply with the terms and provisions of any applicable
hazard insurance policy. Consistent with the foregoing and the SBA Rules and
Regulations, the Servicer may in its discretion waive or permit to be waived any
fee or charge (other than the Servicing Fee, without the written consent of the
SBA) which the Servicer would be entitled to retain hereunder as servicing
compensation and extend the due date for payments due on an SBA Note for a
period (with respect to each payment as to which the due date is extended) not
greater than 180 days after the initially scheduled due date for such payment
provided that the Servicer determines such extension would not be considered a
new mortgage loan for federal income tax purposes. In the event the Servicer
shall consent to the deferment of the due dates for payments due on an SBA Note,
the Servicer shall nonetheless make payment of any required Monthly Advance with
respect to the payments so extended to the same extent as if such installment
were due, owing and delinquent and had not been deferred, and shall be entitled
to reimbursement therefor in accordance with Section 5.04(b) hereof.
Section 5.13 Access to Certain Documentation and
-----------------------------------
Information Regarding the SBA Loans.
-----------------------------------
The Servicer shall provide to the Trustee, the SBA, the FDIC, and the
OCC, and the supervisory agents and examiners of
V-12
<PAGE>
each of the foregoing access to the documentation regarding the SBA Loans
required by applicable local, state and federal regulations, such access being
afforded without charge but only upon reasonable request and during normal
business hours at the offices of the Servicer designated by it.
V-13
<PAGE>
ARTICLE VI
PAYMENTS TO THE CERTIFICATEHOLDERS
----------------------------------
Section 6.01 Establishment of Certificate Account; Deposits in
-------------------------------------------------
Certificate Account; Permitted Withdrawals from
-----------------------------------------------
Certificate Account.
-------------------
(a) No later than the Closing Date, the Trustee will establish and
maintain with itself in its trust department a trust account, which shall not be
interest-bearing, titled "Certificate Account, Marine Midland Bank, as trustee
for the registered holders of First National Bank of New England SBA Loan-Backed
Adjustable Rate Certificates, Series 1998-1, Class A and Class B" (the
"Certificate Account"). The Trustee shall, promptly upon receipt, deposit in
the Certificate Account and retain therein:
(i) the Available Funds (net of the amount of Monthly Advances
and Compensating Interest deposited pursuant to subclause (ii) below
and amounts then on deposit in the Spread Account) remitted by the
Servicer;
(ii) the Compensating Interest and the portion of the Monthly
Advance remitted to the Trustee by the Servicer;
(iii) amounts transferred from the Spread Account pursuant to
Section 6.02(b)(i);
(iv) amounts required to be paid by the Servicer pursuant to
Section 6.06(e) in connection with losses on investments of amounts in
the Certificate Account; and
(v) amounts transferred from the Pre-Funding Account and the
Capitalized Interest Account on the Special Remittance Date pursuant
to Sections 6.04(c) and (h), respectively.
(b) Amounts on deposit in the Certificate Account shall be withdrawn
on each Remittance Date by the Trustee, or the Paying Agent, on its behalf, to
effect the distribution described in Section 6.07(b) and thereafter by the
following parties in no particular order of priority:
VI-1
<PAGE>
(i) by the Trustee, to invest amounts on deposit in the
Certificate Account in Permitted Instruments pursuant to Section 6.06;
(ii) by the Trustee, to pay on a monthly basis to the Servicer
as additional servicing compensation interest paid and earnings
realized on Permitted Instruments;
(iii) by the Trustee, to withdraw any amount not required to be
deposited in the Certificate Account or deposited therein in error;
and
(iv) by the Trustee, to clear and terminate the Certificate
Account upon the termination of this Agreement in accordance with the
terms of Section 11.01 hereof.
Section 6.02 Establishment of Spread Account; Deposits in Spread
---------------------------------------------------
Account; Permitted Withdrawals from Spread Account.
--------------------------------------------------
(a) No later than the Closing Date, the Trustee will establish with
the Spread Account Custodian an Account in accordance with the terms of the
Spread Account Agreement (the "Spread Account"). The Spread Account shall be
the property of the Spread Account Depositor, subject to the terms hereof and of
the Spread Account Agreement, and the funds held therein may be invested in
Permitted Instruments. The Spread Account shall not constitute part of the
Trust Fund. The Trustee or the Spread Account Custodian, as the case may be,
shall, promptly upon receipt, deposit into the Spread Account or, in the case of
the Trustee, transfer to the Spread Account Custodian for deposit in the Spread
Account:
(i) on the Closing Date, the Initial Spread Account Deposit
made by the Spread Account Depositor;
(ii) on each Remittance Date, that portion of the Available
Funds, if any, required to be deposited into the Spread Account
pursuant to Section 6.07(b)(vi) until the Spread Account Balance
equals the then applicable Specified Spread Account Requirement; and
(iii) amounts required to be paid by the Servicer pursuant to
Section 6.06(e) in connection with losses on investments of amounts in
the Spread Account.
VI-2
<PAGE>
(b) Amounts on deposit in the Spread Account shall be withdrawn by
the Spread Account Custodian and transferred to the Trustee for distribution in
the manner set forth in subclause (c) below on each Remittance Date in the
following order of priority:
(i) to deposit in the Certificate Account an amount by which
(a) the sum of the Class A and Class B Interest Distribution Amounts,
the Class A and Class B Principal Distribution Amounts and the Class A
and Class B Carry Forward Amounts exceeds (b) the Available Funds for
such Remittance Date (but excluding from such definition of Available
Funds, amounts in the Spread Account);
(ii) to deposit in the Certificate Account the amount, if any,
required to make the full distribution to the Expense Account pursuant
to Section 6.07(b)(v); and
(iii) to the extent that the amount then on deposit in the
Spread Account after giving effect to all required transfers from the
Spread Account to the Certificate Account on such Remittance Date then
exceeds the Specified Spread Account Requirement as of such Remittance
Date (such excess, a "Spread Account Excess"), an amount equal to such
Spread Account Excess shall be distributed by the Spread Account
Custodian to the Spread Account Depositor;
and also, in no particular order of priority:
(iv) to invest amounts on deposit in the Spread Account in
Permitted Instruments pursuant to Section 6.06;
(v) to withdraw any amount not required to be deposited in the
Spread Account or deposited therein in error; and
(vi) to clear and terminate the Spread Account upon the
termination of this Agreement in accordance with the terms of Section
11.01.
(c) Any amounts which are required to be withdrawn from the Spread
Account pursuant to paragraph (b) above shall be withdrawn from the Spread
Account in the following order of priority: (i) first, from any uninvested
-----
funds therein, and (ii) second, from the proceeds of the liquidation of any
------
investments therein pursuant to Section 6.06(b).
VI-3
<PAGE>
(d) Any amounts which are distributed by the Spread Account Custodian
to the Spread Account Depositor pursuant to paragraph (b) above will not be
required to be refunded, regardless of whether there are sufficient funds on a
subsequent Remittance Date to make a full distribution to holders of the
Certificates on such Remittance Date.
Section 6.03 Establishment of Expense Account; Deposits in Expense
-----------------------------------------------------
Account; Permitted Withdrawals from Expense Account
---------------------------------------------------
(a) No later than the Closing Date, the Trustee will establish with
itself an account for the benefit of the Trustee to pay its fees and expenses
related to the Trust Fund (the "Expense Account"). The Expense Account shall
not constitute part of the Trust Fund and is for the benefit of the Trustee and,
on a subordinate basis, for the benefit of the Servicer as described in (b)(ii)
and (c) below. The Trustee shall deposit into the Expense Account:
(i) on each Remittance Date from the amounts on deposit in the
Certificate Account an amount equal to one-twelfth of the Annual
Expense Escrow Amount; and
(ii) upon receipt, amounts required to be paid by the Servicer
pursuant to Section 6.06(e) in connection with losses on investments
of amounts in the Expense Account.
If, at any time the amount then on deposit in the Expense Account shall be
insufficient to pay in full the fees and expenses of the Trustee then due, the
Trustee shall make demand on the Servicer to advance the amount of such
insufficiency, and the Servicer shall promptly advance such amount to the
Trustee. Thereafter, the Servicer shall be entitled to reimbursement from the
Expense Account for the amount of any such advance from any excess funds
available pursuant to subclause (c)(ii) below. Without limiting the obligation
of the Servicer to advance such insufficiency, in the event the Servicer does
not advance the full amount of such insufficiency by the Business Day
immediately preceding the Determination Date, the amount of such insufficiency
shall be deposited into the Expense Account for payment to the Trustee pursuant
to Section 6.07(b)(v), to the extent of available funds in the Certificate
Account.
(b) The Trustee, at the direction of the Servicer, may invest amounts
on deposit in the Expense Account in Permitted Instruments pursuant to Section
6.06 hereof, and the Trustee shall withdraw amounts on deposit in the Expense
Account to:
VI-4
<PAGE>
(i) pay the Trustee's fees and expenses as described in
Section 2.08 hereof;
(ii) pay on a monthly basis to the Servicer as additional
servicing compensation interest paid and earnings realized on
Permitted Instruments;
(iii) withdraw any amounts not required to be deposited in the
Expense Account or deposited therein in error; and
(iv) clear and terminate the Expense Account upon the
termination of this Agreement in accordance with the terms of Section
11.01.
(c) On the twelfth Remittance Date following the Closing Date, an
on each twelfth Remittance Date thereafter, the Trustee shall determine that all
payments required to be made during the prior twelve month period pursuant to
subclauses (b)(i), (b)(ii) and (b)(iii) above, have been made, and, if all such
payments have been made, from the amounts remaining in the Expense Account, the
Trustee shall (in the following order of priority):
(i) reimburse the Servicer and/or the Seller, for reimbursable
advances made pursuant to Section 9.01;
(ii) reimburse the Servicer for advances made by it pursuant to
the last paragraph of subclause (a) above; and
(iii) remit to the Servicer as additional servicing compensation
any amounts remaining in the Expense Account after payments made
pursuant to subclauses (b)(i), (b)(ii), (b)(iii), (c)(i) and (c)(ii),
above.
Section 6.04 Pre-Funding Account and Capitalized Interest Account.
----------------------------------------------------
(a) No later than the Closing Date, the Seller shall establish and
maintain with the Trustee in its trust department a trust account, which shall
not be interest-bearing, titled "First National Bank of New England SBA Pre-
Funding Account 1998-1" (the "Pre-Funding Account"). The Pre-Funding Account
shall not constitute part of the Trust Fund. The Seller shall be deemed the
owner of the Pre-Funding Account for Federal income tax purposes. The Trustee
shall, promptly upon receipt, deposit into
VI-5
<PAGE>
the Pre-Funding Account and retain therein the Original Pre-Funded Amount from
the proceeds of the sale of the Certificates.
(b) On each Subsequent Transfer Date, the Seller shall instruct the
Trustee to withdraw from the Pre-Funding Account an amount equal to 100% of the
aggregate Principal Balances of the Subsequent SBA Loans as of the related
Subsequent Cut-Off Date sold to the Trust Fund on such Subsequent Transfer Date
and pay such amount to or upon the order of the Seller with respect to such
transfer.
(c) If at the end of the Funding Period amounts still remain in the
Pre-Funding Account, the Servicer shall instruct the Trustee to withdraw from
the Pre-Funding Account on the immediately following Remittance Date and deposit
such amounts in the Certificate Account. However, if at the close of business
on September 10, 1998, amounts still remain in the Pre-Funding Account, the
Servicer shall instruct the Trustee to withdraw from the Pre-Funding Account on
the Special Remittance Date and deposit in the Certificate Account any Pre-
Funded Amount then remaining in the Pre-Funding Account, and then the Pre-
Funding Account shall be closed.
(d) On the Remittance Dates occurring in August and September 1998,
the Trustee shall transfer from the Pre-Funding Account to the Certificate
Account, the Pre-Funding Earnings, if any, applicable to each such Remittance
Date.
(e) No later than the Closing Date, the Seller shall establish and
maintain with the Trustee in its trust department a trust account, which shall
not be interest-bearing, titled "First National Bank of New England SBA
Capitalized Interest Account 1998-1" (the "Capitalized Interest Account"). The
Capitalized Interest Account shall not constitute part of the Trust Fund. The
Seller shall be deemed the owner of the Capitalized Interest Account for Federal
income tax purposes. The Trustee shall, promptly upon receipt, deposit into the
Capitalized Interest Account $71,750.36. If prior to the end of the Funding
Period the funds on deposit in the Pre-Funding Account are invested in a
guaranteed investment contract, repurchase agreement or other arrangement
acceptable to the Rating Agency, that constitutes a Permitted Instrument, the
Trustee shall, within one Business Day of its receipt of notification of
satisfaction of the Rating Agency Condition, withdraw from the Capitalized
Interest Account and pay to the Seller the amount set forth in such
notification.
(f) On each Subsequent Transfer Date the Seller may instruct the
Trustee to withdraw from the Capitalized Interest Account and pay on such
Subsequent Transfer Date to the Seller
VI-6
<PAGE>
the Overfunded Interest Amount for such Subsequent Transfer Date, as calculated
by the pursuant to Section 2.09(e) hereof.
(g) On the Remittance Dates occurring in August and September 1998
the Trustee shall transfer from the Capitalized Interest Account to the
Certificate Account, the Capitalized Interest Requirement, if any, for such
Remittance Dates.
(h) On the Special Remittance Date, the Trustee shall transfer from
the Capitalized Interest Account to the Certificate Account the Capitalized
Interest Requirement, if any, for such Special Remittance Date. Any amounts
remaining in the Capitalized Interest Account after taking into account such
transfer shall be paid on such Special Remittance Date to the Seller, and the
Capitalized Interest Account shall be closed.
Section 6.05 [Intentionally Omitted]
Section 6.06 Investment of Accounts.
----------------------
(a) So long as no default or Event of Default shall have occurred and
be continuing, and consistent with any requirements of the Code, all or a
portion of any Account which is not by the terms of this Agreement to be held
uninvested by the Trustee or the Spread Account Custodian shall be invested and
reinvested by the Trustee or the Spread Account Custodian, as directed in
writing by the Servicer, in one or more Permitted Instruments in the name of the
Trustee or the Spread Account Custodian, as the case may be, bearing interest or
sold at a discount. No such investment in the Certificate Account, the Pre-
Funding Account, the Capitalized Interest Account and the Spread Account shall
mature later than the Business Day immediately preceding the next Remittance
Date and no such investment in the Expense Account shall mature later than the
Business Day immediately preceding the date such funds will be needed to pay
fees or premiums; provided, however, the Trustee or any affiliate thereof, may
-------- -------
be the obligor on any investment which otherwise qualifies as a Permitted
Instrument and any investment on which the Trustee is the obligor may mature on
such Remittance Date or date when needed, as the case may be.
(b) If any amounts are needed for disbursement from any Account held
by the Trustee or the Spread Account Custodian and sufficient uninvested funds
are not available to make such disbursement, the Trustee or the Spread Account
Custodian, as the case may be, shall cause to be sold or otherwise converted to
cash a sufficient amount of the investments in such Account. Neither the
Trustee nor the Spread Account Custodian shall be liable for any investment loss
or other charge resulting therefrom.
VI-7
<PAGE>
(c) Subject to Section 12.01 hereof, neither the Trustee nor the
Spread Account Custodian shall in any way be held liable by reason of any
insufficiency in any Account held by the Trustee or the Spread Account Custodian
resulting from any investment loss on any Permitted Instrument included therein
(except to the extent that the Trustee is the obligor thereon).
(d) The Trustee and the Spread Account Custodian shall invest and
reinvest funds in the Accounts held by the Trustee or the Spread Account
Custodian, to the fullest extent practicable, in such manner as the Servicer
shall from time to time direct in writing, but only in one or more Permitted
Instruments.
(e) All income or other gain from investments in any Account held by
the Trustee or the Spread Account Custodian shall be deposited in such Account,
as the case may be, immediately on receipt, and the Trustee or the Spread
Account Custodian shall notify the Servicer of any loss resulting from such
investments. The Servicer shall remit the amount of any such loss, to the
extent that such investment was made at the direction of the Servicer, from its
own funds, without reimbursement therefor, to the Trustee or the Spread Account
Custodian, as the case may be, for deposit in the Account from which the related
funds were withdrawn for investment by the next Determination Date following
receipt by the Servicer of such notice.
Section 6.07 Distributions.
-------------
(a) The rights of the Certificateholders to receive distributions
from the proceeds of the Trust Fund, and all ownership interests of the
Certificateholders in such distributions, shall be as set forth in this
Agreement.
(b) On each Remittance Date the Trustee shall withdraw from the
Certificate Account the sum of (A) that portion of the Available Funds received
from the Servicer pursuant to Section 6.01(a)(i), (ii) and (iv),and (B) the
amounts deposited therein pursuant to Section 6.02(b)(i) and make distributions
thereof in the following order of priority:
(i) First, to the Class A Certificates in an amount up to the
Class A Interest Distribution Amount;
(ii) Second, to the Class B Certificates in an amount up to the
Class B Interest Distribution Amount;
(iii) Third, to the Class A Certificates in an amount up to the
sum of (a) the Class A Principal
VI-8
<PAGE>
Distribution Amount and (b) the Class A Carry Forward Amount;
(iv) Fourth, to the Class B Certificates, in an amount up to
the sum of (a) the Class B Principal Distribution Amount and (b) the
Class B Carry Forward Amount;
(v) Fifth, to the Expense Account in an amount up to one-
twelfth of the Annual Expense Escrow Amount plus any amount required
to be paid to the Trustee pursuant to Section 6.03(a) resulting from
insufficiencies in the Expense Account;
(vi) Sixth, to the Spread Account, any remaining Available
Funds unless and until the amount therein equals the Specified Spread
Account Requirement;
(vii) Seventh, to the Servicer in an amount up to the
Reimbursable Amounts; and
(viii) Eighth, to the Spread Account Depositor, any amounts in
excess of the Specified Spread Account Requirement.
Notwithstanding the foregoing, the Servicer shall not be entitled to
receive Reimbursable Amounts pursuant to clause (vi) above until the first
Remittance Date on which the Spread Account Balance equals the then applicable
Specified Account Requirement.
Additionally, on the Special Remittance Date, the Trustee shall
withdraw from the Certificate Account the amount, if any, deposited therein
pursuant to Section 6.01(a)(v) and make distributions thereof as follows: (i)
from amounts transferred from the Pre-Funding Account, distributions of
principal to the Class A and Class B Certificates pro rata based upon the Class
A and Class B Percentages and (ii) from amounts transferred from the Capitalized
Interest Account, distributions of interest to such Class A and Class B
Certificates equal to the applicable Capitalized Interest Requirement.
(c) All distributions made to the Certificateholders of a particular
Class will be made on a pro rata basis among the Certificateholders of record of
the applicable Class on the next preceding Record Date based on the Percentage
Interest represented by their respective Certificates on such date, and shall be
made by check or, upon request by a Certificateholder, by wire transfer of
immediately available funds to the account of
VI-9
<PAGE>
such Certificateholder at a bank or other entity having appropriate facilities
therefor, and, in the case of wire transfers, at the expense of such
Certificateholder unless such Certificateholder shall own of record Certificates
which have initial Certificate Principal Balances aggregating at least
$5,000,000.
Section 6.08 [Intentionally Omitted]
Section 6.09 Statements.
----------
Each month, not later than 12:00 noon New York time on the
Determination Date, the Servicer shall deliver to the Trustee, by telecopy, for
distribution to the Certificateholders, the receipt and legibility of which
shall be confirmed telephonically, with hard copy thereof and the Servicer's
Monthly Computer Diskette in the form attached hereto as Exhibit L (both in hard
copy and in computer diskette form) to be delivered on the Business Day
following the Determination Date, a certificate signed by a Servicing Officer (a
"Servicer's Certificate") stating the date (day, month and year), the Series
number of the Certificates, the date of this Agreement, and, as of the close of
business on the Record Date for such month:
(i) Available Funds for the related Remittance Date;
(ii) The Aggregate Class A Certificate Principal Balance, the
Aggregate Class B Certificate Principal Balance and the Pool Principal
Balance as reported in the prior Servicer's Certificate pursuant to
subclause (xii) below, or, in the case of the first Determination
Date, the Original Class A and Class B Certificate Principal Balance
and the Original Pool Principal Balance;
(iii) The number and Principal Balances of all SBA Loans which
were the subject of Principal Prepayments during the Due Period and
the number and Principal Balances of all Defaulted SBA Loans purchased
by the Servicer during the Due Period;
(iv) The product of the Unguaranteed Percentage multiplied by
all Curtailments which were received during the Due Period;
(v) The product of the Unguaranteed Percentage multiplied by
all Excess Payments and the product of the Unguaranteed Percentage
multiplied by
VI-10
<PAGE>
all Monthly Payments in respect of principal received during the Due
Period;
(vi) The aggregate amount of interest received on the
Unguaranteed Interest of each SBA Loan;
(vii) The amount of the Monthly Advances to be made on the
Determination Date and the Compensating Interest payment to be made on
the Determination Date;
(viii) The delinquency and foreclosure information set forth in
the form attached hereto as Exhibit K;
(ix) The product of the Unguaranteed Percentage multiplied by
the amount of any losses realized on a Liquidated SBA Loan;
(x) The Class A and Class B Interest Distribution Amounts and
Principal Distribution Amounts for the Remittance Date with the
components thereof stated separately;
(xi) The amount stated in dollars and as a percentage of the
current aggregate Principal Balance of the Class A and Class B
Certificates of the funds available in the Spread Account as of the
related Record Date in cash and from liquidation of Permitted
Instruments and the amount, if any, to be transferred from the Spread
Account to the Certificate Account pursuant to Section 6.02(b)(i);
(xii) The Aggregate Class A Certificate Principal Balance,
Aggregate Class B Certificate Principal Balance and the Pool Principal
Balance after giving effect to the distribution to be made on the
Remittance Date;
(xiii) The Spread Account Balance and the Specified Spread
Account Requirement with respect to such Remittance Date;
(xiv) The weighted average maturity and weighted average SBA
Loan Interest Rate;
(xv) The Servicing Fees and the Annual Expense Escrow Amount
and other amounts to be deposited to the Expense Account;
VI-11
<PAGE>
(xvi) The amount of all payments and reimbursements to the
Servicer pursuant to Section 5.04 (b), (c), (d)(ii), (e) and (f);
(xvii) The Class A and Class B Remittance Rates with respect to
such Remittance Date;
(xviii) During the Funding Period, the aggregate Principal
Balance of the Subsequent SBA Loans purchased during the prior Due
Period and the amount on deposit in the Pre-Funding Account as of the
end of such Due Period; and
(xix) Such other information as the Trustee, the
Certificateholders or the Rating Agency may reasonably require;
provided, however, that the Servicer shall have no obligation to
distribute such information directly to any Certificateholder.
The Trustee shall forward such report to the Certificateholders and
the Rating Agency on the Remittance Date, together with a separate report
indicating the amount of funds deposited in the Certificate Account pursuant to
Section 6.01(a)(iv); and the amounts which are reimbursable to the Servicer or
the Seller pursuant to Sections 6.03(c)(i), 6.03(c)(ii) and 6.07(b)(vii) (all
reports prepared by the Trustee of such withdrawals and deposits will be based
in whole or in part upon the information provided to the Trustee by the
Servicer).
To the extent that there are inconsistencies between the telecopy of
the Servicer's Certificate and the hard copy thereof, the Trustee shall be
entitled to rely upon the telecopy. In the case of information furnished
pursuant to subclauses (ii), (iii), (iv), (v), (x) and (xii), above, the amounts
shall be expressed in a separate section of the report as a dollar amount for
each Class per $1,000 original dollar amount as of the Cut-Off Date.
Additionally, on the Special Remittance Date the Trustee shall, based
upon information received from the Servicer, forward to the Certificateholders
and the Rating Agency a report setting forth the amount of principal and
interest, if any, being paid to each Class of Certificates on the Special
Remittance Date.
(a) Within a reasonable period of time after the end of each calendar
year, the Servicer shall furnish to the Trustee for distribution to each Person
who at any time during the calendar year was a Certificateholder such
information as is
VI-12
<PAGE>
reasonably necessary to provide to such Person a statement containing the
information set forth in subclauses (vi), (x), and (xiv), above, aggregated for
such calendar year or applicable portion thereof during which such Person was a
Certificateholder. 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.
(b) Upon reasonable advance notice in writing, the Servicer will
provide to each Certificateholder which is a savings and loan association, bank
or insurance company certain reports and access to information and documentation
regarding the SBA Loans sufficient to permit such Certificateholder to comply
with applicable regulations of its regulatory authorities with respect to
investment in the Certificates.
(c) The Servicer shall furnish to each Certificateholder, during the
term of this Agreement, 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 Certificateholder or otherwise with respect to
the purposes of this Agreement, all such reports or information to be provided
by and in accordance with such applicable instructions and directions as the
Certificateholder may reasonably require; provided, that the Servicer shall be
entitled to be reimbursed by such Certificateholder for the Servicer's actual
expenses incurred in providing such reports if such reports are not producible
in the ordinary course of the Servicer's business. The Rating Agency shall
receive copies of any such reports or information furnished to the
Certificateholders.
Section 6.10 Advances by the Servicer.
------------------------
Not later than the close of business on each Determination Date, the
Servicer, may in its sole discretion, if it determines such amount is
recoverable, remit to the Trustee for deposit in the Certificate Account an
amount (as indicated in the Servicer's Certificate prepared pursuant to Section
6.09), to be distributed on the related Remittance Date pursuant to Section
6.07, equal to the amount by which (i) 30 days' interest (or with respect to the
first Remittance Date, 45 days' interest) at a rate equal to the then applicable
Adjusted SBA Loan Remittance Rate on the aggregate Class A and Class B Principal
Balances immediately prior to the related Remittance Date (plus or minus the
difference, if any, between (A) the sum of the Class A and Class B Interest
Distribution Amounts and (B) the sum of the Adjusted Class A and Adjusted Class
B Interest Distribution Amounts for the related Remittance Date) exceeds (ii)
the amount
VI-13
<PAGE>
received by the Servicer as of the related Record Date in respect of interest on
the Unguaranteed Interest of the SBA Loans minus the Servicing Fee allocable to
the Unguaranteed Interest (plus, for the Remittance Dates in August and
September 1998, the sum of (i) all funds to be transferred to the Certificate
Account from the Capitalized Interest Account for such Remittance Date pursuant
to Section 6.04(g) and (ii) the Pre-Funding Earnings for the applicable
Remittance Date), such excess being defined herein as the "Monthly Advance." The
Servicer may reimburse itself for Monthly Advances made pursuant to Section
5.04. Notwithstanding the foregoing, the Servicer shall not be required to make
a Monthly Advance with respect to an SBA Loan if it determines, in good faith,
that such advance would be nonrecoverable from amounts received in respect of
the SBA Loans.
Section 6.11 Compensating Interest.
---------------------
The Certificateholders shall be entitled to a full month's interest on
the principal portion of the Unguaranteed Interest of each SBA Loan at the then
applicable Class A or Class B Remittance Rate, as the case may be. Not later
than the close of business on each Determination Date, with respect to each SBA
Loan for which a Principal Prepayment or Curtailment was received during the
related Due Period, the Servicer shall remit to the Trustee for deposit in the
Certificate Account from amounts otherwise payable to it as servicing
compensation, an amount (such amount required to be delivered to the Trustee is
referred to herein as "Compensating Interest") (as indicated in the Servicer's
Certificate prepared pursuant to Section 6.09) equal to the difference between
(a) 30 days' interest (or with respect to the first Remittance Date 45 days'
interest) at the Adjusted SBA Loan Remittance Rate on the Principal Balance of
each such SBA Loan as of the beginning of the Due Period applicable to the
Remittance Date on which such amount will be distributed, and (b) the amount of
interest actually received on the Unguaranteed Interest of each such SBA Loan
for such Due Period net of the Servicing Fee allocable to the Unguaranteed
Interest and the fees and expenses of the Trustee allocable to such interest
and, with respect to each Additional Fee SBA Loan, the Additional Fee.
Section 6.12 Reports of Foreclosure and Abandonment of Mortgaged
---------------------------------------------------
Property
--------
Each year the Servicer shall make the reports of foreclosures and
abandonments of any Mortgaged Property required by Section 6050J of the Code.
Promptly after filing each such report with the Internal Revenue Service, the
Servicer shall provide the Trustee with an Officer's Certificate certifying that
such report has been filed.
VI-14
<PAGE>
ARTICLE VII
GENERAL SERVICING PROCEDURE
---------------------------
Section 7.01 [Intentionally Omitted]
Section 7.02 Satisfaction of Mortgages and Collateral and Release of
-------------------------------------------------------
SBA Files
---------
The Servicer shall maintain the Fidelity Bond as provided for in
Section 5.09 insuring the Servicer against any loss it may sustain with respect
to any SBA Loan not satisfied in accordance with the procedures set forth
herein.
Upon the payment in full of any SBA 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 will immediately notify the FTA and
the Trustee by a certification in the form of Exhibit I attached hereto (which
certification shall include a statement to the effect that all amounts received
or to be received in connection with such payment which are required to be
deposited in the Principal and Interest Account pursuant to Section 5.03 have
been or will be so deposited) of a Servicing Officer and shall request delivery
to it of the Trustee's Document File. Upon receipt of such certification and
request, the FTA and the Trustee shall release, within 3 Business Days, the
related Trustee's Document File to the Servicer. Expenses incurred in
connection with any instrument of satisfaction or deed of reconveyance shall be
payable only from and to the extent of servicing compensation and shall not be
chargeable to the Principal and Interest Account or the Certificate Account.
Subject to the Multi-Party Agreement, from time to time and as
appropriate for the servicing or foreclosure of any SBA Loan, the FTA and the
Trustee shall, upon request of the Servicer and delivery to the FTA and the
Trustee of a certification in the form of Exhibit I attached hereto signed by a
Servicing Officer, release the related Trustee's Document File to the Servicer
within 3 Business Days, and the Trustee shall execute such documents as shall be
necessary to the prosecution of any such proceedings. The Servicer shall return
the Trustee's Document File to the FTA and the Trustee when the need therefor by
the Servicer no longer exists, unless the SBA Loan has been liquidated and the
Unguaranteed Percentage of the Liquidation Proceeds relating to the SBA Loan has
been deposited in the Principal and Interest Account and remitted to the Trustee
for deposit in the Certificate Account or the SBA File or such document has been
delivered to an attorney, or to a public trustee or other public official as
required by law, for purposes
VII-1
<PAGE>
of initiating or pursuing legal action or other proceedings for the foreclosure
of the Mortgaged Property or repossession of other Collateral either judicially
or non-judicially, and the Servicer has delivered to the FTA and the Trustee a
certificate of a Servicing Officer certifying as to the name and address of the
Person to whom such SBA File or such document was delivered and the purpose or
purposes of such delivery. Upon receipt of a certificate of a Servicing Officer
stating that such SBA Loan was liquidated, the servicing receipt shall be
released by the Trustee to the Servicer.
The Trustee shall execute and deliver to the Servicer any court
pleadings, requests for trustee's sale or other documents provided to it
necessary to the foreclosure or trustee's sale in respect of a Mortgaged
Property or other Collateral or to any legal action brought to obtain judgment
against any Obligor on the SBA Note or Mortgage or other agreement securing
Collateral or to obtain a deficiency judgment, or to enforce any other remedies
or rights provided by the SBA Note or Mortgage or other agreement securing
Collateral or otherwise available at law or in equity. Together with such
documents or pleadings, the Servicer shall deliver to the Trustee a certificate
of a Servicing Officer requesting that such pleadings or documents be executed
by the Trustee and certifying as to the reason such documents or pleadings are
required and that the execution and delivery thereof by the Trustee will not
invalidate or otherwise affect the lien of the Mortgage or other agreement
securing Collateral, except for the termination of such a lien upon completion
of the foreclosure or trustee's sale. The Trustee shall, upon receipt of a
written request from a Servicing Officer, execute any document provided to the
Trustee by the Servicer or take any other action requested in such request, that
is, in the opinion of the Servicer as evidenced by such request, required by any
state or other jurisdiction to discharge the lien of a Mortgage or other
agreement securing Collateral upon the satisfaction thereof and the Trustee will
sign and post, but will not guarantee receipt of, any such documents to the
Servicer, or such other party as the Servicer may direct, within five Business
Days of the Trustee's receipt of such certificate or documents. Such
certificate or documents shall establish to the Trustee's satisfaction that the
related SBA Loan has been paid in full by or on behalf of the Obligor and that
such payment has been deposited in the Principal and Interest Account.
Section 7.03 Servicing Compensation.
----------------------
As compensation for its services hereunder, the Servicer shall be
entitled to withdraw from the Principal and Interest Account or to retain from
interest payments on the SBA Loans the Servicer's Servicing Fee in accordance
with Section
VII-2
<PAGE>
5.04(b). Additional servicing compensation in the form of assumption and other
administrative fees, interest paid on funds on deposit in the Principal and
Interest Account, interest paid and earnings realized on Permitted Instruments,
amounts remitted pursuant to Section 6.03(c)(iii) and late payment charges shall
be retained by or remitted to the Servicer to the extent not required to be
remitted to the Trustee for deposit in the Certificate Account. 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
therefor except as specifically provided for herein.
Section 7.04 Annual Statement as to Compliance.
---------------------------------
The Servicer will deliver to the Trustee, the SBA and the Rating
Agency on or before March 31 of each year beginning March 31, 1999, an Officer's
Certificate stating that (i) the Servicer has fully complied with the provisions
of Articles V and VII, (ii) 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 (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, if there has been a default in
the fulfillment of any such obligation, specifying each such default known to
such officers and the nature and status thereof and the action being taken by
the Servicer to cure such default.
Section 7.05 Annual Independent Public Accountants' Servicing Report
-------------------------------------------------------
On or before March 31 of each year beginning March 31, 1999, the
Servicer, at its expense, shall cause one of the "big six" accounting firms to
furnish a letter or letters to the Trustee and the Rating Agency to the effect
that such firm has with respect to the Servicer's overall servicing operations
examined such operations in accordance with the requirements of the Uniform
Single Audit Program for Mortgage Bankers, and stating such firm's conclusions
relating thereto.
Section 7.06 SBA's and Trustee's Right to Examine Servicer Records
-----------------------------------------------------
and Audit Operations
--------------------
The SBA and the Trustee shall have the right upon reasonable prior
notice, during normal business hours and as often as reasonably required, 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 behalf of the Servicer,
which may be relevant to the performance or observance by the Servicer of the
terms, covenants or conditions of this Agreement.
VII-3
<PAGE>
No amounts payable in respect of the foregoing shall be paid from the Trust
Fund.
Section 7.07 Reports to the Trustee; Principal and Interest Account
------------------------------------------------------
Statements.
----------
Not later than 20 days after each Record Date, the Servicer shall
forward to the Trustee and the SBA a statement, certified by a Servicing
Officer, setting forth the status of the Principal and Interest Account as of
the close of business on the preceding Record Date and showing, for the period
covered by such statement, the aggregate of deposits into the Principal and
Interest Account for each category of deposit specified in Section 5.03, the
aggregate of withdrawals from the Principal and Interest Account for each
category of withdrawal specified in Section 5.04, the aggregate amount of
permitted withdrawals not made in the related Due Period, and the amount of any
Monthly Advances or payments of Compensating Interest, in each case, for the
related Due Period.
Section 7.08 Premium Protection Fee and Servicing Fee.
----------------------------------------
Pursuant to and in accordance with the policies of the SBA and SBA
Form 1086, the Servicer shall retain the Premium Protection Fee where the
Guaranteed Interest has been sold and the Servicing Fee for each SBA (S) 7(a)
Loan. The Premium Protection Fee and the Servicing Fee shall not constitute
part of the Trust Fund and Certificateholders shall have no interest in, and are
not entitled to receive any portion of, the Premium Protection Fee and the
Servicing Fee. If the Servicer is replaced as servicer pursuant to any
provision of this Agreement, it shall no longer be entitled to the Premium
Protection Fee and the Servicing Fee but, instead, the successor servicer shall
be entitled thereto.
VII-4
<PAGE>
ARTICLE VIII
REPORTS TO BE PROVIDED BY SERVICER
----------------------------------
Section 8.01 Financial Statements.
--------------------
The Servicer understands that, in connection with a transfer of the
Certificates, Certificateholders may request that the Servicer make available to
prospective Certificateholders the annual audited financial statements of the
Servicer's parent (First International Bancorp, Inc., and any successor thereto)
for one or more of the most recently completed five fiscal years for which such
statements are publicly available, which request shall not be unreasonably
denied.
The Servicer also agrees to make available on a reasonable basis to
any prospective Certificateholder a knowledgeable financial or accounting
officer for the purpose of answering reasonable questions respecting recent
developments affecting the Servicer or the financial statements of the Servicer
and its parent (First International Bancorp, Inc. and any successor thereto) and
to permit any prospective Certificateholder to inspect the Servicer's servicing
facilities during normal business hours for the purpose of satisfying such
prospective Certificateholder that the Servicer has the ability to service the
SBA Loans in accordance with this Agreement.
VIII-1
<PAGE>
ARTICLE IX
THE SERVICER
------------
Section 9.01 Indemnification; Third Party Claims.
-----------------------------------
(a) The Servicer agrees to indemnify and hold the Trustee, the SBA,
and each Certificateholder harmless against any and all claims, losses,
penalties, fines, forfeitures, legal fees and related costs, judgments, and any
other costs, fees and expenses that the Trustee, the SBA, and any
Certificateholder may sustain in any way related to the failure of the Servicer
to perform its duties and service the SBA Loans in compliance with the terms of
this Agreement. The Servicer shall immediately notify the Trustee, the SBA and
each Certificateholder if a claim is made by any party with respect to this
Agreement, and the Servicer shall assume (with the consent of the Trustee) the
defense of any such claim and pay all expenses in connection therewith,
including reasonable counsel fees, and promptly pay, discharge and satisfy any
judgment or decree which may be entered against the Servicer, the Trustee, the
SBA, and/or a Certificateholder in respect of such claim. The Trustee may
reimburse the Servicer from the Expense Account pursuant to Section 6.03(c)(i)
for all amounts advanced by it pursuant to the preceding sentence except when
the claim relates directly to the failure of the Servicer to service and
administer the SBA Loans in compliance with the terms of this Agreement.
(b) The Seller agrees to indemnify and hold the Trustee, the SBA and
each Certificateholder harmless against any and all claims, losses, penalties,
fines, forfeitures, legal fees and related costs, judgments, and any other
costs, fees and expenses that the Trustee, the SBA, and any Certificateholder
may sustain in any way related to the failure of the Servicer, if it is an
affiliate thereof, or the failure of the Seller to perform its respective duties
in compliance with the terms of this Agreement and in the best interests of the
SBA and the Certificateholders. The Seller shall immediately notify the
Trustee, the SBA, and each Certificateholder if a claim is made by a third party
with respect to this Agreement, and the Seller shall assume (with the consent of
the Trustee) the defense of any such claim and pay all expenses in connection
therewith, including reasonable counsel fees, and promptly pay, discharge and
satisfy any judgment or decree which may be entered against the Servicer, the
Seller, the Trustee, the SBA and/or a Certificateholder in respect of such
claim. The Trustee may reimburse the Seller from the Expense Account pursuant
to Section 6.03(c)(i) for all amounts advanced by them pursuant to the preceding
sentence except when the claim relates directly to the Seller's indemnification
pursuant to Section 2.05 and
IX-1
<PAGE>
Section 3.03 or to the failure of the Servicer, if it is an affiliate of the
Seller, to perform its obligations to service and administer the Mortgages in
compliance with the terms of this Agreement, or the failure of the Seller to
perform its duties in compliance with the terms of this Agreement and in the
best interests of the SBA and the Certificateholders.
Section 9.02 Merger or Consolidation of the Servicer; Assignment of
------------------------------------------------------
the Servicer's Duties.
- ---------------------
The Servicer will keep in full effect its existence, rights and
franchises as a corporation, bank or association and will obtain and preserve
its qualification to do business as a foreign entity in each jurisdiction
necessary to protect the validity and enforceability of this Agreement or any of
the SBA Loans and to perform its duties under this Agreement.
Any Person into which the Servicer may be merged or consolidated, or
any Person resulting from any merger, conversion or consolidation to which the
Servicer shall be a party, or any Person succeeding to all or substantially all
of the business of the Servicer, shall be an established mortgage loan servicing
institution that has a net worth of at least $15,000,000 and shall be an
approved SBA guaranteed lender in good standing, operating pursuant to an
effective Loan Guaranty Agreement, and 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 parties hereto, anything herein to the contrary
notwithstanding. The Servicer shall send notice of any such merger or
consolidation to the Trustee, the Rating Agency and the SBA.
Subject to the receipt of approval from the SBA, the Servicer is
permitted to assign its rights and duties hereunder to, and such rights and
duties can be assumed by, an affiliate of the Servicer having a net worth of at
least $15,000,000 and which is an approved SBA guaranteed lender in good
standing, operating pursuant to an effective Loan Guaranty Agreement (the
"Assignee") (in which case all of the provisions of this Agreement shall, to the
same extent as they apply to the Servicer hereunder, apply to the Assignee
rather than the Servicer), 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. The Servicer shall send notice of any such assignment
to the Trustee, the Rating Agency and the SBA.
IX-2
<PAGE>
Section 9.03 Limitation on Liability of the Servicer and Others.
--------------------------------------------------
The Servicer and any director, officer, employee or agent of the
Servicer may rely on any document of any kind which it in good faith reasonably
believes to be genuine and to have been adopted or signed by the proper
authorities or persons respecting any matters arising hereunder. Subject to the
terms of Section 9.01 herein, the Servicer shall have no obligation to appear
with respect to, prosecute or defend any legal action which is not incidental to
the Servicer's duty to service the SBA Loans in accordance with this Agreement.
Section 9.04 Servicer Not to Resign.
----------------------
The Servicer shall not resign from the obligations and duties hereby
imposed on it except (i) by mutual consent of the Servicer, the SBA, the Trustee
and the Majority Certificateholders, or (ii) in connection with a merger,
conversion or consolidation permitted pursuant to Section 9.02 and with the
consent of the SBA (in which case the Person resulting from the merger,
conversion or consolidation shall be the successor of the Servicer), or (iii) in
connection with an assignment permitted pursuant to Section 9.02 and with the
consent of the SBA (in which case the Assignee shall be the successor of the
Servicer), or (iv) upon the determination that the Servicer's duties hereunder
are no longer permissible under applicable law or administrative determination
and such incapacity cannot be cured by the Servicer. Any such determination
permitting the resignation of the Servicer shall be evidenced by a written
Opinion of Counsel (who may be counsel for the Servicer) to such effect
delivered to the Trustee, the SBA and to each Certificateholder, which Opinion
of Counsel shall be in form and substance acceptable to the Trustee. No such
resignation shall become effective until a successor has assumed the Servicer's
responsibilities and obligations hereunder in accordance with Section 10.02.
IX-3
<PAGE>
ARTICLE X
DEFAULT
-------
Section 10.01 Events of Default.
-----------------
(a) In case one or more of the following Events of Default by the
Servicer shall occur and be continuing, that is to say:
(i) (A) the failure by the Servicer to make any required
Servicing Advance, to the extent such failure materially and adversely
affects the interests of the Certificateholders; (B) the failure by
the Servicer to make any required Monthly Advance to the extent such
failure materially and adversely affects the interests of the
Certificateholders; (C) the failure by the Servicer to remit any
Compensating Interest to the extent such failure materially and
adversely affects the interests of the Certificateholders; or (D) any
failure by the Servicer to remit to Certificateholders, or to the
Trustee for the benefit of the Certificateholders, any payment
required to be made under the terms of this Agreement which continues
unremedied 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 Trustee or to the Servicer and the Trustee by any
Certificateholder; or
(ii) failure by the Servicer or the Seller duly to observe or
perform, in any material respect, any other covenants, obligations or
agreements of the Servicer or the Seller as set forth in this
Agreement, which failure continues unremedied for a period of 60 days
after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Servicer or the
Seller, as the case may be, by the Trustee or to the Servicer, or the
Seller, as the case may be, and the Trustee by any Certificateholder;
or
(iii) 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, 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
X-1
<PAGE>
or order shall have remained in force, undischarged or unstayed for a
period of 60 days; or
(iv) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, 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 the Servicer's property; or
(v) the Servicer shall admit in writing its inability to pay
its debts 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;
(b) then, and in each and every such case, so long as an Event
of Default shall not have been remedied, and in the case of clause (i) above
(except for clause (i)(B)), if such Event of Default shall not have been
remedied within 30 days after the Servicer has received notice of such Event of
Default, (x) with respect solely to clause (i)(B) above, if such Monthly Advance
is not made earlier than 4:00 p.m. New York time on the Determination Date, the
Trustee shall give immediate telephonic notice of such failure to a Servicing
Officer of the Servicer and, unless such failure is cured, either by receipt of
payment or receipt of evidence (e.g., a wire reference number communicated by
----
the sending bank) that such funds have been sent, by 12:00 Noon New York time on
the following Business Day, the Trustee shall immediately assume, pursuant to
Section 10.02 hereof, the duties of a successor servicer; and (y) in the case of
clauses (i)(A), (i)(C), (i)(D), (iii), (iv) and (v), the Majority
Certificateholders, by notice in writing to the Servicer (except with respect to
(iii), (iv) and (v) for which no notice is required) may, in addition to
whatever rights such Certificateholders may have at law or equity including
damages, injunctive relief and specific performance, in each case immediately
terminate all the rights and obligations of the Servicer under this Agreement
and in and to the SBA Loans and the proceeds thereof, as Servicer. Upon such
receipt by the Servicer of a second written notice from the Majority
Certificateholders stating that they or it intend to terminate the Servicer as a
result of such Event of Default, all authority and power of the Servicer under
this Agreement, whether with respect to the SBA Loans or otherwise, shall,
subject to Section 10.02 and the Multi-Party Agreement, pass to and be vested in
the Trustee and the Trustee is hereby authorized and empowered to execute and
deliver, on behalf of the Servicer, as attorney-in-fact or otherwise, any and
all documents and other instruments and do or
X-2
<PAGE>
cause to be done all other acts or things necessary or appropriate to effect the
purposes of such notice of termination, including, but not limited to, the
transfer and endorsement or assignment of the SBA Loans and related documents.
The Servicer agrees to cooperate with the Trustee in effecting the termination
of the Servicer's responsibilities and rights hereunder, including, without
limitation, the transfer to the Trustee for administration by it of all amounts
which shall at the time be credited by the Servicer to each Principal and
Interest Account or thereafter received with respect to the SBA Loans. The
Trustee shall provide notice to the SBA of any Event of Default hereunder.
Section 10.02 Trustee to Act; Appointment of Successor
----------------------------------------
On and after the time of the Servicer's immediate termination, or the
Servicer's receipt of notice if required by Section 10.01, or at any time if the
Trustee receives the resignation of the Servicer evidenced by an Opinion of
Counsel pursuant to Section 9.04 or the Servicer is removed as Servicer pursuant
to this Article X, the Trustee shall be the successor in all respects to the
Servicer in its capacity as Servicer under this Agreement and the transactions
set forth or provided for herein and shall be subject to all the
responsibilities, duties and liabilities relating thereto placed on the Servicer
by the terms and provisions hereof; provided, however, that the Trustee shall
not be liable for any actions of any Servicer prior to it, and that the Trustee
shall not be obligated to make advances or payments pursuant to Sections 6.03,
6.10, 6.11, 5.10 or 5.14 but only to the extent the Trustee determines
reasonably and in good faith that such advances would not be recoverable, such
determination to be evidenced with respect to each such advance by a
certification of a Responsible Officer of the Trustee. As compensation
therefor, the Trustee shall be entitled to all funds relating to the SBA Loans
which the Servicer would have been entitled to receive from the Principal and
Interest Account pursuant to Section 5.04 if the Servicer had continued to act
as Servicer hereunder and shall be entitled to the Servicing Fee and the Premium
Protection Fee, together with other servicing compensation in the form of
assumption fees, late payment charges or otherwise as provided in Sections 7.01
and 7.03.
Notwithstanding the above, the Trustee shall, if it is unable to so
act or if the SBA so requests in writing to the Trustee, appoint, or petition a
court of competent jurisdiction to appoint, any established servicing
institution acceptable to the SBA and satisfying the Rating Agency Condition
that has a net worth of not less than $15,000,000, and which is an approved SBA
guaranteed lender in good standing, operating pursuant to an effective Loan
Guaranty Agreement, as the successor to the
X-3
<PAGE>
Servicer hereunder in the assumption of all or any part of the responsibilities,
duties or liabilities of the Servicer hereunder. Any collections received by the
Servicer after removal or resignation shall be endorsed by it to the Trustee and
remitted directly to the Trustee or, at the direction of the Trustee, to the
successor servicer. The compensation of any successor servicer (including,
without limitation, the Trustee) so appointed shall be the aggregate Servicing
Fees and Premium Protection Fees and other servicing compensation in the form of
assumption fees, late payment charges or otherwise. In the event the Trustee is
required to solicit bids as provided herein, the Trustee shall solicit, by
public announcement, bids from banks and mortgage servicing institutions meeting
the qualifications set forth above. Such public announcement shall specify that
the successor servicer shall be entitled to the full amount of the aggregate
Servicing Fees and Premium Protection Fees as servicing compensation, together
with the other servicing compensation in the form of assumption fees, late
payment charges or otherwise. Within thirty days after any such public
announcement, the Trustee shall negotiate and effect the sale, transfer and
assignment of the servicing rights and responsibilities hereunder to the
qualified party submitting the highest qualifying bid. The Trustee shall deduct
from any sum received by the Trustee from the successor to the Servicer in
respect of such sale, transfer and assignment all costs and expenses of any
public announcement and of any sale, transfer and assignment of the servicing
rights and responsibilities hereunder and the amount of any unreimbursed
Servicing Advances and Monthly Advances. After such deductions, the remainder of
such sum shall be paid by the Trustee as a servicing fee to the SBA at the time
of such sale, transfer and assignment to the Servicer's successor. The Trustee
and such successor shall take such action, consistent with this Agreement, as
shall be necessary to effectuate any such succession. The Servicer agrees to
cooperate with the Trustee and any successor servicer in effecting the
termination of the Servicer's servicing responsibilities and rights hereunder
and shall promptly provide the Trustee or such successor servicer, as
applicable, all documents and records reasonably requested by it to enable it to
assume the Servicer's functions hereunder and shall promptly also transfer to
the Trustee or such successor servicer, as applicable, all amounts which then
have been or should have been deposited in the Principal and Interest Account or
Spread Account by the Servicer or which are thereafter received with respect to
the SBA Loans. Neither the Trustee nor any other successor servicer shall be
held liable by reason of any failure to make, or any delay in making, any
distribution hereunder or any portion thereof caused by (i) the failure of the
Servicer to deliver, or any delay in delivering, cash, documents or records to
it, or (ii) restrictions imposed by any regulatory authority having jurisdiction
over the Servicer hereunder. No
X-4
<PAGE>
appointment of a successor to the Servicer hereunder shall be effective until
written notice of such proposed appointment shall have been provided by the
Trustee to each Certificateholder and the SBA and the Trustee and the SBA shall
have consented thereto. The Trustee shall not resign as servicer until a
successor servicer reasonably acceptable to the SBA has been appointed.
Pending appointment of a successor to the Servicer hereunder, the
Trustee shall act in such capacity as hereinabove provided. In connection with
such appointment and assumption, the Trustee may make such arrangements for the
compensation of such successor out of payments on SBA Loans as it and such
successor shall agree; provided, however, that no such compensation shall be in
excess of that permitted the Servicer pursuant to Section 7.03 or otherwise as
provided in this Agreement. The Servicer, the Trustee and such successor shall
take such action, consistent with this Agreement, as shall be necessary to
effectuate any such succession.
Section 10.03 Waiver of Defaults.
------------------
The SBA may, or the Majority Certificateholders may on behalf of all
Certificateholders and subject to the consent of the SBA, which consent may not
be unreasonably withheld, and satisfaction of the Rating Agency Condition, waive
any events permitting removal of the Servicer pursuant to this Article X;
provided, however, that the Majority Certificateholders or the SBA may not waive
a default in making a required distribution on a Certificate without the consent
of the holder of such Certificate. Upon any 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 thereto except to the extent expressly so waived.
Section 10.04. Control by Majority Certificateholders and Others.
-------------------------------------------------
The SBA may, or the Majority Certificateholders with the consent of
the SBA may, direct the time, method and place of conducting any proceeding
relating to the Trust Fund or the Certificates or for any remedy available to
the Trustee with respect to the Certificates or exercising any trust or power
conferred on the Trustee with respect to the Certificates or the Trust Fund
provided that:
- -------- ----
(i) such direction shall not be in conflict with any rule of law
or with this Agreement;
X-5
<PAGE>
(ii) the Trustee shall have been provided with indemnity
satisfactory to it; and
(iii) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction; provided,
--------
however, that the Trustee, as the case may be, need not take any
-------
action which it determines might involve it in liability or may be
unjustly prejudicial to the Certificateholders not so directing.
X-6
<PAGE>
ARTICLE XI
TERMINATION
-----------
Section 11.01 Termination.
-----------
This Agreement shall terminate upon notice to the Trustee of the
earlier of the following events: (a) the final payment or other liquidation of
the last SBA Loan or the disposition of all property acquired upon foreclosure
or deed in lieu of foreclosure of any SBA Loan and the remittance of all funds
due thereunder, or (b) mutual consent of the Servicer and all Certificateholders
in writing; provided, however, that in no event shall the Trust Fund established
by this Agreement terminate later than twenty-one years after the death of the
last surviving lineal descendant of Joseph P. Kennedy, late Ambassador of the
United States to the Court of St. James, alive as of the date hereof.
The Servicer may, at its option, terminate this Agreement on any date
on which the Pool Principal Balance is less than 5.0% of the sum of (i) the
Original Pool Principal Balance and (ii) the Original Pre-Funded Amount by
purchasing, on the next succeeding Remittance Date, all of the Unguaranteed
Interests in the SBA Loans and Foreclosed Properties at a price equal to the sum
of (i) 100% of the then outstanding Aggregate Class A and Class B Certificate
Principal Balances, and (ii) 30 days' interest thereon at the then applicable
Class A and Class B Remittance Rates, as the case may be (the "Termination
Price"). Notwithstanding the prior sentence, if at the time the Servicer
determines to exercise such option the unsecured long-term debt obligations of
the Servicer are not rated at least Baa3 by Moody's, if such Rating Agency is
still rating the Certificates, the Servicer shall give such Rating Agency prior
written notice of the Servicer's determination to exercise such option and shall
not exercise such option, without the consent of each such Rating Agency, prior
to furnishing each such Rating Agency with an Opinion of Counsel, in form and
substance reasonably satisfactory to each such Rating Agency, that the exercise
of such option would not be deemed a fraudulent conveyance by the Servicer.
Notice of any termination, specifying the Remittance Date upon which
the Trust Fund will terminate and that the Certificateholders shall surrender
their Certificates to the Trustee for payment of the final distribution and
cancellation shall be given promptly by the Servicer by letter to
Certificateholders mailed during the month of such final distribution before the
Determination Date in such month, specifying (i) the Remittance Date upon which
final payment of
XI-1
<PAGE>
the Certificates will be made upon presentation and surrender of Certificates at
the office of the Trustee therein designated, (ii) the amount of any such final
payment and (iii) that the Record Date otherwise applicable to such Remittance
Date is not applicable, payments being made only upon presentation and surrender
of the Certificates at the office of the Trustee therein specified. The Servicer
shall give such notice to the Trustee therein specified. The Servicer shall give
such notice to the Trustee at the time such notice is given to
Certificateholders. Any obligation of the Servicer to pay amounts due to the
Trustee shall survive the termination of this Agreement.
In the event that all of the Certificateholders shall not surrender
their Certificates for cancellation within six months after the time specified
in the above-mentioned written notice, the Servicer shall give a second written
notice to the remaining Certificateholders to surrender their Certificates for
cancellation and receive the final distribution with respect thereto and shall
at the expense of the Trust Fund cause to be published once, in the national
edition of The Wall Street Journal notice that such money remains unclaimed. If
-----------------------
within six months after the second notice all of the Certificates shall not have
been surrendered for cancellation, the Trustee may take appropriate steps, or
may appoint an agent to take appropriate steps, to contact the remaining
Certificateholders concerning surrender of their Certificates and the cost
thereof shall be paid out of the funds and other assets which remain subject
hereto. If within the period then specified in the escheat laws of the State of
New York after the second notice all the Certificates shall not have been
surrendered for cancellation, the Seller shall be entitled to all unclaimed
funds and other assets which remain subject hereto and the Trustee upon transfer
of such funds shall be discharged of any responsibility for such funds and the
Certificateholders shall look to the Seller for payment.
Section 11.02 Accounting Upon Termination of Servicer
---------------------------------------
Upon termination of the Servicer under Article X hereof, the Servicer
shall:
(a) deliver to its successor or, if none shall yet have been
appointed, to the Trustee the funds in any Principal and Interest Account;
(b) deliver to its successor or, if none shall yet have been
appointed, to the Trustee all SBA Files and related
XI-2
<PAGE>
documents and statements held by it hereunder and a SBA Loan portfolio computer
diskette;
(c) deliver to its successor or, if none shall yet have been
appointed, to the Trustee and, upon request, to the Certificateholders a full
accounting of all funds, including a statement showing the Monthly Payments
collected by it and a statement of moneys held in trust by it for the payments
or charges with respect to the SBA Loans; and
(d) execute and deliver such instruments and perform all acts
reasonably requested in order to effect the orderly and efficient transfer of
servicing of the SBA Loans to its successor and to more fully and definitively
vest in such successor all rights, powers, duties, responsibilities, obligations
and liabilities of the Servicer under this Agreement.
XI-3
<PAGE>
ARTICLE XII
THE TRUSTEE
-----------
Section 12.01 Duties of Trustee.
-----------------
The Trustee, prior to the occurrence of an Event of Default and after
the curing of all Events of Default which may have occurred, undertakes to
perform such duties and only such duties as are specifically set forth in this
Agreement. If an Event of Default has occurred and has not been cured or waived,
the Trustee shall exercise such of the rights and powers vested in it by this
Agreement, and use the same degree of care and skill in its exercise as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.
The Trustee, upon receipt of all resolutions, certificates,
statements, opinions, reports, documents, orders or other instruments furnished
to the Trustee which are specifically required to be furnished pursuant to any
provision of this Agreement, shall examine them to determine whether they
conform to the requirements of this Agreement, provided, however that the
Trustee shall not be responsible for the accuracy or content of any resolution,
certificate, statement, opinion, report, document, order or other instrument
furnished by the Servicer or the Seller hereunder. If any such instrument is
found not to conform to the requirements of this Agreement in a material manner,
the Trustee shall take action as it deems appropriate to have the instrument
corrected, and if the instrument is not corrected to the Trustee's satisfaction,
the Trustee will provide notice thereof to the Certificateholders and the
Servicer.
No provision of this Agreement shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act or its own willful misconduct or bad faith; provided, however, that:
(a) Prior to the occurrence of an Event of Default, and after the
curing of all such Events of Default which may have occurred, the duties and
obligations of the Trustee shall be determined solely by the express provisions
of this Agreement, the Trustee shall not be liable except for the performance of
such duties and obligations as are specifically set forth in this Agreement, no
implied covenants or obligations shall be read into this Agreement against the
Trustee and, in the absence of bad faith on the part of the Trustee, the Trustee
may conclusively rely, as to the truth of the statements and the correctness of
the opinions expressed therein, upon any certificates or opinions
XII-1
<PAGE>
furnished to the Trustee and conforming to the requirements of this Agreement;
(b) The Trustee shall not be personally liable for an error of
judgment made in good faith by officers of the Trustee, unless it shall be
proved that the Trustee was negligent in ascertaining the pertinent facts;
(c) The Trustee shall not be personally liable with respect to any
action taken, suffered or omitted to be taken by it in good faith in accordance
with the direction of the Majority Certificateholders, relating to the time,
method and place of conducting any proceeding for any remedy available to the
Trustee, or exercising any trust or power conferred upon the Trustee, under this
Agreement;
(d) In the absence of actual knowledge of an officer of the Trustee
in its Corporate Trust Office of an Event of Default, the Trustee shall not be
required to take notice or be deemed to have notice or knowledge of any default
or Event of Default unless the Trustee shall be specifically notified in writing
by the Servicer or any of the Certificateholders. In the absence of actual
knowledge or receipt of such notice, the Trustee may conclusively assume that
there is no default or Event of Default; and
(e) The Trustee shall not be required to expend or risk its own funds
or otherwise incur financial liability for the performance of any of its duties
hereunder or the exercise of any of its rights or powers if there is reasonable
ground for believing that the repayment of such funds or adequate indemnity
against such risk or liability is not reasonably assured to it.
Section 12.02 Certain Matters Affecting the Trustee.
-------------------------------------
(a) Except as otherwise provided in Section 12.01:
(i) The Trustee may request and rely and shall be protected in
acting or refraining from acting upon any resolution, Officer's
Certificate, certificate of auditors or any other certificate,
statement, instrument, opinion, report, notice, request, consent,
order, appraisal, bond or other paper or document believed by it to be
genuine and to have been signed or presented by the proper party or
parties;
(ii) The Trustee may consult with counsel and any opinion of
counsel shall be full and complete authorization and protection in
respect of any action
XII-2
<PAGE>
taken or suffered or omitted by it hereunder in good faith and in
accordance with such opinion of counsel;
(iii) The Trustee shall be under no obligation to exercise any
of the trusts or powers vested in it by this Agreement or to
institute, conduct or defend by litigation hereunder or in relation
hereto at the request, order or direction of the Certificateholders,
pursuant to the provisions of this Agreement, unless such
Certificateholders shall have offered to the Trustee reasonable
security or indemnity against the costs, expenses and liabilities
which may be incurred therein or thereby; nothing contained herein
shall, however, relieve the Trustee of the obligation, upon the
occurrence of an Event of Default (which has not been cured), to
exercise such of the rights and powers vested in it by this Agreement,
and to use the same degree of care and skill in its exercise as a
prudent person would exercise or use under the circumstances in the
conduct of such person's own affairs;
(iv) The Trustee shall not be personally liable for any action
taken, suffered or omitted by it in good faith and reasonably believed
by it to be authorized or within the discretion or rights or powers
conferred upon it by this Agreement;
(v) Prior to the occurrence of an Event of Default hereunder
and after the curing of all Events of Default which may have occurred,
the Trustee shall not be bound to make any investigation into the
facts or matters stated in any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order,
approval, bond or other paper or document, unless requested in writing
to do so by Holders of Certificates evidencing Percentage Interests
aggregating not less than 25% provided, however, that if the payment
within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such
investigation is, in the opinion of the Trustee, not reasonably
assured to the Trustee by the security afforded to it by the terms of
this Agreement, the Trustee may require reasonable indemnity against
such expense or liability as a condition to taking any such action.
The reasonable expense of every such examination shall be paid by the
Servicer or, if paid by the Trustee, shall be repaid by the Servicer
upon demand from the Servicer's own funds;
XII-3
<PAGE>
(vi) The right of the Trustee to perform any discretionary act
enumerated in this Agreement shall not be construed as a duty, and the
Trustee shall not be answerable for other than its negligence or
willful misconduct or bad faith in the performance of such act;
(vii) The Trustee shall not be required to give any bond or
surety in respect of the execution of the trust created hereby or the
powers granted hereunder;
(viii) The Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys; and
(ix) In the event that the Trustee is also acting as Paying
Agent, Registrar or Spread Account Custodian, the rights and
protections afforded to the Trustee shall be afforded to such Paying
Agent, Registrar or Spread Account Custodian.
Section 12.03 Trustee Not Liable for Certificates or SBA Loans.
------------------------------------------------
The recitals contained herein and in the Certificates (other than the
certificate of authentication on the Certificates) shall be taken as the
statements of the Servicer, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Agreement or of the Certificates or of any SBA Loan or
related document. The Trustee shall not be accountable for the use or
application by the Servicer of any of the Certificates or of the proceeds of
such Certificates, or for the use or application of any funds paid to the
Servicer in respect of the SBA Loans or deposited in or withdrawn from the
Principal and Interest Account by the Servicer. The Trustee shall not be
responsible for the legality or validity of the Agreement or the validity,
priority, perfection or sufficiency of the security for the Certificates issued
or intended to be issued hereunder.
Section 12.04 Trustee May Own Certificates.
----------------------------
The Trustee in its individual or any other capacity may become the
owner or pledgee of Certificates with the same rights it would have if it were
not Trustee, and may otherwise deal with the parties hereto.
XII-4
<PAGE>
Section 12.05 Servicer To Pay Trustee's Fees and Expenses.
-------------------------------------------
The Servicer covenants and agrees to pay to the Trustee from time to
time, and the Trustee shall be entitled to, reasonable compensation (which shall
not be limited by any provision of law in regard to the compensation of a
trustee of an express trust) for all services rendered by it in the execution of
the trusts hereby created and in the exercise and performance of any of the
powers and duties hereunder of the Trustee, and the Servicer will pay or
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in accordance with
any of the provisions of this Agreement (including the reasonable compensation
and the expenses and disbursements of its counsel and of all persons not
regularly in its employ) except any such expense, disbursement or advance as may
arise from its negligence or bad faith, provided that the Trustee shall have no
lien on the Trust Fund for the payment of its fees and expenses. To the extent
that actual fees and expenses of the Trustee exceed the amount available for
payment thereof on deposit in the Expense Account as of the date such fees and
expenses are due and payable, the Servicer shall reimburse the Trustee for such
shortfall out of its own funds without reimbursement therefor, except as
provided in Section 6.03. The Trustee and any director, officer, employee or
agent of the Trustee and the Spread Account Custodian and any director, officer,
employee or agent of the Spread Account Custodian shall be indemnified by the
Servicer and held harmless against any loss, liability or expense (i) incurred
in connection with any legal action relating to this Agreement or the
Certificates, other than any loss, liability or expense incurred by reason of
willful misfeasance, bad faith or negligence in the performance of duties
hereunder or by reason of reckless disregard of obligations and duties
hereunder, and (ii) resulting from any error in any tax or information return
prepared by the Servicer. The obligations of the Servicer under this Section
12.05 shall survive payment of the Certificates, and shall extend to any co-
trustee appointed pursuant to this Article XII.
Section 12.06 Eligibility Requirements for Trustee.
------------------------------------
The Trustee hereunder shall at all times be (i) a national banking
association or banking corporation or trust company organized and doing business
under the laws of any state or the United States of America, (ii) authorized
under such laws to exercise corporate trust powers, (iii) having a combined
capital and surplus of at least $30,000,000, (iv) having unsecured and
unguaranteed long-term debt obligations rated at least Baa3 by Moody's or such
other rating as is acceptable to the SBA, (v) is subject to supervision or
examination by federal
XII-5
<PAGE>
or state authority, (vi) is an approved SBA guaranteed lender in good standing,
operating pursuant to an effective Loan Guaranty Agreement, and (vii) is
reasonably acceptable to the SBA. If such banking association publishes reports
of condition at least annually, pursuant to law or to the requirements of the
aforesaid supervising or examining authority, then for the purposes of this
Section its combined capital and surplus shall be deemed to be as set forth in
its most recent report of condition so published. In case at any time the
Trustee shall cease to be eligible in accordance with the provisions of this
Section, the Trustee shall (a) give prompt notice to the SBA and each
Certificateholder that it has so ceased to be eligible to be the Trustee and (b)
resign, upon the request of the SBA or the Majority Certificateholders, in the
manner and with the effect specified in Section 12.07.
Section 12.07 Resignation and Removal of the Trustee.
--------------------------------------
The Trustee may at any time resign and be discharged from the trusts
hereby created by giving written notice thereof to the Servicer, the SBA, and to
all Certificateholders. Upon receiving such notice of resignation, the Servicer
shall with the consent of the SBA promptly appoint a successor trustee by
written instrument, in duplicate, which instrument shall be delivered to the
resigning Trustee and to the successor trustee. A copy of such instrument shall
be delivered to the Certificateholders by the Servicer. Unless a successor
trustee shall have been so appointed and have accepted appointment within 60
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
trustee. If the resigning Trustee fails to petition an appropriate court, the
SBA may, after such 60 day period, petition any court of competent jurisdiction
for the appointment of a successor trustee.
If at any time the Trustee shall cease to be eligible in accordance
with the provisions of Section 12.06 and shall fail to resign after written
request therefor by the Servicer, or if at any time the Trustee shall become
incapable of acting, or shall be adjudged bankrupt or insolvent, or a receiver
of the Trustee or of its property shall be appointed, or any public officer
shall take charge or control of the Trustee or of its property or affairs for
the purpose of rehabilitation, conservation or liquidation, then the Servicer
may remove the Trustee and appoint, subject to the approval of the SBA, a
successor trustee by written instrument, in duplicate, which instrument shall be
delivered to the Trustee so removed and to the successor trustee. A copy of such
instrument shall be delivered to the Certificateholders and the SBA by the
Servicer.
XII-6
<PAGE>
The Majority Certificateholders with the consent of the SBA, which
consent will not be unreasonably withheld, and upon satisfaction of the Rating
Agency Condition, or the SBA may at any time remove the Trustee and appoint a
successor trustee by written instrument or instruments, in triplicate, signed by
such Holders or their attorneys-in-fact duly authorized, one complete set of
which instruments shall be delivered to the Servicer, one complete set to the
Trustee so removed and one complete set to the successor Trustee so appointed.
Any resignation or removal of the Trustee and appointment of a
successor trustee pursuant to any of the provisions of this Section shall become
effective upon acceptance of appointment by the successor trustee as provided in
Section 12.08.
Section 12.08 Successor Trustee.
-----------------
Any successor trustee appointed as provided in Section 12.07 shall
execute, acknowledge and deliver to the Servicer and to its predecessor trustee
an instrument accepting such appointment hereunder, and thereupon the
resignation or removal of the predecessor trustee shall become effective and
such successor trustee, without any further act, deed or conveyance, shall
become fully vested with all the rights, powers, duties and obligations of its
predecessor hereunder, with the like effect as if originally named as trustee
herein. The predecessor trustee shall deliver to the successor trustee all SBA
Files and related documents and statements held by it hereunder, and the
Servicer and the predecessor trustee shall execute and deliver such instruments
and do such other things as may reasonably be required for more fully and
certainly vesting and confirming in the successor trustee all such rights,
powers, duties and obligations.
No successor trustee shall accept appointment as provided in this
Section unless at the time of such acceptance such successor trustee shall be
eligible under the provisions of Section 12.06.
Upon acceptance of appointment by a successor trustee as provided in
this Section, the Servicer shall mail notice of the succession of such trustee
hereunder to all Holders of Certificates at their addresses as shown in the
Certificate Register. If the Servicer fails to mail such notice within 10 days
after acceptance of appointment by the successor trustee, the successor trustee
shall cause such notice to be mailed at the expense of the Servicer.
XII-7
<PAGE>
Section 12.09 Merger or Consolidation of Trustee.
----------------------------------
Any Person into which the Trustee may be merged or converted or with
which it may be consolidated or any corporation or national banking association
resulting from any merger, conversion or consolidation to which the Trustee
shall be a party, or any corporation or national banking association succeeding
to the business of the trustee, shall be the successor of the Trustee hereunder,
provided such corporation or national banking association shall be eligible
under the provisions of Section 12.06, 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. The Trustee shall send notice of any
such merger or consolidation to the Rating Agency.
Section 12.10 Appointment of Co-Trustee or Separate Trustee.
---------------------------------------------
Notwithstanding any other provisions hereof, at any time, for the
purpose of meeting any legal requirements of any jurisdiction in which any part
of the Trust Fund or property securing the same may at the time be located, the
Servicer and the Trustee acting jointly shall have the power and shall execute
and deliver all instruments to appoint one or more Persons approved by the
Trustee and the SBA pursuant to the procedure set forth below, to act as co-
trustee or co-trustees, jointly with the Trustee, or separate trustee or
separate trustees, of all or any part of the Trust Fund, and to vest in such
Person or Persons, in such capacity, such title to the Trust Fund, or any part
thereof, and, subject to the other provisions of this Section 12.10, such
powers, duties, obligations, rights and trusts as the Servicer and the Trustee
may consider necessary or desirable. If the Servicer shall not have joined in
such appointment within 15 days after the receipt by it of a request so to do,
or in case an Event of Default shall have occurred and be continuing, the
Trustee alone shall have the power to make such appointment. No co-trustee or
separate trustee hereunder shall be required to meet the terms of eligibility as
a successor trustee under Section 12.06 hereunder. No notice to Holders of
Certificates of the appointment of co-trustee(s) or separate trustee(s) shall be
required under Section 12.08 hereof. The Trustee shall notify the SBA prior to
the appointment of any co-trustee(s) or separate trustee(s) and the SBA shall
have ten Business Days from its receipt of such notice to notify the Trustee
whether it, in its
XII-8
<PAGE>
reasonable judgment, disapproves of such co-trustee(s) or separate trustee(s).
If the SBA does not notify the Trustee within such time frame, it will be deemed
to have approved such co-trustee(s) or separate trustee(s). If the SBA notifies
the Trustee within such time frame that it, in its reasonable judgment,
disapproves of such co-trustee(s) or separate trustee(s) (which notice shall be
accompanied by the name(s) of the SBA's alternative proposed co-trustee(s) or
separate trustee(s)), such appointments shall not be effective.
In the case of any appointment of a co-trustee or separate trustee
pursuant to this Section 12.10, all rights, powers, duties and obligations
conferred or imposed upon the trustee shall be conferred or imposed upon and
exercised or performed by the Trustee and such separate trustee or co-trustee
jointly except to the extent that under any law of any jurisdiction in which any
particular act or acts are to be performed (whether as Trustee hereunder or as
successor to the Servicer hereunder), the Trustee shall be incompetent or
unqualified to perform such act or acts, in which event such rights, powers,
duties and obligations (including the holding of title to the Trust Fund or any
portion thereof in any such jurisdiction) shall be exercised and performed by
such separate trustee or co-trustee at the direction of the Trustee.
Any notice, request or other writing given to the Trustee shall be
deemed to have been given to each of the then separate trustees and co-trustees,
as effectively as if given to each of them. Every instrument appointing any
separate trustee or co-trustee shall refer to this Agreement and the conditions
of this Article XII. Each separate trustee and co-trustee, upon its acceptance
of the trusts conferred, shall be vested with the estates or property specified
in its instrument of appointment, either jointly with the Trustee or separately,
as may be provided therein, subject to all the provisions of this Agreement,
specifically including every provision of this Agreement relating to the conduct
of, affecting the liability of, or affording protection to, the Trustee. Every
such instrument shall be filed with the Trustee.
Any separate trustee or co-trustee may, at any time, constitute the
Trustee, its agent or attorney-in-fact, with full power and authority, to the
extent not prohibited by law, to do any lawful act under or in respect of this
Agreement on its behalf and in its name. The Trustee shall not be responsible
for any action or inaction of any such separate trustee or co-trustee. If any
separate trustee or co-trustee shall die, become incapable of acting, resign or
be removed, all of its estates, properties, rights, remedies and trusts shall
vest in and be exercised by the Trustee, to the extent permitted by law, without
the appointment of a new or successor trustee.
XII-9
<PAGE>
Section 12.11 Authenticating Agent.
--------------------
Upon the request of the Servicer, the Trustee shall appoint an
Authenticating Agent, initially, Marine Midland Bank, with power to act on the
Trustee's behalf and subject to its direction in the authentication and delivery
of the Certificates in connection with transfers and exchanges under Section
4.02, as fully to all intents and purposes as though the Authenticating Agent
had been expressly authorized by that Section to authenticate and deliver
Certificates. For all purposes of this Agreement, the authentication and
delivery of Certificates by the Authenticating Agent pursuant to this Section
shall be deemed to be the authentication and delivery of Certificates by the
Trustee. Such Authenticating Agent shall at all times be a Person meeting the
requirements for the Trustee set forth in Section 12.06.
Any corporation or national banking association into which any
Authenticating Agent may be merged or converted or with which it may be
consolidated, or any corporation or national banking association resulting from
any merger, consolidation or conversion to which any Authenticating Agent shall
be a party, or any corporation or national banking association succeeding to the
corporate trust business of any Authenticating Agent, shall be the successor of
the Authenticating Agent hereunder, if such successor corporation or national
banking association is otherwise eligible under this Section, without the
execution or filing of any further act on the part of the parties hereto or the
Authenticating Agent or such successor corporation.
Any Authenticating Agent may at any time resign by giving notice of
resignation to the Trustee and the Servicer. The Trustee may at any time
terminate the agency of any Authenticating Agent by giving written notice of
termination to such Authenticating Agent and the Servicer. Upon receiving such a
notice of resignation or upon such a termination, or in case at any time any
Authenticating Agent shall cease to be eligible under this Section, the Trustee
shall promptly appoint a successor Authenticating Agent and shall give written
notice of such appointment to all Certificateholders as their names and
addresses appear on the Certificate Register. The Servicer agrees to pay to the
Authenticating Agent from time to time reasonable compensation for its services.
The provisions of Sections 4.04 and 12.03 shall be applicable to any
Authenticating Agent.
Section 12.12 Tax Returns and Reports.
-----------------------
The Trustee, upon request, will furnish the Servicer with all such
information as may be reasonably required in
XII-10
<PAGE>
connection with the Servicer's preparation of all Tax Returns of the Trust Fund
and, upon request within five (5) Business Days after its receipt thereof, shall
(i) sign on behalf of the Trust Fund any Tax Return that the Trustee is required
to sign pursuant to applicable federal, state or local tax laws, and (ii) cause
such Tax Return to have been returned to the Servicer for filing.
The Servicer shall prepare and file or cause to be filed with the
Internal Revenue Service Federal tax information returns with respect to the
Trust Fund and the Certificates containing such information and at the times and
in the manner as may be required by the Code or applicable Treasury regulations,
and shall furnish to each Holder of Certificates at any time during the calendar
year for which such returns or reports are made such statements or information
at the times and in the manner as may be required thereby. The Trustee shall
sign all tax information returns filed pursuant to this Section and any other
returns as may be required by the Code, and in doing so shall rely entirely
upon, and shall have no liability for information provided by, or calculations
provided by, the Servicer.
Section 12.13 Protection of Trust Fund.
------------------------
(a) The Trustee will hold the Trust Fund and such other assets as may
from time to time be deposited with it hereunder in trust for the benefit of the
Holders and the SBA and at the request of the Seller or the SBA will from time
to time execute and deliver all such supplements and amendments hereto pursuant
to Section 13.02 hereof and all instruments of further assurance and other
instruments, and will take such other action upon such request as it deems
reasonably necessary or advisable, to:
(i) more effectively hold in trust all or any portion of the
Trust Fund or such other assets;
(ii) perfect, publish notice of, or protect the validity of any
grant made or to be made by this Agreement;
(iii) enforce any of the SBA Loans; or
(iv) preserve and defend title to the Trust Fund and the rights
of the Trustee, and the ownership interests of the Certificateholders
represented thereby, in such Trust Fund against the claims of all
Persons and parties.
XII-11
<PAGE>
The Trustee shall send copies of any request received from the Seller
or the SBA to take any action pursuant to this Section 12.13 to the Holders.
(b) Subject to Article X hereof, the Trustee shall have the power to
enforce, and shall enforce the obligations of the other parties to this
Agreement by action, suit or proceeding at law or equity, and shall also have
the power to enjoin, by action or suit in equity, any acts or occurrences which
may be unlawful or in violation of the rights of the Holders; provided, however,
that nothing in this Section 12.13 shall require any action by the Trustee
unless the Trustee shall first (i) have been furnished indemnity satisfactory to
it and (ii) when required by this Agreement, have been requested to take such
action by the Majority Certificateholders, the SBA or the Seller in accordance
with the terms of this Agreement.
(c) The Trustee shall execute any instrument required pursuant to
this Section so long as such instrument does not conflict with this Agreement or
with the Trustee's fiduciary duties.
Section 12.14 Representations, Warranties and Covenants of Trustee.
----------------------------------------------------
The Trustee hereby makes the following representations, warranties and
covenants on which the Seller, the Servicer, the SBA and the Certificateholders
shall rely:
(a) The Trustee is a banking corporation and trust company duly
organized, validly existing and in good standing under the laws of the State of
New York.
(b) The Trustee has full power, authority and legal right to execute,
deliver and perform this Agreement, and shall have taken all necessary action to
authorize the execution, delivery and performance by it of this Agreement.
(c) The execution, delivery and performance by the Trustee of this
Agreement shall not (i) violate any provision of any law or any order, writ,
judgment or decree of any court, arbitrator or governmental authority applicable
to the Trustee or any of its assets, (ii) violate any provision of the corporate
charter or By-laws of the Trustee or (iii) violate any provision of, or
constitute, with or without notice or lapse of time, a default under, or result
in the creation or imposition of any lien on any properties included in the
Trust Fund pursuant to the provisions of, any mortgage, indenture, contract,
agreement or other undertaking to which it is a party, which violation, default
or lien could reasonably be expected to materially and
XII-12
<PAGE>
adversely affect the Trustee's performance or ability to perform its duties
under this Agreement or the transactions contemplated in this Agreement.
(d) The execution, delivery and performance by the Trustee of this
Agreement shall not require the authorization, consent or approval of, the
giving of notice to, the filing or registration with or the taking of any other
action in respect of any governmental authority or agency regulating the banking
and corporate trust activities of the Trustee.
(e) This Agreement has been duly executed and delivered by the
Trustee and constitutes the legal, valid and binding agreement of the Trustee,
enforceable in accordance with its terms, subject to the effect of bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally or the application of equitable principles
in any proceeding, whether at law or in equity. The Trustee hereby agrees and
covenants that it will not at any time in the future, deny that this Agreement
constitutes the legal, valid and binding agreement of the Trustee.
(f) The Trustee shall not take any action, or fail to take any
action, if such action or failure to take action will materially interfere with
the enforcement of any rights of the SBA or the Certificateholders under this
Agreement or the Certificates.
(g) The Trustee will comply at all times with the provisions of the
SBA Rules and Regulations in respect of its activities concerning the SBA Loans,
and will at all times hold an effective Loan Guaranty Agreement.
XII-13
<PAGE>
ARTICLE XIII
MISCELLANEOUS PROVISIONS
------------------------
Section 13.01 Acts of Certificateholders
--------------------------
Except as otherwise specifically provided herein, whenever
Certificateholder action, consent or approval is required under this Agreement,
such action, consent or approval shall be deemed to have been taken or given on
behalf of, and shall be binding upon, all Certificateholders if the Majority
Certificateholders agree to take such action or give such consent or approval.
Section 13.02 Amendment.
---------
(a) This Agreement may be amended from time to time by the Seller,
the Servicer and the Trustee by written agreement, upon the prior written
consent of the SBA, without the notice to or consent of the Certificateholders,
to cure any ambiguity, to correct or supplement any provisions herein, to comply
with any changes in the Code, or to make any other provisions with respect to
matters or questions arising under this Agreement which shall not be
inconsistent with the provisions of this Agreement; provided, however, that such
action shall not, as evidenced by an Opinion of Counsel delivered to the
Trustee, adversely affect the interests of any Certificateholder or any other
party and further provided that no such amendment shall reduce in any manner the
amount of, or delay the timing of, any amounts received on SBA Loans which are
required to be distributed on any Certificate without the consent of the Holder
of such Certificate, or change the rights or obligations of any other party
hereto without the consent of such party.
(b) This Agreement may be amended from time to time by the Seller,
the Servicer, the Trustee and the Majority Certificateholders, upon the prior
written consent of the SBA, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement or
of modifying in any manner the rights of the Holders; provided, however, that no
such amendment shall reduce in any manner the amount of, or delay the timing of,
any amounts which are required to be distributed on any Certificate without the
consent of the Holder of such Certificate or reduce the percentage of Holders
which are required to consent to any such amendment without the consent of the
Holders of 100% of the Certificates affected thereby and, provided further, that
no amendment affecting only one class of Certificates shall require the approval
of Holders of Certificates of the other Class.
XIII-1
<PAGE>
(c) It shall not be necessary for the consent of Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent shall approve the substance thereof.
Section 13.03 Recordation of Agreement.
------------------------
To the extent permitted by applicable law, this Agreement is subject
to recordation in all appropriate public offices for real property records in
all of the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other appropriate
public recording office or elsewhere, such recordation to be effected by the
Servicer at the Certificateholders' expense on direction of the Majority
Certificateholders, but only when accompanied by an Opinion of Counsel to the
effect that such recordation materially and beneficially affects the interests
of the Certificateholders or is necessary for the administration or servicing of
the SBA Loans.
Section 13.04 Duration of Agreement.
---------------------
This Agreement shall continue in existence and effect until terminated
as herein provided.
SECTION 13.05 GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 13.06 Notices.
-------
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by overnight mail, certified mail or registered mail, postage prepaid, to (i) in
the case of the Bank, First National Bank of New England, One Commercial Plaza,
Hartford, Connecticut 06103, Attention: Leslie Galbraith, or such other
addresses as may hereafter be furnished to the Certificateholders in writing by
the Bank, (ii) in the case of the Trustee, Marine Midland Bank, 140 Broadway,
New York, New York 10005, 12th Floor, Attention: Corporate Trust Department,
(iii) in the case of the Certificateholders, as set forth in the Certificate
Register, (iv) in the case of Moody's, to Moody's Investors Service, ABS
Monitoring Department, 99 Church Street,
XIII-2
<PAGE>
4th Floor, New York, New York 10007, and (v) in the case of the SBA, the United
States Small Business Administration, 409 Third Street, S.W., Washington, D.C.
20416, Attention: Associate Administrator for Financial Assistance. Any such
notices shall be deemed to be effective with respect to any party hereto upon
the receipt of such notice by such party, except that notices to the
Certificateholders shall be effective upon mailing or personal delivery.
Section 13.07 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 covenants,
agreements, provisions or terms of this Agreement.
Section 13.08 No Partnership.
--------------
Nothing herein contained shall be deemed or construed to create a co-
partnership or joint venture between the parties hereto and the services of the
Servicer shall be rendered as an independent contractor and not as agent for the
Certificateholders.
Section 13.09 Counterparts.
------------
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.
Section 13.10 Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of and be binding upon the
Seller and the Servicer, the Trustee and the Certificateholders and their
respective successors and assigns.
Section 13.11 Headings.
--------
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be part of
this Agreement.
XIII-3
<PAGE>
Section 13.12 Paying Agent.
------------
The Trustee hereby appoints Marine Midland Bank as Paying Agent. The
Trustee may appoint one or more other Paying Agents or successor Paying Agents
meeting the eligibility requirements of a Trustee set forth in Section 12.06
(i), (ii), (iii), (iv), (v) and (vii) hereof.
Each Paying Agent, immediately upon such appointment, shall signify
its acceptance of the duties and obligations imposed upon it by this Agreement
by written instrument of acceptance deposited with the Trustee.
Each such Paying Agent other than the Trustee shall execute and
deliver to the Trustee an instrument in which such Paying Agent shall agree with
the Trustee, subject to the provisions of Section 6.06, that such Paying Agent
will:
(a) allocate all sums received for distribution to the Holders of
Certificates for which it is acting as Paying Agent on each Remittance Date
among such Holders in the proportion specified by the Trustee; and
(b) hold all sums held by it for the distribution of amounts due with
respect to the Certificates in trust for the benefit of the Holders entitled
thereto until such sums shall be paid to such Holders or otherwise disposed of
as herein provided and pay such sums to such Persons as herein provided.
Any Paying Agent other than the Trustee may at any time resign and be
discharged of the duties and obligations created by this Agreement by giving at
least sixty (60) days written notice to the Trustee. Any such Paying Agent may
be removed at any time by an instrument filed with such Paying Agent signed by
the Trustee.
In the event of the resignation or removal of any Paying Agent other
than the Trustee such Paying Agent shall pay over, assign and deliver any moneys
held by it as Paying Agent to its successor, or if there be no successor, to the
Trustee.
Upon the appointment, removal or notice of resignation of any Paying
Agent, the Trustee shall notify the Certificateholders by mailing notice thereof
to their addresses appearing on the Certificate Register.
Section 13.13 Notification to Rating Agency.
-----------------------------
The Trustee shall give prompt notice to the Rating Agency of the
occurrence of any of the following events of which
XIII-4
<PAGE>
it has received notice: (1) any modification or amendment to this Agreement, (2)
any change of the Trustee, the Servicer or Paying Agent, (3) any Event of
Default or waiver of an Event of Default, (4) that any superior lienholder has
accelerated or intends to accelerate the obligations secured by a Prior Lien,
and (5) the final payment of all the Certificates. The Servicer shall promptly
deliver to the Rating Agency a copy of each of the Servicer's Certificates.
Further, the Servicer shall give prompt notice to the Rating Agency if the
Servicer or any of its affiliates acquire any Certificates.
Section 13.14 Third Party Rights
------------------
The Trustee, the FTA, the Spread Account Custodian and the Servicer
agree that the SBA shall be deemed a third-party beneficiary of this Agreement
entitled to all the rights and benefits set forth herein as fully as if it were
a party hereto.
XIII-5
<PAGE>
IN WITNESS WHEREOF, the Bank and the Trustee have caused their names
to be signed hereto by their respective officers thereunto duly authorized as of
the day and year first above written.
FIRST NATIONAL BANK OF NEW ENGLAND,
as Seller and Servicer
By:______________________________
Name:
Title:
MARINE MIDLAND BANK,
as Trustee
By:______________________________
Name:
Title:
XIII-6
<PAGE>
Acceptance of Marine Midland Bank
---------------------------------
Marine Midland Bank hereby accepts its appointment under the within
instrument to serve as initial Authenticating Agent, Certificate Registrar and
Paying Agent. In connection therewith, Marine Midland Bank agrees to be bound
by all applicable provisions of such instrument.
MARINE MIDLAND BANK, as initial Authenticating
Agent, Certificate Registrar and Paying Agent
By:______________________________
Name:
Title:
XIII-7
<PAGE>
STATE OF NEW YORK _____________)
: ss.:
COUNTY OF NEW YORK ____________)
On the ____ day of June, 1998 before me, a Notary Public in and for
said State, personally appeared ____________________ known to me to be an
officer of the Trustee, the trust company that executed the within instrument,
and also known to me to be the person who executed it on behalf of said banking
corporation, and acknowledged to me that such banking corporation executed the
within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
__________________________________
Notary Public
My Commission expires ___________
<PAGE>
STATE OF __________ )
: ss.:
COUNTY OF __________)
On the ____ day of June, 1998 before me, a Notary Public in and for
said State, personally appeared ___________ known to me to be the
_______________ of First National Bank of New England, the corporation that
executed the within instrument as seller and servicer, and also known to me to
be the person who executed it on behalf of said corporation, and acknowledged to
me that such corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
__________________________________
Notary Public
My Commission expires ___________
<PAGE>
EXHIBIT A
CONTENTS OF SBA FILE
With respect to each SBA Loan, the SBA File shall include a copy of
any of the following items delivered to the Trustee or, with respect to 1 below
for the SBA (S) 7(a) Loans, the FTA:
1. The original SBA Note, endorsed by means of an allonge as
follows: "Pay to the order of Marine Midland Bank, and its
successors and assigns, as trustee under that certain Pooling and
Servicing Agreement dated as of May 31, 1998, for the benefit of
the United States Small Business Administration and holders of
First National Bank of New England SBA Loan-Backed Adjustable
Rate Certificates, Series 1998-1, Class A and Class B, as their
respective interests may appear, without recourse" and signed, by
facsimile or manual signature, in the name of the Seller by a
Responsible Officer, with all prior and intervening endorsements
showing a complete chain of endorsement from the originator to
the Seller, if the Seller was not the originator; provided,
--------
however, that in lieu of the original SBA Note relating to one
SBA Loan, where the original SBA Note has been lost the Seller
may deliver a lost note affidavit and, if a copy exists, a copy
of the original SBA Note;
2. With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Mortgage, with evidence of recording
thereon, (ii) a copy of the Mortgage certified as a true copy by
a Responsible Officer of the Seller where the original has been
transmitted for recording until such time as the original is
returned by the public recording office or duly licensed title or
escrow officer or (iii) a copy of the Mortgage certified by the
public recording office in those instances where the original
recorded Mortgage has been lost;
3. With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) the original Assignment of Mortgage from the Seller
endorsed as follows: "Marine Midland Bank, ("Assignee") its
successors and assigns, as trustee under the Pooling and
Servicing Agreement dated as of May
A-1
<PAGE>
31, 1998 subject to the Multi-Party Agreement dated as of May 31,
1998" with evidence of recording thereon (provided, however, that
where permitted under the laws of the jurisdiction wherein the
Mortgaged Property is located, the Assignment of Mortgage may be
effected by one or more blanket assignments for SBA Loans secured
by Mortgaged Properties located in the same county), or (ii) a
copy of such Assignment of Mortgage certified as a true copy by a
Responsible Officer of the Seller where the original has been
transmitted for recording (provided, however, that where the
-------- -------
original Assignment of Mortgage is not being delivered to the
Trustee, each such Responsible Officer may complete one or more
blanket certificates attaching copies of one or more Assignments
of Mortgage relating to the Mortgages originated by the Seller);
4. With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of all intervening assignments, if any,
showing a complete chain of title from the originator to the
Seller, including warehousing assignments, with evidence of
recording thereon if such assignments were recorded, (ii) copies
of any assignments certified as true copies by a Responsible
Officer of the Seller where the originals have been submitted for
recording until such time as the originals are returned by the
public recording officer, or (iii) copies of any assignments
certified by the public recording office in any instances where
the original recorded assignments have been lost;
5. With respect to those SBA Loans secured by Mortgaged Properties,
either: (i) originals of all title insurance policies relating
to the Mortgaged Properties to the extent the Seller obtained
such policies or (ii) copies of any title insurance policies or
other evidence of lien position, including but not limited to
PIRT policies, limited liability reports and lot book reports, to
the extent the Seller obtains such policies or other evidence of
lien position, certified as true by the Seller;
6. With respect to these SBA Loans secured by other items of
Collateral, the original or certified copy of all filed UCC
financing statements
A-2
<PAGE>
securing such Collateral naming the Seller as "Secured Party;"
7. For all SBA Loans, blanket assignment of all Collateral securing
the SBA Loan, including without limitation, all rights under
applicable guarantees and insurance policies;
8. For all SBA Loans, irrevocable power of attorney of the Seller to
the Trustee to execute, deliver, file or record and otherwise
deal with the Collateral for the SBA Loans in accordance with the
Agreement. The power of attorney will be delegable by the
Trustee to the Servicer and any successor servicer and will
permit the Trustee or its delegate to prepare, execute and file
or record UCC financing statements and notices to insurers; and
9. For all SBA Loans, blanket UCC-1 financing statements identifying
by type all Collateral for the SBA Loans in the SBA Loan Pool and
naming the Trustee as Secured Party and the Seller as the Debtor.
The UCC-1 financing statements will be filed promptly following
the Closing Date in New York and Connecticut and will be in the
nature of protective notice filings rather than a true financing
statement.
A-3
<PAGE>
EXHIBIT B-1
[FORM OF CLASS A CERTIFICATE]
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE CERTIFICATE
REGISTRAR OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND
ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES OR
BLUE SKY LAW OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS CERTIFICATE,
AGREES THAT THIS CERTIFICATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS
AND ONLY (1) (A) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO
A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A (A "QIB"), PURCHASING FOR ITS OWN ACCOUNT OR A
QIB PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED THAT THE
REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A, OR (B) IN CERTIFICATED FORM TO AN INSTITUTIONAL "ACCREDITED INVESTOR"
(WITHIN THE MEANING OF RULE 501(A)(1)-(3) OR (7) UNDER THE SECURITIES ACT)
PURCHASING FOR INVESTMENT AND NOT FOR DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, IN EACH CASE, SUBJECT TO (X) THE RECEIPT BY THE TRUSTEE OF A
LETTER SUBSTANTIALLY IN THE FORM PROVIDED IN THE AGREEMENT AND (Y) THE RECEIPT
BY THE TRUSTEE OF SUCH OTHER EVIDENCE ACCEPTABLE TO THE TRUSTEE THAT SUCH
REOFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND
OTHER APPLICABLE LAWS OR IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE UNITED STATES AND SECURITIES AND BLUE SKY LAWS OF ANY
STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION, (2) PURSUANT
TO ANOTHER EXEMPTION AVAILABLE UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH
ANY APPLICABLE STATE SECURITIES LAWS, OR (3) PURSUANT TO A VALID REGISTRATION
STATEMENT.
B-1-1
<PAGE>
THIS CERTIFICATE IS NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY ANY OTHER PERSON.
THIS CERTIFICATE MAY NOT BE ACQUIRED FOR OR ON BEHALF OF (1) AN EMPLOYEE BENEFIT
PLAN OR RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED, AND/OR SECTION 4975 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, OR (2) ANY ENTITY, THE ASSETS OF WHICH WOULD BE DEEMED
PLAN ASSETS UNDER THE DEPARTMENT OF LABOR REGULATIONS SET FORTH AT 29 C.F.R.
(S)2510.3-101.
THE RIGHTS OF THE HOLDERS OF THE CLASS B CERTIFICATES TO RECEIVE DISTRIBUTIONS
WITH RESPECT TO INTEREST AND PRINCIPAL WILL BE SUBORDINATED TO SUCH RIGHTS OF
THE HOLDERS OF THE CLASS A CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING
AND SERVICING AGREEMENT REFERRED TO HEREIN.
B-1-2
<PAGE>
FIRST NATIONAL BANK OF NEW ENGLAND
SBA LOAN-BACKED ADJUSTABLE RATE CERTIFICATES
Series 1998-1 Original Class A Certificate
Class A Principal Balance:
No. 1 $24,211,000
Original Dollar Amount as
of the Cut-Off Date
Represented by this
Certificate:
$24,211,000
Remittance Rate: Percentage Interest of
Variable the Class A Certificates
Evidenced by this
Certificate: 100%
Date of Pooling and Servicer:
Servicing Agreement First National Bank
and Cut-Off Date: of New England
May 31, 1998
First Remittance Date: Latest Maturity Date:
August 17, 1998 September 15, 2024
CUSIP No.: 32110F AC 0
Closing Date: Trustee:
June 30, 1998 Marine Midland Bank
First National Bank of New England certifies that CEDE & CO. is the
registered owner of a percentage interest (the "Percentage Interest") in a trust
consisting of certain Unguaranteed Interests in a pool of loans partially
guaranteed by the U.S. Small Business Administration (the "SBA Loans") and
serviced by First National Bank of New England (hereinafter called the
"Servicer," in its capacity as the Servicer, and the "Seller," in its capacity
as Seller, which terms include any successor entity under the Pooling and
Servicing Agreement referred to below). The SBA Loans were originated or
purchased by the Seller. The SBA Loans will be serviced pursuant to the terms
and conditions of that certain Pooling and Servicing Agreement dated as of May
31, 1998 (the "Pooling and Servicing Agreement") between First National Bank of
New England, as Seller
B-1-3
<PAGE>
and Servicer, and Marine Midland Bank, as trustee (the "Trustee"), certain of
the pertinent provisions of which are set forth herein. To the extent not
defined herein, the capitalized terms used herein have the meanings assigned in
the Pooling and Servicing Agreement. This Certificate is issued under and is
subject to the terms, provisions and conditions of the Pooling and Servicing
Agreement, to which Pooling and Servicing Agreement the holder of this
Certificate by virtue of the acceptance hereof assents and by which such holder
is bound.
On each Remittance Date, commencing on August 17, 1998, the Trustee or
Paying Agent shall distribute to the Person in whose name this Certificate is
registered at the close of business on the last day of the month next preceding
the month of such distribution (the "Record Date"), an amount equal to the
product of the Percentage Interest of the Class A Certificates evidenced by this
Certificate and the amount required to be distributed to Holders of Class A
Certificates on such Remittance Date pursuant to Section 6.07 of the Pooling and
Servicing Agreement.
During the initial Interest Accrual Period, this Certificate will bear
interest at the rate of 6.50% per annum. During each subsequent Interest
Accrual Period, this Certificate will bear interest at a per annum rate equal to
the Prime Rate in effect on the preceding Adjustment Date minus 2.00% per annum,
subject to the limits described in the Pooling and Servicing Agreement.
Distributions on this Certificate will be made by the Trustee or
Paying Agent by check mailed to the address of the Person entitled thereto as
such name and address shall appear on the Certificate Register or, upon written
request to the Trustee, by wire transfer of immediately available funds to the
account of the Person entitled thereto as shall appear on the Certificate
Register without the presentation or surrender of this Certificate or the making
of any notation thereon, at a bank or other entity having appropriate facilities
therefor, and, in the case of wire transfers, at the expense of such Person
unless such Person shall own of record Certificates which have initial
Certificate Principal Balances aggregating at least $5,000,000.
Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Class A
Certificate at the office or agency maintained for that purpose by the
Certificate Registrar in New York, New York.
B-1-4
<PAGE>
This Certificate is one of a duly authorized issue of Certificates
designated as First National Bank of New England SBA Loan-Backed, Adjustable
Rate Certificates, Series 1998-1, Class A and Class B (herein called the
"Certificates") and representing undivided ownership in the right to receive the
principal portion of the Unguaranteed Interests of the SBA Loans together with
interest thereon at the then applicable Class A or Class B Remittance Rate, as
the case may be.
Neither the Certificates nor the SBA Loans represent an obligation of,
or an interest in, the Servicer and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Small Business Administration, the Government
National Mortgage Association or the Veterans Administration or any other
governmental agency. The Certificates are limited in right of payment to
certain collections and recoveries respecting the SBA Loans, all as more
specifically set forth herein and in the Pooling and Servicing Agreement. In
the event Servicer funds are advanced with respect to any SBA Loan, such advance
is reimbursable to the Servicer from late recoveries of interest on the SBA
Loans generally.
As provided in the Pooling and Servicing Agreement, deposits and
withdrawals from the Certificate Account, the Spread Account and the Expense
Account may be made by the Trustee from time to time for purposes other than
distributions to Certificateholders, such purposes including reimbursement to
the Servicer of advances made, or certain expenses incurred, by it, and
investment in Permitted Instruments.
Subject to certain restrictions, the Pooling and Servicing Agreement
permits the amendment thereof with respect to certain modifications (a) by the
Seller, the Servicer and the Trustee without the consent of the
Certificateholders and (b) by the Seller, the Servicer and the Trustee with the
consent of the Majority Certificateholders. The Pooling and Servicing Agreement
permits the Majority Certificateholders to waive, on behalf of all
Certificateholders, any default by the Servicer in the performance of its
obligations under the Pooling and Servicing Agreement and its consequences,
except in a default in making any required distribution on a Certificate. Any
such consent or waiver by the Majority Certificateholders shall be conclusive
and binding on the holder of this Certificate and upon all future holders of
this Certificate and of any Certificate issued upon the transfer hereof or in
exchange herefor or in lieu hereof whether or not notation of such consent is
made upon this Certificate.
As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, the transfer of
B-1-5
<PAGE>
this Certificate is registrable in the Certificate Register upon surrender of
this Certificate for registration of transfer at the offices or agencies
maintained by the Certificate Registrar in New York, New York, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to, the
Trustee, duly executed by the holder hereof or such holder's attorney duly
authorized in writing, and thereupon one or more new Certificates in authorized
denominations evidencing the same aggregate undivided Percentage Interest will
be issued to the designated transferee or transferees.
The Certificates are issuable only as registered Certificates. As
provided in the Pooling and Servicing Agreement and subject to certain
limitations therein set forth, the Certificate is exchangeable for a new
Certificate evidencing the same undivided ownership interest, as requested by
the holder surrendering the same.
No service charge will be made for any such registration of transfer
or exchange, but the Certificate Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
The Servicer, the Seller, the Trustee and the Certificate Registrar,
and any agent of any of the foregoing, may treat the person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
foregoing shall be affected by notice to the contrary.
Except for certain obligations of the Servicer to the Trustee, the
obligations created by the Pooling and Servicing Agreement shall terminate upon
notice to the Trustee of the later of the following events: (i) the final
payment or other liquidation of the last SBA Loan or the disposition of all
property acquired upon foreclosure, deed in lieu of foreclosure or other legal
process of any SBA Loan and the remittance of all funds due thereunder or (ii)
mutual consent of the Servicer and all Certificateholders in writing; provided,
however, that in no event shall the Trust Fund established by the Agreement
terminate later than twenty-one years after the death of the last surviving
lineal descendant of Joseph P. Kennedy, late Ambassador of the United States to
the Court of St. James, alive as of the date of the Agreement.
B-1-6
<PAGE>
IN WITNESS WHEREOF, the Servicer has caused this Certificate to be
duly executed.
FIRST NATIONAL BANK OF NEW ENGLAND,
Servicer
By::__________________________
Name:
Title:
This is one of the
Certificates referred
to in the within-
mentioned Agreement.
MARINE MIDLAND BANK,
as Trustee
By:______________________
Authorized Signatory
or
MARINE MIDLAND BANK
as Authenticating Agent
By:______________________
Authorized Signatory
B-1-7
<PAGE>
EXHIBIT B-2
[FORM OF CLASS B CERTIFICATE]
THIS CERTIFICATE HAS NOT BEEN AND WILL NOT BE REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR UNDER ANY STATE SECURITIES OR
BLUE SKY LAW OF ANY STATE. THE HOLDER HEREOF, BY PURCHASING THIS CERTIFICATE,
AGREES THAT THIS CERTIFICATE MAY BE REOFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY IN COMPLIANCE WITH THE SECURITIES ACT AND OTHER APPLICABLE LAWS
AND ONLY (1) (A) PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") TO
A PERSON THAT THE HOLDER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
WITHIN THE MEANING OF RULE 144A (A "QIB"), PURCHASING FOR ITS OWN ACCOUNT OR A
QIB PURCHASING FOR THE ACCOUNT OF A QIB, WHOM THE HOLDER HAS INFORMED THAT THE
REOFFER, RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A, OR (B) IN CERTIFICATED FORM TO AN INSTITUTIONAL "ACCREDITED INVESTOR"
(WITHIN THE MEANING OF RULE 501(A)(1)-(3) OR (7) UNDER THE SECURITIES ACT)
PURCHASING FOR INVESTMENT AND NOT FOR DISTRIBUTION IN VIOLATION OF THE
SECURITIES ACT, IN EACH CASE, SUBJECT TO (X) THE RECEIPT BY THE TRUSTEE OF A
LETTER SUBSTANTIALLY IN THE FORM PROVIDED IN THE AGREEMENT AND (Y) THE RECEIPT
BY THE TRUSTEE OF SUCH OTHER EVIDENCE ACCEPTABLE TO THE TRUSTEE THAT SUCH
REOFFER, RESALE, PLEDGE OR TRANSFER IS IN COMPLIANCE WITH THE SECURITIES ACT AND
OTHER APPLICABLE LAWS OR IN EACH CASE IN ACCORDANCE WITH ALL APPLICABLE
SECURITIES LAWS OF THE UNITED STATES AND SECURITIES AND BLUE SKY LAWS OF ANY
STATE OF THE UNITED STATES AND ANY OTHER APPLICABLE JURISDICTION, (2) PURSUANT
TO ANOTHER EXEMPTION AVAILABLE UNDER THE SECURITIES ACT AND IN ACCORDANCE WITH
ANY APPLICABLE STATE SECURITIES LAWS, OR (3) PURSUANT TO A VALID REGISTRATION
STATEMENT.
THIS CERTIFICATE MAY NOT BE ACQUIRED FOR OR ON BEHALF OF (1) AN EMPLOYEE BENEFIT
PLAN OR RETIREMENT ARRANGEMENT SUBJECT TO THE EMPLOYEE RETIREMENT INCOME
SECURITY ACT OF 1974, AS AMENDED, AND/OR SECTION 4975 OF THE INTERNAL REVENUE
CODE OF 1986, AS AMENDED, OR (2) ANY ENTITY, THE ASSETS OF WHICH WOULD BE DEEMED
PLAN ASSETS UNDER THE DEPARTMENT OF LABOR REGULATIONS SET FORTH AT 29 C.F.R.
(S)2510.3-101.
THIS CERTIFICATE IS NOT GUARANTEED OR INSURED BY ANY GOVERNMENTAL AGENCY OR
INSTRUMENTALITY OR BY ANY OTHER PERSON.
B-2-1
<PAGE>
THE RIGHTS OF THE HOLDERS OF THE CLASS B CERTIFICATES TO RECEIVE DISTRIBUTIONS
WITH RESPECT TO INTEREST AND PRINCIPAL WILL BE SUBORDINATED TO SUCH RIGHTS OF
THE HOLDERS OF THE CLASS A CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING
AND SERVICING AGREEMENT REFERRED TO HEREIN.
SO LONG AS THIS CLASS B CERTIFICATE IS REGISTERED IN THE NAME OF FNBNE SBA
HOLDINGS, INC., THIS CLASS B CERTIFICATE MAY NOT BE SOLD, PLEDGED, TRANSFERRED,
ASSIGNED OR OTHERWISE CONVEYED, IN WHOLE OR IN PART, WITHOUT THE PRIOR WRITTEN
APPROVAL OF THE UNITED STATES SMALL BUSINESS ADMINISTRATION.
THE RIGHTS OF THE HOLDERS OF THE CLASS B CERTIFICATES TO RECEIVE DISTRIBUTIONS
WITH RESPECT TO INTEREST AND PRINCIPAL WILL BE SUBORDINATED TO SUCH RIGHTS OF
THE HOLDERS OF THE CLASS A CERTIFICATES TO THE EXTENT DESCRIBED IN THE POOLING
AND SERVICING AGREEMENT REFERRED TO HEREIN.
B-2-2
<PAGE>
FIRST NATIONAL BANK OF NEW ENGLAND
SBA LOAN-BACKED ADJUSTABLE RATE CERTIFICATES
Series 1998-1 Original Class B Certificate
Class B Principal Balance:
No. 1 $2,690,728.97
Original Dollar Amount as
of the Cut-Off Date
Represented by this
Certificate:
$2,690,728.97
Remittance Rate: Percentage Interest of
Variable the Class B Certificates
Evidence by this
Certificate: 100%
Date of Pooling and Servicer:
Servicing Agreement First National Bank of
and Cut-Off Date: New England
May 31, 1998
First Remittance Latest Maturity Date:
Date: September 15, 2024
August 17, 1998
CUSIP NO.: 32110F AD 8
Closing Date: Trustee:
June 30, 1998 Marine Midland Bank
First National Bank of New England certifies that FNBNE SBA HOLDINGS, INC.
is the registered owner of a percentage interest (the "Percentage Interest") in
a trust consisting of certain Unguaranteed Interests in a pool of loans
partially guaranteed by the U.S. Small Business Administration and, to the
extent delivered pursuant to the Pooling and Servicing Agreement referred to
below, certain loans originated in connection with such loans (the "SBA Loans")
and serviced by First National Bank of New England (hereinafter called the
"Servicer," in its capacity as the Servicer, and the "Seller," in its capacity
as Seller, which terms include any successor entity under the Pooling and
Servicing Agreement referred to below). The SBA Loans were originated or
purchased by the Seller. The SBA Loans will be serviced pursuant to the terms
and conditions of that certain Pooling and Servicing Agreement dated as of May
31, 1998 (the "Pooling and Servicing Agreement") between First National
B-2-3
<PAGE>
Bank of New England, as Seller and Servicer and Marine Midland Bank, as trustee
(the "Trustee"), certain of the pertinent provisions of which are set forth
herein. To the extent not defined herein, the capitalized terms used herein have
the meanings assigned in the Pooling and Servicing Agreement. This Certificate
is issued under and is subject to the terms, provisions and conditions of the
Pooling and Servicing Agreement, to which Agreement the holder of this
Certificate by virtue of the acceptance hereof assents and by which such holder
is bound.
On each Remittance Date, commencing on August 17, 1998, the Trustee or
Paying Agent shall distribute to the Person in whose name this Certificate is
registered at the close of business on the last day of the month next preceding
the month of such distribution (the "Record Date"), an amount equal to the
product of the Percentage Interest of the Class B Certificates evidenced by this
Certificate and the amount required to be distributed to Holders of Class B
Certificates on such Remittance Date pursuant to Section 6.07 of the Pooling and
Servicing Agreement.
During the initial Interest Accrual Period, this Certificate will bear
interest at the rate of 7.50% per annum. During each subsequent Interest
Accrual Period, this Certificate will bear interest at a per annum rate equal to
the Prime Rate in effect on the preceding Adjustment Date minus 1.00% per annum,
subject to the limits described in the Pooling and Servicing Agreement.
Distributions on this Certificate will be made by the Trustee or
Paying Agent by check mailed to the address of the Person entitled thereto as
such name and address shall appear on the Certificate Register or, upon written
request to the Trustee, by wire transfer of immediately available funds to the
account of the Person entitled thereto as shall appear on the Certificate
Register without the presentation or surrender of this Certificate or the making
of any notation thereon, at a bank or other entity having appropriate facilities
therefor, and, in the case of wire transfers, at the expense of such Person
unless such Person shall own of record Certificates which have initial
Certificate Principal Balances aggregating at least $5,000,000.
Notwithstanding the above, the final distribution on this Certificate
will be made after due notice by the Trustee of the pendency of such
distribution and only upon presentation and surrender of this Certificate at the
office or agency maintained for that purpose by the Certificate Registrar in New
York, New York.
B-2-4
<PAGE>
This Certificate is one of a duly authorized issue of Certificates
designated as First National Bank of New England SBA Loan-Backed, Adjustable
Rate Certificates, Series 1998-1, Class A and Class B (herein called the
"Certificates") and representing undivided ownership in the right to receive the
principal portion of the Unguaranteed Interests of the SBA Loans together with
interest thereon at the then applicable Class A or Class B Remittance Rate, as
the case may be.
Neither the Certificates nor the SBA Loans represent an obligation of,
or an interest in, the Servicer and are not insured or guaranteed by the Federal
Deposit Insurance Corporation, the Small Business Administration, the Government
National Mortgage Association or the Veterans Administration or any other
governmental agency. The Certificates are limited in right of payment to
certain collections and recoveries respecting the SBA Loans, all as more
specifically set forth herein and in the Pooling and Servicing Agreement. In
the event Servicer funds are advanced with respect to any SBA Loan, such advance
is reimbursable to the Servicer from late recoveries of interest on the SBA
Loans generally.
As provided in the Pooling and Servicing Agreement, deposits and
withdrawals from the Certificate Account, the Spread Account and the Expense
Account may be made by the Trustee from time to time for purposes other than
distributions to Certificateholders, such purposes including reimbursement to
the Servicer of advances made, or certain expenses incurred, by it, and
investment in Permitted Instruments.
Subject to certain restrictions, the Pooling and Servicing Agreement
permits the amendment thereof with respect to certain modifications (a) by the
Seller, the Servicer and the Trustee without the consent of the
Certificateholders and (b) by the Seller, the Servicer and the Trustee with the
consent of the Majority Certificateholders. The Pooling and Servicing Agreement
permits the Majority Certificateholders to waive, on behalf of all
Certificateholders, any default by the Servicer in the performance of its
obligations under the Pooling and Servicing Agreement and its consequences,
except in a default in making any required distribution on a Certificate. Any
such consent or waiver by the Majority Certificateholders shall be conclusive
and binding on the holder of this Certificate and upon all future holders of
this Certificate and of any Certificate issued upon the transfer hereof or in
exchange herefor or in lieu hereof whether or not notation of such consent is
made upon this Certificate.
As provided in the Pooling and Servicing Agreement and subject to
certain limitations therein set forth, the transfer of
B-2-5
<PAGE>
this Certificate is registrable in the Certificate Register upon surrender of
this Certificate for registration of transfer at the offices or agencies
maintained by the Certificate Registrar in New York, New York, duly endorsed by,
or accompanied by a written instrument of transfer in form satisfactory to, the
Trustee, duly executed by the holder hereof or such holder's attorney duly
authorized in writing, and thereupon one or more new Certificates in authorized
denominations evidencing the same aggregate undivided Percentage Interest will
be issued to the designated transferee or transferees.
The Certificates are issuable only as registered Certificates. As
provided in the Pooling and Servicing Agreement and subject to certain
limitations therein set forth, the Certificate is exchangeable for a new
Certificate evidencing the same undivided ownership interest, as requested by
the holder surrendering the same.
No service charge will be made for any such registration of transfer
or exchange, but the Certificate Registrar may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
The Servicer, the Seller, the Trustee and the Certificate Registrar,
and any agent of any of the foregoing, may treat the person in whose name this
Certificate is registered as the owner hereof for all purposes, and none of the
foregoing shall be affected by notice to the contrary.
Except for certain obligations of the Servicer to the Trustee, the
obligations created by the Pooling and Servicing Agreement shall terminate upon
notice to the Trustee of the later of the following events: (i) the final
payment or other liquidation of the last SBA Loan or the disposition of all
property acquired upon foreclosure, deed in lieu of foreclosure or other legal
process of any SBA Loan and the remittance of all funds due thereunder or (ii)
mutual consent of the Servicer and all Certificateholders in writing; provided,
however, that in no event shall the Trust Fund established by the Agreement
terminate later than twenty-one years after the death of the last surviving
lineal descendant of Joseph P. Kennedy, late Ambassador of the United States to
the Court of St. James, alive as of the date of the Agreement.
B-2-6
<PAGE>
IN WITNESS WHEREOF, the Servicer has caused this Certificate to be
duly executed.
FIRST NATIONAL BANK OF NEW ENGLAND,
Servicer
By: ___________________________
Name:
Title:
This is one of the
Certificates referred
to in the within-
mentioned Agreement.
MARINE MIDLAND BANK,
as Trustee
By:_____________________
Authorized Signatory
or
MARINE MIDLAND BANK,
as Authenticating Agent
By:_____________________
Authorized Signatory
B-2-7
<PAGE>
EXHIBIT C
PRINCIPAL AND INTEREST ACCOUNT LETTER AGREEMENT
(date)
To: Marine Midland Bank
140 Broadway, 12th Floor
New York, New York 1005 (the "Depository")
As "Servicer" under the Pooling and Servicing Agreement, dated as of
May 31, 1998, First National Bank of New England SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1 Class A and Class B (the "Agreement"), we hereby
authorize and request you to establish an account, as a Principal and Interest
Account pursuant to Section 5.03 of the Agreement, to be designated as "First
National Bank of New England, in trust for the registered holders of First
National Bank of New England SBA Loan-Backed Adjustable Rate Certificates,
Series 1998-1." 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.
FIRST NATIONAL BANK OF NEW ENGLAND
By:_______________________________
Name:
Title:
C-1
<PAGE>
The undersigned, as Depository, hereby certifies that the above
described account has been established under Account Number 10-875345, at the
office of the depository indicated above, and agrees to honor withdrawals on
such account as provided above. The amounts deposited at any time in the
account will be insured to the maximum amount provided by applicable law by the
Federal Deposit Insurance Corporation.
MARINE MIDLAND BANK
-------------------
(Name of Depository)
By:______________________________
Name:
Title:
C-2
<PAGE>
EXHIBIT D
[OMITTED]
D-1
<PAGE>
EXHIBIT E
WIRING INSTRUCTIONS FORM
_______________,19__
[Paying Agent]
[Trustee]
________________________
________________________
________________________
Re: First National Bank of New England SBA Loan-Backed
Adjustable Rate Certificates, Series 1998-1,
[Class A] [Class B] Number ____
------------------------------------
Dear Sir:
In connection with the sale of the above-captioned Certificate by
___________________________________ to ___________________________________,
("Transferee") you, as Paying Agent, are instructed to make all remittances to
Transferee as Certificateholder as of ____________, 19__ by wire transfer. For
such wire transfer, the wiring instructions are as follows:
___________________________
___________________________
___________________________
________________________________
Transferee
Certificateholder's mailing address:
Name:
Address:
E-1
<PAGE>
EXHIBIT F-1
FORM OF INITIAL CERTIFICATION
___________, 1998
[Seller]
[Servicer]
[SBA]
Re: Pooling and Servicing Agreement
First National Bank of New England SBA
Loan-Backed Adjustable Rate Certificates, Series 1998-1, dated as
of May 31, 1998 between First National Bank of New England and
Marine Midland Bank, as Trustee
----------------
Gentlemen:
In accordance with Section 2.05 of the above-captioned Pooling and
Servicing Agreement (the "Agreement"), the undersigned, as Trustee, hereby
certifies that, except as noted on the attachment hereto, if any (the "Loan
Exception Report"), it has received each of the documents required to be
delivered to it pursuant to Section 2.04 of the Agreement (not including the
original SBA Notes relating to the SBA (S) 7(a) Loans, which are to be delivered
to the FTA) with respect to each [Initial] [Subsequent] SBA Loan listed in the
SBA Loan Schedule and the documents contained therein appear to bear original
signatures.
The Trustee has made no independent examination of any such documents
beyond the review specifically required in the above-referenced Pooling and
Servicing Agreement.
F-1-1
<PAGE>
The Trustee makes no representations as to: (i) the validity,
legality, sufficiency, enforceability or genuineness of any such documents or
any of the SBA Loans identified on the SBA Loan Schedule, or (ii) the
collectibility, insurability, effectiveness or suitability of any such SBA Loan.
MARINE MIDLAND BANK,
as Trustee
By:______________________________
Name:
Title:
F-1-2
<PAGE>
EXHIBIT F-2
FORM OF FINAL CERTIFICATION
[date]
[Servicer]
[Seller]
[SBA]
Re: Pooling and Servicing Agreement
First National Bank of New England SBA
Loan-Backed Adjustable Rate Certificates, Series
1998-1, dated as of May 31, 1998 between First
National Bank of New England and Marine Midland
Bank, as Trustee
----------------
Gentlemen:
In accordance with Section 2.05 of the above-captioned Pooling and
Servicing Agreement, the undersigned, as Trustee, hereby certifies that, except
as noted on the attachment hereto, as to each SBA Loan listed in the SBA Loan
Schedule (other than any SBA Loan paid in full or listed on the attachment
hereto) it has reviewed the documents delivered to it pursuant to Section 2.04
of the Pooling and Servicing Agreement and has determined that (i) all such
documents are in its possession, (ii) such documents have been reviewed by it
and have not been mutilated, damaged, torn or otherwise physically altered and
relate to such SBA Loan and (iii) based on its examination, and only as to the
foregoing documents, the information set forth in the SBA Loan Schedule
respecting such SBA Loan is correct. The Trustee has made no independent
examination or inquiring of such documents beyond the review specifically
required in the above-referenced Pooling and Servicing Agreement.
F-2-1
<PAGE>
The Trustee makes no representations as to: (i) the validity,
legality, enforceability or genuineness of any such documents contained in each
or any of the Loans identified on the SBA Loan Schedule, (ii) the
collectibility, insurability, effectiveness or suitability of any such SBA Loan,
or (iii) the compliance by such documents with statutory or regulatory
guidelines.
MARINE MIDLAND BANK,
as Trustee
By:______________________________
Name:
Title:
F-2-2
<PAGE>
EXHIBIT G
[OMITTED]
G-1
<PAGE>
EXHIBIT H
SBA LOAN SCHEDULE
[SEE TAB 8]
H-1
<PAGE>
EXHIBIT I
REQUEST FOR RELEASE OF DOCUMENTS
To: [Trustee]
[FTA]
Re: Pooling and Servicing Agreement
First National Bank of New England SBA
Loan-Backed Adjustable Rate Certificates,
Series 1998-1, dated as of May 31, 1998,
between First National Bank of New England and
Marine Midland Bank, as Trustee
--------------------------------
In connection with the administration of the pool of SBA Loans held by
you, we request the release, and acknowledge receipt, of the (Trustee's SBA
File/[specify document]) for the SBA Loan described below, for the reason
indicated. Please execute the attached documents, if any, for the described SBA
Loan for the reasons indicated.
Obligor's Name, Address & Zip Code:
- ----------------------------------
SBA Loan Number:
- ---------------
Reason for Requesting Documents (check one)
- -------------------------------
____ 1. SBA Loan Paid in Full
(Servicer hereby certifies that all amounts received in
connection therewith have been credited to the Principal and
Interest Account and remitted to the Trustee for deposit into the
Certificate Account pursuant to the Pooling and Servicing
Agreement.)
____ 2. SBA Loan Liquidated
(Servicer hereby certifies that all proceeds of foreclosure,
insurance or other liquidation have been finally received and
credited to the Principal and Interest Account and remitted to
the Trustee for deposit into the Certificate Account pursuant to
the Pooling and Servicing Agreement.)
____ 3. SBA Loan in Foreclosure or other Legal Process
I-1
<PAGE>
_____4. SBA Loan Repurchased Pursuant to Section 11.01 of the Pooling and
Servicing Agreement.
_____5. SBA Loan Repurchased or Substituted Pursuant to Article II or III of
the Pooling and Servicing Agreement (Servicer hereby certifies
that the repurchase price or Substitution Adjustment has been
credited to the Principal and Interest Account and/or remitted to
the Trustee for deposit into the Certificate Account pursuant to
the Pooling and Servicing Agreement.)
____ 6. Collateral Being Released Pursuant to Section 5.01(f) of the Pooling
and Servicing Agreement.
____ 7. SBA Loan Collateral being substituted or subordinated.
If box 1 or 2 above is checked, and if all or part of the Trustee's
SBA File was previously released to us, please release to us our previous
receipt on file with you, as well as any additional documents in your possession
relating to the above specified SBA Loan.
If box 3, 4, 5, 6 or 7 above is checked, upon our return of all of the
above documents to you, please acknowledge your receipt by signing in the space
indicated below, and returning this form.
FIRST NATIONAL BANK OF NEW ENGLAND,
as Servicer
By:__________________________
Name:
Title:
Date:
____________________________________________________________
Documents returned to Trustee:
MARINE MIDLAND BANK, as Trustee
By:__________________________
Name:
Title
Date:
I-2
<PAGE>
EXHIBIT J
FORM OF LIQUIDATION REPORT
Customer Name:
Account number:
Original Principal Balance:
1. Unguaranteed Percentage of Liquidation Proceeds
Principal Prepayment $________
Property Sale Proceeds ________
Insurance Proceeds ________
Other (Itemize) ________
Unguaranteed Percentage of
Total Proceeds $________
2. Servicing Advances $________
Monthly Advances ________
Total Advances $________
3. Net Liquidation Proceeds $________
(Line 1 minus Line 2)
4. Principal Balance of the SBA
Loan on date of liquidation $________
5. Realized (Loss) or Gain $________
(Line 3 minus Line 4)
J-1
<PAGE>
EXHIBIT K
FORM OF DELINQUENCY REPORT
DELINQUENCY, REO PROPERTY AND FORECLOSURE INFORMATION
<TABLE>
<CAPTION>
Total
Ranges Total Gross Unguaranteed
Series (in days) Acct Loan Amount Interest Amount Ungtd Pct
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 to 29 Days
30 to 59 Days
60 to 89 Days
90 to 179 Days
180 to 719 Days
720 and Over
Foreclosure
REO Property
Total Delinquency
Outstanding by Category
</TABLE>
K-1
<PAGE>
EXHIBIT L
SERVICER'S MONTHLY COMPUTER DISKETTE FORMAT
The computer diskette to be delivered to the Trustee pursuant to Section
6.09 shall contain the following information for each SBA Loan as of the related
Record Date:
1. Name of the Obligor, address of the Mortgaged Property, if
applicable, and Account Number.
2. The SBA Loan Interest Rate.
3. The Monthly Payment.
4. The dates on which the payments were received for the applicable
Due Period and the amount of such payments segregated into the
following categories; (a) total interest received (including
Servicing Fee, interest payable to holder of the Guaranteed
Interest, the Premium Protection Fee, FTA's Fee, Extra Interest
and, if applicable, Additional Fee); (b) interest payable to the
holder of the Guaranteed Interest and FTA's Fee; (c) principal and
Excess Payments received; (d) Curtailments received; and (e)
Principal Prepayments received.
5. The SBA Loan principal balance.
6. The SBA Loan date and original term to maturity.
7. A "Delinquency Flag" noting that the SBA Loan is current or
delinquent. If delinquent, state the date on which the last
payment was received.
8. For any SBA Loan that is not either 24 months delinquent or
otherwise determined to be uncollectible, a "Foreclosure Flag"
noting that the SBA Loan is the subject of foreclosure proceedings
or other legal process.
9. For any SBA Loan that is not either 24 months delinquent or
otherwise determined to be uncollectible, an "REO Flag" noting that
title to the Mortgaged Property or Repossessed Collateral has been
acquired.
K-1
<PAGE>
10. A "Liquidated SBA Loan Flag" noting that the SBA Loan is a
Liquidated SBA Loan and the Net Liquidation Proceeds received in
connection therewith.
11. Any additional information reasonably requested by the Trustee.
K-2
<PAGE>
EXHIBIT M
MULTI-PARTY AGREEMENT
AMONG FIRST NATIONAL BANK OF NEW ENGLAND, MARINE MIDLAND BANK, COLSON SERVICES
CORP. AND SBA
This Multi-Party Agreement is entered into as of May 31, 1998 (this
"Agreement"), by and among First National Bank of New England (the "SBA
Lender"), Marine Midland Bank, not in its individual capacity but solely as
Trustee (the "Trustee"), Colson Services Corp. ("FTA"), and the United States
Small Business Administration ("SBA").
The SBA Lender has made and intends to continue to make loans to small
businesses under the Small Business Act, as amended.
SBA guarantees a portion of each SBA Lender Loan in accordance with 13
C.F.R. Part 120 and one or more Small Business Administration Loan Guaranty
Agreements (SBA Form 750), between SBA and the SBA Lender (the "SBA
Agreements").
Because SBA guarantees a portion of each SBA Lender Loan, SBA has an
interest in the SBA Lender Loans, the underlying collateral, and the Loan
Documents.
The SBA Lender has entered into certain Secondary Participation
Guaranty Agreements on SBA Form 1086 (each, a "Participation Agreement") with a
purchaser (each, a "Guaranteed Holder"), SBA and FTA. Under the Participation
Agreements, the SBA Lender has sold the guaranteed portion (the "Guaranteed
Interest") in certain SBA Lender Loans.
<PAGE>
SBA has caused FTA to issue a certificate to each Guaranteed Holder which
entitles the Guaranteed Holder to receive the payments and other recoveries of
principal relating to the Guaranteed Interest on the related SBA Lender Loans,
together with interest on the Guaranteed Interest at a per annum rate in effect
from time to time in accordance with the Participation Agreement.
The SBA Lender and the Trustee have entered into a Pooling and
Servicing Agreement, dated as of May 31, 1998 (the "Pooling and Servicing
Agreement"), which establishes a trust (the "Trust"). Under the Pooling and
Servicing Agreement, the SBA Lender will convey the Conveyed Interest to the
Trust. The Trust will issue certificates (the "Certificates") evidencing the
right to receive the Unguaranteed Interest in the SBA Lender Loans together with
interest.
13 C.F.R. Section 120.420 and the SBA Agreements require the SBA
Lender to obtain SBA's written consent before it sells the Unguaranteed
Interest.
The SBA Lender, the Trustee and SBA want to assure consistency between
the SBA Agreements and the Pooling and Servicing Agreement and clarify the
respective rights of the parties.
<PAGE>
The SBA Lender, the Trustee, FTA and SBA agree as follows:
1. Definitions. In this Agreement, the following terms have the
-----------
following meanings:
a. "Conveyed Interest": the Unguaranteed Interest of each
SBA Lender Loan.
b. "Event of Default": as defined in the Pooling and
Servicing Agreement.
c. "Loan Documents": all Notes, mortgages, deeds of trust,
security deeds, security agreements, instruments of
hypothecation, guarantees and other agreements and
documents that relate to the SBA Lender Loans.
d. "Notes": the notes evidencing the SBA Lender Loans.
e. "Premium Protection Fee": 0.60% per annum of the then
outstanding principal balance of the Guaranteed Interest.
f. "SBA Lender Loan Debtor": any debtor obligated under an
SBA Lender Loan.
<PAGE>
g. "SBA Lender Loans": the loans listed on Exhibit H of the
Pooling and Servicing Agreement (including any Subsequent
SBA Loans (as defined in the Pooling and Servicing
Agreement)) and any other loans included in the Trust
Fund (as defined in the Pooling and Servicing Agreement).
h. "SBA Rules and Regulations": the Small Business Act, as
amended, the SBA Agreements, all rules and regulations
promulgated from time to time under the Small Business
Act, and SBA Standard Operating Procedures and official
Notices as from time to time in effect.
i. "Servicer": The "Servicer" (as defined in the Pooling and
Servicing Agreement) and, if applicable, any Subservicer
(as defined in the Pooling and Servicing Agreement).
j. "Servicing Fee": 0.40% per annum of the then outstanding
principal
<PAGE>
balance of the entire SBA Lender Loan.
k. "Spread Account Excess": as defined in the Pooling and
Servicing Agreement.
l. "Unguaranteed Interest": the portion of each SBA Lender
Loan not guaranteed by SBA.
2. SBA's Guaranteed Interest. The SBA Lender, the Trustee (on
-------------------------
behalf of itself and the holders of the Certificates) and FTA acknowledges
SBA's interest in the Guaranteed Interest of all SBA Lender Loans, together
with the collateral securing the SBA Lender Loans and the Loan Documents,
and in all payments and recoveries with respect to the SBA Lender Loans and
the collateral, including insurance proceeds, and agree to recognize and
uphold such interest under SBA Rules and Regulations. The SBA Lender and
the Trustee will execute any release, assignment, endorsement or other
document that SBA may from time to time reasonably request with respect to
the Guaranteed Interest. The SBA Lender and the Trustee will remit funds
received in respect of the Guaranteed Interest in the SBA Lender Loans to
FTA or SBA, as appropriate. If SBA purchases the Guaranteed Interest in
any SBA Lender Loan, any recoveries from the SBA Lender Loan Debtor or
<PAGE>
the collateral securing the SBA Lender Loan will be distributed pro rata to
SBA as holder of the Guaranteed Interest and to the Trustee as holder of
the Unguaranteed Interest.
3. Unguaranteed Interest. SBA acknowledges that it has no
---------------------
interest in the Unguaranteed Interest, the Servicing Fee or the Premium
Protection Fee. SBA further acknowledges that it has no interest in any
collateral that secures any SBA Lender Loan or any Loan Document, except to
the extent the collateral secures or a Loan Document relates to the
Guaranteed Interest. The collateral for an SBA Lender Loan secures the
Guaranteed Interest and the Unguaranteed Interest pari passu and all
recoveries from insurance or any other source will be shared pro rata. If
SBA receives any amount in respect of the Conveyed Interest, SBA will remit
the sum to the Trustee for the credit of the SBA Lender, provided that in
no event will SBA have any obligation to pay any amount not owed by SBA
under SBA Rules and Regulations. If SBA receives any amount in respect of
the Servicing Fee or the Premium Protection Fee, SBA will remit the sum to
the SBA Lender for distribution to itself, or, if the SBA Lender is not the
Servicer, the Servicer, provided that the Trustee shall have given FTA and
SBA 15 days prior written
<PAGE>
notice under this Agreement of the change in Servicer. This Agreement
constitutes a notice of claims assignment for the full term of the Pooling
and Servicing Agreement under the Federal Assignment of Claims Act of 1940,
as amended, 31 U.S.C. Section 3727, with respect to any right to payment of
any Unguaranteed Interest or the Servicing Fee or the Premium Protection
Fee.
4. SBA Consent to Pooling and Servicing Agreement.
-----------------------------------------------
(a) SBA consents to the SBA Lender's execution and
performance of the Pooling and Servicing Agreement and the transactions
contemplated in it including, but not limited to, the sales of
Certificates, other than the Class B Certificates (as defined in the
Pooling and Servicing Agreement).
(b) Notwithstanding anything to the contrary contained in
the Pooling and Servicing Agreement, a default by the SBA Lender under
another agreement or a default by an entity other than the SBA Lender under
another agreement may not be an event of default under the Pooling and
Servicing Agreement. The Trustee waives any rights it may have, including
rights of set-off and banker's liens, to any account of the SBA Lender into
which payments from SBA Lender Loan
<PAGE>
Debtors are received and the Principal and Interest Account (as defined in
the Pooling and Servicing Agreement).
(c) It will be a condition precedent to the effectiveness
of this Agreement that the SBA receives opinions of counsel stating that
the Multi-Party Agreement is enforceable against the Trustee and the SBA
Lender.
5. SBA Lender to Retain Ultimate Risk of Loss. As required by 13
------------------------------------------
C.F.R. Section 120.420(b)(2), the SBA Lender must retain an economic risk
in and bear the ultimate risk of loss on the Unguaranteed Interest. The
SBA Lender will establish the Spread Account under the Pooling and
Servicing Agreement and cause a wholly owned subsidiary of the SBA Lender,
or a wholly-owned subsidiary of such other entity succeeding to the
business of SBA Lender relating to originating and servicing SBA Loans as
may be approved by SBA in its sole discretion, to be and remain the Spread
Account Depositor (as defined in the Pooling and Servicing Agreement). The
Trust will issue the Class B Certificates to a wholly owned subsidiary of
the SBA Lender, which will retain legal and beneficial ownership thereof in
accordance with Section 11 hereof.
<PAGE>
Such wholly owned subsidiary will retain the Spread Account Excess.
6. Premium Protection Fee and Servicing Fee. The SBA Lender
-----------------------------------------
will retain the Premium Protection Fee and the Servicing Fee with respect
to all its SBA Lender Loans.
7. Restriction on Use of SBA Lender Loans. The SBA Lender will
---------------------------------------
not use the SBA Lender Loans or the collateral supporting the SBA Lender
Loans for any borrowing or other financing not related to financing of the
guaranteed or unguaranteed portions of the SBA Lender Loans.
8. FTA To Hold Original SBA Lender Notes; Possession of Loan
---------------------------------------------------------
Documents. (a) The SBA Lender will deliver all original Notes or in the
---------
case of a lost note, a lost note affidavit (the "Affidavit") relating to
the Initial SBA Loans (as defined in the Pooling and Servicing Agreement)
to FTA prior to the issuance of the Certificates and the SBA Lender will
deliver all original Notes relating to the Subsequent SBA Loans (as defined
in the Pooling and Servicing Agreement) to FTA prior to each Subsequent
Transfer of the Subsequent SBA Loans. Each Note will be endorsed by means
of an allonge (an endorsement of the Note constituting a separate piece of
paper) as follows: "Pay to the order
<PAGE>
of Marine Midland Bank, and its successors and assigns, as trustee under
the Pooling and Servicing Agreement dated as of May 31, 1998, for the
benefit of the United States Small Business Administration and the holders
of First National Bank of New England SBA Loan Backed Certificates, Series
1998-1, Class A and Class B as their respective interests may appear,
without recourse." Upon receiving the Note or Affidavit, and if a copy
exists, a copy of the SBA Note, FTA will deliver to the SBA Lender and the
Trustee a receipt for such Note or Affidavit in the form of Exhibit 1.
(b) The Notes and Affidavit are being delivered to FTA for the
purposes of protecting SBA's and the Certificateholders' respective
interests. SBA appoints FTA as its fiscal and transfer agent and each of
SBA and the Trustee appoint FTA as its agent to hold the Notes and
Affidavit. FTA does not and will not during the term of this Agreement
have any interest in the SBA Lender Loans in the Loan Pool or the related
Loan Documents.
(c) FTA will not release any Note or Affidavit to either the SBA
Lender or any other person except (i) upon receipt from the SBA Lender of a
Request for Release of Note in the form of Exhibit 3, along with a
confirmation of release from the Trustee,
<PAGE>
or (ii) with SBA's prior written consent. Upon receipt of the required
request and confirmation or consent, FTA will release, within 3 Business
Days, the related Note or Affidavit. The Servicer will return the Notes or
Affidavit to FTA in accordance with the appropriate provisions of the
Pooling and Servicing Agreement and when the Notes are returned to FTA, FTA
will issue a receipt in the form of Exhibit 1 hereto. SBA will notify
Moody's Investors Service, Inc. if FTA releases any Note solely upon the
instructions of SBA.
(d) Upon reasonable notice to FTA, SBA will have the right
during normal business hours to inspect the original Notes or Affidavit at
FTA's office.
(e) The SBA Lender will deliver to the Trustee the Loan
Documents and assignments of Loan Documents in accordance with the Pooling
and Servicing Agreement. All instruments of assignment will assign the
applicable collateral to "Marine Midland Bank, ("Assignee") its successors
and assigns, as trustee under the Pooling and Servicing Agreement dated as
of May 31, 1998, subject to the Multi-Party Agreement dated as of May 31,
1998." All financing statements will name the Trustee as secured party.
Any power of attorney from the SBA Lender to the Trustee must require the
Trustee to deal with the collateral in
<PAGE>
accordance with the terms of the Pooling and Servicing Agreement and this
Agreement.
(f) If the Servicer or SBA must be the record owner or secured
party with respect to any Note or any collateral securing any Note for any
purpose including, without limitation, to liquidate (including by any
judicial means) or otherwise pursue remedies against any SBA Lender Loan
Debtor or any collateral securing any Note, the Trustee will assign such
Note or collateral to the Servicer, or SBA, as necessary.
9. Servicing of SBA Lender Loans. The Servicer will service
------------------------------
the SBA Lender Loans in the Loan Pool. Any servicing actions required of
the Servicer under the Pooling and Servicing Agreement or this Agreement
may be performed by a Subservicer, but performance by such Subservicer will
not limit or reduce the Servicer's obligations or liabilities as Servicer
under the Pooling and Servicing Agreement or this Agreement. The Servicer
will remit funds to which the Guaranteed Holders or SBA is entitled in
accordance with the terms of the Participation Agreements, and will remit
to the Trustee funds which are required to be remitted to the Trustee in
accordance with the terms of the Pooling and Servicing Agreement. The
Servicer must proceed with all collection, enforcement of
<PAGE>
remedies and liquidation actions against SBA Lender Loan Debtors in default
in accordance with SBA Rules and Regulations. The Servicer must perform all
servicing activities in accordance with SBA Rules and Regulations, the
Participation Agreements and, to the extent there is no conflict, the
Pooling and Servicing Agreement. Property acquired through foreclosure or
deed in lieu of foreclosure will be titled in the name of the Trustee for
the benefit of SBA and the holders of the Certificates, as their interests
may appear, subject to the terms of this Agreement. The Servicer will
continue to administer such property and will be responsible for its
disposition in accordance with the SBA Rules and Regulations and, to the
extent there is no conflict, the terms of the Pooling and Servicing
Agreement. The Servicer will distribute disposition proceeds to SBA, as
party in interest with respect to the Guaranteed Interest, and to the
Trustee in respect of the Unguaranteed Interest, pro rata. SBA may, at its
--- ----
option, assume servicing of any SBA Lender Loan in accordance with SBA
Rules and Regulations. Unless Trustee becomes the Servicer, the Trustee
will not take (i) any action regarding the servicing of any SBA Lender Loan
or (ii) any action with respect to any SBA Lender Loan Debtor or any
collateral securing any SBA
<PAGE>
Lender Loan. Any actions required of SBA Lender under the Pooling and
Servicing Agreement or this Agreement may be performed by or through a
subservicer approved by SBA under an agreement approved by SBA, but any
such subservicing arrangement will not limit or reduce the SBA Lender's
obligations or liabilities as servicer under the Pooling and Servicing
Agreement or this Agreement.
10. Default Under Pooling and Servicing Agreement. The Trustee
---------------------------------------------
will give SBA prompt written notice of an Event of Default and prompt
written notice of any termination of the Servicer, as Servicer under the
Pooling and Servicing Agreement. Upon an Event of Default and termination
of the Servicer, as Servicer in accordance with the terms of the Pooling
and Servicing Agreement, the Trustee may be substituted as Servicer so long
as the Trustee is then an approved SBA participating lender in good
standing, operating under a current Small Business Administration Loan
Guaranty Agreement (Deferred Participation) (Form 750). If the Trustee
does not meet that condition or is otherwise unable to act or if SBA
requests in writing, the Trustee will appoint another Servicer in
accordance with the Pooling and Servicing Agreement. Any successor
Servicer must agree to be bound by the terms
<PAGE>
of this Agreement and must execute an agreement in the form of Exhibit 2.
Any substitute Servicer will be entitled to receive the Servicing Fee and
the Premium Protection Fee.
11. Transferees. Other than the issuance of the Certificates,
-----------
the Trustee will not sell, participate, pledge, hypothecate, enter into any
repurchase agreement with respect to, or otherwise transfer any of its
interest in any SBA Lender Loan or any Note without SBA's prior written
consent. The proposed transferee must be an approved SBA participating
lender in good standing, operating under a current Small Business
Administration Loan Guaranty Agreement (Deferred Participation) (Form 750)
and must be acceptable to SBA. Upon consenting to any proposed transfer,
SBA will give FTA prompt written notice. Any transferee must agree to be
bound by the terms of this Agreement. Upon initial issuance, the Class B
Certificates will be issued to and registered in the name of FNBNE SBA
Holdings, Inc., a wholly owned subsidiary of the SBA Lender ("Holdings"),
which will retain legal and beneficial ownership of the Class B
Certificates. Holdings will remain a wholly-owned subsidiary of the SBA
Lender or a wholly-owned subsidiary of such other entity succeeding to the
<PAGE>
business of SBA Lender relating to originating and servicing SBA Loans as
may be approved by SBA in its sole discretion. The SBA Lender agrees that
Holdings may not pledge, transfer, assign or otherwise convey, in whole or
in part, the Class B Certificates without the prior written consent of SBA.
12. SBA Lender Acknowledgment of Continuing Obligation; No
------------------------------------------------------
Assumption of Liabilities. No action taken by the Trustee, SBA or the
--------------------------
Servicer under this Agreement, the SBA Agreements, or the Pooling and
Servicing Agreement will release or relieve the SBA Lender of any of its
obligations to SBA or to the Trustee. None of SBA, the Trustee, FTA or the
Servicer will incur any liability or obligation to the SBA Lender by reason
of any reasonable or customary action taken in carrying out the provisions
of this Agreement. Neither the execution of this Agreement, nor the taking
of any action by the Trustee, SBA, FTA or the Servicer under this
Agreement will be an assumption by the Trustee, SBA, FTA or the Servicer of
any liabilities or obligations of the SBA Lender. The provisions of this
Section will survive termination of this Agreement.
13. FTA's and SBA's Limited Liability and Expenses. (a) FTA may
----------------------------------------------
rely upon any signature, notice, certificate, or other document reasonably
believed by
<PAGE>
it to be genuine and to have been signed by the party purporting to sign
it. The SBA Lender will assume liability for and indemnify, protect, and
hold harmless FTA from any liabilities or losses arising out of this
Agreement, except in the case of FTA's gross negligence or willful
misconduct. The SBA Lender will reimburse FTA for all expenses, taxes, and
other charges that FTA incurs in administering this Agreement. The SBA
Lender will pay FTA its standard fee for its services under this Agreement.
In performing its obligations under this Agreement, FTA will not follow
instructions from any party other than SBA or, pursuant to Section 8(c),
upon the request of the SBA Lender and concurring instructions of the
Trustee. The SBA Lender will not hold FTA liable for any action taken in
accordance with such instructions.
(b) SBA may rely on any signature, notice, certificate, request
or other document reasonably believed by it to be genuine and to have been
signed by the party purporting to sign it. The SBA Lender will assume
liability for and indemnify, protect and hold harmless SBA from all
liabilities or losses arising out of this Agreement, except in the case of
gross negligence or willful misconduct. Upon request by SBA, SBA Lender
will reimburse SBA for all reasonable
<PAGE>
expenses and other charges that SBA incurs in connection with this
Agreement.
(c) The provisions of this Section 13 will survive any
termination of this Agreement.
14. Counterparts. This Agreement may be executed in any number
------------
of counterparts each of which will be an original.
15. Inconsistencies. If any provision of this Agreement is
---------------
inconsistent with any provision in any other agreement, including but not
limited to the Pooling and Servicing Agreement, the provision of this
Agreement controls. The Pooling and Servicing Agreement and any agreements
entered into in connection with such agreement are amended to the extent
necessary to give effect to the prior sentence. The SBA Agreements are
amended to provide that FTA will hold the Notes that are transferred
pursuant to the Pooling and Servicing Agreement and that the Trustee may
hold the Loan Documents as provided in this Agreement.
16. Amendment and Term. This Agreement may not be terminated or
------------------
amended without the prior written consent of the parties. Neither the SBA
Agreements nor the Pooling and Servicing Agreement may be amended in any
manner that would impair the respective rights of
<PAGE>
SBA or the Trustee under this Agreement without the prior written consent
of the party so affected.
17. GOVERNING LAW. THIS AGREEMENT WILL BE INTERPRETED AND
-------------
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REFERENCE TO ITS CONFLICT OF LAWS RULES.
18. Successors and Assigns. This Agreement binds and benefits
----------------------
the parties and their respective successors and assigns.
19. Section Headings. The section headings in this Agreement
----------------
are for convenience only, and are without substantive meaning or content.
20. Severability. Any provision of this Agreement which is
------------
prohibited or unenforceable in any jurisdiction will be given no effect and
shall not invalidate any other provision of this Agreement.
21. Notices and Deliveries. Except as otherwise expressly
----------------------
provided in this document, all notices or deliveries under this Agreement
will be given by actual delivery to the parties at the addresses below or
to such other addresses that any party may designate for itself by written
notice to each of the other parties. All notices will be effective upon
receipt by the applicable party.
<PAGE>
If to SBA Lender, at:
First National Bank of New England
One Commercial Plaza
Hartford, Connecticut 06103
Telecopy No.: 860-241-2501
Attention: Leslie Galbraith
If to the Trustee, at:
Marine Midland Bank
140 Broadway, 12th Floor
New York, New York 10005
Attention: Corporate Trust Administration
If to FTA, at:
Colson Services Corp.
150 Nassau Street
New York, New York 10038
Attn.: President
If to SBA, at:
U.S. Small Business Administration
409 3rd Street, S.W.
Washington, D.C. 20416
Attn.: Associate Administrator for Financial Assistance
Additionally, SBA Lender will provide SBA with a copy of (i) the
SBA Loan Schedule included as Exhibit H to the Pooling and Servicing
Agreement, along with any amendments thereto delivered to the Trustee, and
(ii) each delinquency and foreclosure report prepared in accordance with
clause (viii) of Section 6.09 of the Pooling and Servicing Agreement. Such
Schedules and reports will be sent (to the extent practicable, in
electronic format) to Mr. James Hammersley, Director of Secondary Market
Sales ([email protected]).
<PAGE>
In witness whereof the SBA Lender, the Trustee, FTA, and SBA have
executed this Agreement below.
FIRST NATIONAL BANK OF NEW ENGLAND
By: _______________________________________
Name:
Title:
MARINE MIDLAND BANK , not in its individual capacity
but solely as Trustee
By: _______________________________________
Name:
Title:
UNITED STATES SMALL BUSINESS ADMINISTRATION
By: _______________________________________
Name: Jane Palsgrove Butler
Title: Acting Associate
Administrator for Financial Assistance
COLSON SERVICES CORP.
By: _______________________________________
Name:
Title:
<PAGE>
EXHIBIT 1
---------
ACKNOWLEDGMENT OF RECEIPT OF NOTE OR LOST NOTE AFFIDAVIT
___________, 1998
In accordance with Section 8 of the Multi-Party Agreement, dated as of
May 31, 1998, by and among First National Bank of New England, Marine Midland
Bank, as trustee, Colson Services Corp. ("Colson") and the United States Small
Business Administration ("SBA"), Colson, as agent for SBA, hereby acknowledges
receipt of the SBA guaranteed Note or with respect to a lost SBA Note, a lost
note affidavit and if a copy exists, a copy of the original SBA Note described
below with respect to the following:
MAKER:
ORIGINAL PRINCIPAL AMOUNT:
DATE OF NOTE:
SBA LOAN NUMBER (GP NUMBER):
ACCOUNT NUMBER:
COLSON SERVICES CORP.,
AS AGENT FOR THE UNITED STATES
SMALL BUSINESS ADMINISTRATION
By: ___________________________
Name:
Title:
INSTRUCTIONS TO COLSON SERVICES CORP. One original executed copy of this receipt
should be made available for pick-up at the office of Colson or delivered to
Marine Midland Bank, as trustee, 140 Broadway, 12th Floor, New York, New York
10005, and a copy First National Bank of New England, One Commercial Plaza,
Hartford, Connecticut, 06103, Attention: Leslie Galbraith.
M-1-1
<PAGE>
EXHIBIT 2
---------
The undersigned consents and agrees to be bound as successor Servicer
by the terms of foregoing Multi-Party Agreement, dated as of May 31, 1998 among
First National Bank of New England, Marine Midland Bank, as trustee, Colson
Services Corp. and the United States Small Business Administration.
___________________________________
By:________________________________
Name:
Title:
M-2-1
<PAGE>
EXHIBIT 3
---------
REQUEST FOR RELEASE OF NOTE
_____________, 199__
Colson Services Corp.
As Agent for the United States
Small Business Administration
150 Nassau Street
New York, NY 10038
In accordance with Section 8(c) of the Multi-Party Agreement dated as
of May 31, 1998 by and among First National Bank of New England, Marine Midland
Bank, as trustee, Colson Services Corp. ("Colson") and the United States Small
Business Administration ("SBA") and, subject to your receipt of concurrence from
Marine Midland Bank, as trustee, First National Bank of New England hereby
requests release of the Note described below:
OBLIGOR'S NAME AND ADDRESS:
SBA LOAN NUMBER (GP NUMBER):
Reason for Requesting Note
(ONE OF THESE MUST BE CHECKED)
____1. SBA Loan Paid in Full
____2. SBA Loan Liquidated
____3. SBA Loan in Foreclosure or other Legal Process
____4. SBA Loan repurchased pursuant to Section 11.01 of the Pooling and
Servicing Agreement, dated as of May 31, 1998, relating to First National
Bank of New England SBA Loan-Backed Adjustable Rate Certificates, Series
1998-1 (The "Pooling and Servicing Agreement")
____5. SBA Loan repurchased or substituted pursuant to Article II or Article
III of the Pooling and Servicing Agreement
M-3-1
<PAGE>
____6. Collateral being released pursuant to Section 5.01(f) of the Pooling and
Servicing Agreement
____7. SBA Loan Collateral being substituted or subordinated
FIRST NATIONAL BANK OF NEW ENGLAND
By: ___________________
Name:
Title:
M-3-2
<PAGE>
EXHIBIT N
SPREAD ACCOUNT AGREEMENT
This Spread Account Agreement is dated as of June 30, 1998 (the
"Agreement") among FNBNE SBA Holdings, Inc., a Delaware corporation, as Spread
Account Depositor (the "Spread Account Depositor"), Marine Midland Bank, as
trustee (the "Trustee"), and Marine Midland Bank, in its capacity as custodian
hereunder (the "Spread Account Custodian"). All capitalized terms used but not
otherwise defined herein shall have the meanings set forth in the Pooling and
Servicing Agreement referred to below.
WHEREAS, First National Bank of New England (in its capacity as the
"Seller") and Marine Midland Bank, in its capacity as Trustee, have entered into
a Pooling and Servicing Agreement, dated as of May 31, 1998 (the "Pooling and
Servicing Agreement"), in connection with the establishment of a Trust (the
"Trust") and the issuance of First National Bank of New England SBA Loan-Backed,
Adjustable Rate Certificates, Series 1998-1, representing an undivided
beneficial ownership interest in the Trust;
WHEREAS, the Spread Account Depositor wishes to establish the Spread
Account (the "Account") with the Spread Account Custodian, to be used in
accordance with the provisions of Section 6.02 of the Pooling and Servicing
Agreement; and
WHEREAS, the Spread Account Custodian herein agrees to maintain the
Account in accordance with the terms of this Agreement and the Pooling and
Servicing Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements herein contained, the parties hereto agree as follows:
Section 1. Definitions. In addition to those terms defined in the
-----------
Pooling and Servicing Agreement and otherwise herein, the following words and
phrases, unless the context otherwise requires, shall have the following
meanings:
"Account" has the meaning set forth in the second WHEREAS clause
hereof.
"Account Property" has the meaning set forth in Section 3 hereof.
N-1
<PAGE>
"Certificated Securities" has the meaning set forth in Section 8-
102(4) of the UCC.
"Clearing Corporation" has the meaning set forth in Section 8-
102(5) of the UCC.
"Delivery" when used with respect to Account Property means:
(a) with respect to bankers' acceptances, commercial paper,
negotiable certificates of deposit and other obligations that constitute
instruments and are susceptible of physical delivery ("Physical Property"):
(i) transfer of possession thereof to the Spread Account
Custodian, endorsed to, or registered in the name of, the Spread
Account Custodian or its nominee or endorsed in blank;
(b) with respect to a certificated security:
(i) delivery thereof in bearer form to the Spread Account
Custodian; or
(ii) delivery thereof in registered form to the Spread Account
Custodian and
(A) the certificate is endorsed to the Spread Account
Custodian or in blank by effective endorsement; or
(B) the certificate is registered in the name of the Spread
Account Custodian, upon original issue or registration of transfer by
the issuer;
(c) with respect to an uncertificated security:
(i) the delivery of the uncertificated security to the Spread
Account Custodian; or
(ii) the issuer has agreed that it will comply with instructions
originated by the Spread Account Custodian without further consent by
the registered owner;
(d) with respect to any security issued by the U.S. Treasury that is
a book-entry security held through the Federal Reserve System pursuant to
Federal book-entry regulations:
N-2
<PAGE>
(i) a Federal Reserve Bank by book entry credits the book-entry
security to the securities account (as defined in 31 CFR Part 357) of
a participant (as defined in 31 CFR Part 357) which is also a
securities intermediary; and
(ii) the participant indicates by book entry that the book-entry
security has been credited to the Spread Account Custodian's
securities account;
(e) with respect to a security entitlement:
(i) the Spread Account Custodian becomes the entitlement holder;
or
(ii) the securities intermediary has agreed that it will comply
with entitlement orders originated by the Spread Account Custodian
without further consent by the entitlement holder;
(f) for the purpose of clauses (b) and (c) hereof "delivery" means:
(i) with respect to a certificated security:
(A) the Spread Account Custodian acquires possession
thereof;
(B) another person (other than a securities intermediary)
either acquires possession thereof on behalf of the Spread Account
Custodian or, having previously acquired possession thereof,
acknowledges that it holds for the Spread Account Custodian; or
(C) a securities intermediary acting on behalf of the Spread
Account Custodian acquires possession thereof, only if the certificate
is in registered form and has been specially endorsed to the Spread
Account Custodian by an effective endorsement;
(ii) with respect to an uncertificated security:
(A) the issuer registers the Spread Account Custodian as the
registered owner, upon original issue or registration of transfer; or
(B) another person (other than a securities intermediary)
either becomes the registered owner thereof on behalf of the Spread
Account Custodian or,
N-3
<PAGE>
having previously become the registered owner, acknowledges that it
holds for the Spread Account Custodian;
(g) for purposes of this definition, except as otherwise indicated,
the following terms shall have the meaning assigned to each such term in the
UCC:
(i) "certificated security"
(ii) "effective endorsement"
(iii) "entitlement holder"
(iv) "instrument"
(v) "securities account"
(vi) "securities entitlement"
(vii) "securities intermediary"
(viii) "uncertificated security"
(h) in each case of Delivery contemplated herein, the Spread Account
Custodian shall make appropriate notations on its records, and shall cause the
same to be made on the records of its nominees, indicating that securities are
held in trust pursuant to and as provided in this Agreement.
"Depositary" has the meaning set forth in 31 C.F.R. 306.118 or
similar federal regulations governing the transfer of securities
issued by the United States Treasury which are maintained in book-
entry form.
"Securities Intermediary" has the meaning set forth in Section 8-
102(a)(14) of the UCC.
"Instruments" has the meaning set forth in Section 9-105(l)(ii)
of the UCC but excludes any "instruments" that are "certificated
securities" as defined in Section 8-102(l) (a) of the UCC.
"Physical Property" has the meaning set forth in clause (i) of
the definition of "Delivery" in this Section 1.
"UCC" means the New York Uniform Commercial Code.
N-4
<PAGE>
"Uncertificated Security" has the meaning set forth in Section 8-
102(a)(18) of the UCC.
Section 2. Appointment of Spread Account Custodian. The Spread
---------------------------------------
Account Depositor and the Trustee hereby appoint Marine Midland Bank as their
agent under this Agreement to act on their behalf in accordance with the terms
of this Agreement with respect to their interests in the Account and all amounts
and investments deposited therein or credited thereto. Marine Midland Bank
hereby accepts and acknowledges its appointment as agent on behalf of the Spread
Account Depositor and the Trustee.
Section 3. Pledge of Security Interest. The Spread Account Depositor
---------------------------
hereby assigns, sells, conveys and transfers to the Spread Account Custodian and
its successors and assigns, and grants thereto a security interest in, all of
its right, title and interest in and to all amounts payable to the Spread
Account pursuant to Section 6.02 of the Pooling and Servicing Agreement, the
Account, all amounts deposited therein or credited thereto, from time to time,
and all proceeds of the foregoing, including, without limitation, all other
amounts and investments held from time to time in the Account (whether in the
form of deposit accounts, Physical Property, book-entry securities,
Uncertificated Securities, or otherwise) (all of the foregoing, collectively,
the "Account Property"), to have and to hold all the aforesaid property, rights
and privileges unto the Spread Account Custodian, its successors and assigns, in
trust for the benefit of the Trustee and the Certificateholders, subject to the
terms and provisions, set forth in this Agreement. The Spread Account Custodian
hereby acknowledges such transfer and, upon receipt, shall hold and distribute
the Account Property in accordance with the terms and provisions of this
Agreement.
Section 4. Establishment of the Account. The Spread Account
----------------------------
Depositor hereby establishes and shall hereafter maintain with the Spread
Account Custodian the Account as a separate trust account to include the money
and other property deposited and held therein pursuant hereto. The Account
shall be a segregated trust account maintained in New York and initially
established with the Spread Account Custodian and maintained with the Spread
Account Custodian in the Corporate Trust Department of the Spread Account
Custodian. The Spread Account Custodian acknowledges the interest of the
Trustee in the Account, as set forth herein and in Article VI of the Pooling and
Servicing Agreement. The Spread Account Custodian further acknowledges and
agrees that (i) any deposits to the Account shall be made solely by the Servicer
or the Trustee in accordance with Section 6.02(a) of the Pooling and Servicing
Agreement; (ii) any withdrawals from the Account shall be made by the Spread
Account Custodian solely upon instructions
N-5
<PAGE>
therefor given by the Trustee as specifically set forth in Section 6.02(b) of
the Pooling and Servicing Agreement; and (iii) the Seller and the Servicer and
the Spread Account Depositor shall have no rights to receive any amounts in the
Account other than as specifically set forth herein and in Section 6.02(b) of
the Pooling and Servicing Agreement.
Section 5. Delivery of Account Property. With respect to the Account
----------------------------
Property, the Spread Account Depositor and the Spread Account Custodian agree
that:
(a) any Account Property that is held in deposit accounts shall
be held solely with a Designated Depository Institution; and each such
deposit account shall be subject to the exclusive dominion and control
of the Spread Account Custodian, and the Spread Account Custodian
shall have sole signature authority with respect thereto;
(b) any Account Property that is Physical Property shall be
delivered to the Spread Account Custodian in accordance with paragraph
(a) of the definition of "Delivery" and shall be held, pending
maturity or disposition, solely by the Spread Account Custodian or a
securities intermediary (as such term is defined in Section 8-
102(a)(14) of the Relevant UCC);
(c) any Account Property that is a "certificated security" under
Article 8 of the Relevant UCC shall be delivered to the Spread Account
Custodian in accordance with paragraph (b) of the definition of
"Delivery" and shall be held, pending maturity or disposition, solely
by the Spread Account Custodian or a securities intermediary (as such
term is defined in Section 8-102(a)(14) of the Relevant UCC);
(d) any Account Property that is an "uncertificated security"
under Article 8 of the Relevant UCC shall be delivered to the Spread
Account Custodian in accordance with paragraph (c) of the definition
of "Delivery" and shall be maintained by the Spread Account Custodian,
pending maturity or disposition, through continued registration on the
books and records of the issuer thereof of the ownership of such
security by the Spread Account Custodian (or its nominee) or a
securities intermediary (as such term is defined in Section 8-
102(a)(14) of the Relevant UCC);
N-6
<PAGE>
(e) any Account Property that is a book-entry security held
through the Federal Reserve System pursuant to Federal book-entry
regulations shall be delivered to the Spread Account Custodian in
accordance with paragraph (d) of the definition of "Delivery" and
shall be maintained by the Spread Account Custodian, pending maturity
or disposition, through continued book-entry registration of such
Account Property in the name of the Spread Account Custodian or a
securities intermediary (as such term is defined in Section 8-
102(a)(14) of the Relevant UCC); and
(f) any Account Property held through a securities intermediary
(as such term is defined in Section 8-102(a)(14) of the Relevant UCC)
shall be held in a securities account (as such term is defined in
Section 8-501(a) of the Relevant UCC) that is established by such
securities intermediary in the name of the Spread Account Custodian
for which the Spread Account Custodian is the sole entitlement holder
(as defined in Section 8-102(a)(7) of the Relevant UCC).
Section 6. Investment. Amounts held in the Account shall be invested
----------
in Permitted Instruments in accordance with the provisions of Section 6.06 of
the Pooling and Servicing Agreement. All such investments shall be made in the
name of the Spread Account Custodian or its nominee, and all income and gain
realized thereon shall be retained in the Account until withdrawals are
permitted under Section 6.02(b)(iii) of the Pooling and Servicing Agreement.
Section 7. Statement of Account. On or before each Determination
--------------------
Date, the Spread Account Custodian shall deliver to the Trustee, the Servicer
and the Spread Account Depositor an account statement of the Spread Account
Custodian setting forth, as of such date, (i) the amount on deposit in the
Account, (ii) the activity in the Account for the preceding month and (iii) the
amount of any income or gain (or loss) on amounts held in the Account.
Section 8. Termination. This Agreement shall terminate upon the
-----------
termination of the Pooling and Servicing Agreement in accordance with their
terms. Upon termination of this Agreement, any amounts on deposit in the
Account shall be paid by the Spread Account Custodian to the Spread Account
Depositor in accordance with the terms of the Pooling and Servicing Agreement.
N-7
<PAGE>
Section 9. Amendment. This Agreement may be amended by the Spread
---------
Account Depositor and the Spread Account Custodian with the consent of the
Trustee. The parties hereto agree to make any changes to this Agreement
required by Moody's in order to obtain an investment-grade rating.
Section 10. Counterparts. 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.
SECTION 11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN
-------------
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, AND THE OBLIGATIONS, RIGHTS
AND REMEDIES OF THE PARTIES UNDER THIS AGREEMENT SHALL BE DETERMINED IN
ACCORDANCE WITH SUCH LAWS WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OF
LAW.
Section 12. Notices. All demands, notices and communications upon or
-------
to the Spread Account Depositor, the Servicer, the Spread Account Custodian or
the Trustee under this Agreement shall be in writing, personally delivered or
mailed by certified mail, return receipt requested, and shall be deemed to have
been duly given upon receipt (a) in the case of the Spread Account Depositor,
the Servicer and the Trustee, at the addresses therefor set forth in Section
13.06 of the Pooling and Servicing Agreement; (b) in the case of the Spread
Account Custodian, at 140 Broadway, New York, New York 10005, 12th Floor,
Attention: Corporate Trust Department; and (c) in the case of the Spread Account
Depositor, c/o First National Bank of New England, One Commercial Plaza,
Hartford, Connecticut 06103, Attention: Leslie Galbraith.
Section 13. Severability of Provisions. If any one or more of the
--------------------------
agreements, provisions or terms of this Agreement shall be for any reason
whatsoever held invalid, then such agreements, provisions or terms shall be
deemed severable from the remaining 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 14. Assignment; Benefit of Agreement. Notwithstanding
--------------------------------
anything to the contrary contained herein, this Agreement may not be assigned by
the Spread Account Depositor Spread Account Custodian without the prior written
consent of the Trustee. Subject to the foregoing, this Agreement will inure to
the benefit of and be binding upon the parties hereto and the Trustee and their
respective successors and permitted assigns.
N-8
<PAGE>
IN WITNESS WHEREOF, the Trustee, the Spread Account Depositor and the
Spread Account Custodian have caused this Spread Account Agreement to be duly
executed by their respective officers as of the day and year first above
written.
MARINE MIDLAND BANK,
not in its individual capacity
but solely as Trustee
By_____________________________
Name:
Title:
MARINE MIDLAND BANK,
as Spread Account Custodian
By_____________________________
Name:
Title:
FNBNE SBA HOLDINGS, INC.,
as Spread Account Depositor
By_____________________________
Name:
Title:
N-9
<PAGE>
EXHIBIT O-1
FORM OF TRANSFEREE LETTER [NON-RULE 144A]
First National Bank of New England
as Servicer
One Commercial Plaza
Hartford, Connecticut 06103
Attention: Leslie Galbraith
Marine Midland Bank, as Trustee
140 Broadway, 12th Floor
New York, New York 10005
Attention: Corporate Trust Administration
__________, 199__
Re:First National Bank of New England
SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1, Class [A] [B]
--------------------------------------------
Ladies and Gentlemen:
In connection with our acquisition of the above-captioned
Certificates, we certify that (a) we understand that the Certificates are not
being registered under the Securities Act of 1933, as amended (the "Act"), or
any state securities laws and are being transferred to us in a transaction that
is exempt from the registration requirements of the Act and any such laws, (b)
we are an institutional "Accredited Investor," as defined in the Pooling and
Servicing Agreement pursuant to which the Certificates were issued (the
"Agreement"), and have such knowledge and experience in financial and business
matters that we are capable of evaluating the merits and risks of investments in
the Certificates, (c) we have had the opportunity to ask questions of and
receive answers from the Seller concerning the purchase of the Certificates and
all matters relating thereto or any additional information deemed necessary to
our decision to purchase the Certificates, (d) we are acquiring the
Certificates for investment for our own account and not with a view to any
distribution of such Certificates (but without prejudice to our right at all
times to sell or otherwise dispose of the Certificates in accordance with clause
(f) below), (e) we have not offered or sold any Certificates to, or solicited
offers to buy any Certificates from, any person, or otherwise approached or
negotiated with any person with respect thereto, or taken any other action which
would result in a violation of Section 5 of
O-1-1
<PAGE>
the Act, (f) we will not sell, transfer or otherwise dispose of any Certificates
unless (1) such sale, transfer or other disposition is made pursuant to an
effective registration statement under the Act or is exempt from such
registration requirements, and if requested, we will at our expense provide an
opinion of counsel satisfactory to the addressees of this Certificate that such
sale, transfer or other disposition may be made pursuant to an exemption from
the Act, (2) the purchaser or transferee of such Certificate has executed and
delivered to you a certificate to substantially the same effect as this
certificate if required by the Agreement, and (3) the purchaser or transferee
has otherwise complied with any conditions for transfer set forth in the
Agreement and (g) the purchaser is not acquiring a Certificate, directly or
indirectly, for or on behalf of: (i) an employee benefit plan or other
retirement arrangement subject to the Employee Retirement Income Security Act of
1974, as amended, and/or Section 4975 of the Internal Revenue Code of 1986, as
amended, or (ii) any entity, the assets of which would be deemed plan assets
under the Department of Labor regulations set forth at 29 C.F.R. (S)2510.3-101.
Very truly yours,
___________________________________
Print Name of Transferee
By:________________________________
Authorized Officer
O-1-2
<PAGE>
EXHIBIT O-2
FORM OF RULE 144A CERTIFICATION
First National Bank of New England
as Servicer
One Commercial Plaza
Hartford, Connecticut 06103
Attention: Leslie Galbraith
Marine Midland Bank, as Trustee
140 Broadway, 12th Floor
New York, New York 10005
Attention: Corporate Trust Administration
__________, 199__
Re: First National Bank of New England
SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1, Class [A] [B]
--------------------------------------------
Ladies and Gentlemen:
In connection with our acquisition of the above Certificates we
certify that (a) we understand that the Certificates are not being registered
under the Securities Act of 1933, as amended (the "Act"), or any state
securities laws and are being transferred to us in a transaction that is exempt
from the registration requirements of the Act and any such laws, (b) we have had
the opportunity to ask questions of and receive answers from the Seller
concerning the purchase of the Certificates and all matters relating thereto or
any additional information deemed necessary to our decision to purchase the
Certificates, (c) we have not, nor has anyone acting on our behalf offered,
transferred, pledged, sold or otherwise disposed of the Certificates, any
interest in the Certificates or any other similar security to, or solicited any
offer to buy or accept a transfer, pledge or other disposition of the
Certificates, any interest in the Certificates or any other similar security
from, or otherwise approached or negotiated with respect to the Certificates,
any interest in the Certificates or any other similar security 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, that would constitute a
distribution of the Certificates under the Act or that would render the
disposition of the Certificates a violation of Section 5 of the Act or require
registration pursuant thereto,
<PAGE>
nor will act, nor has authorized or will authorize any person to act, in such
manner with respect to the Certificates, (d) we are a "qualified institutional
buyer" as that term is defined in Rule 144A under the Act and have completed the
form of certification to that effect attached hereto as Annex 1 and (e) we are
not acquiring a Certificate, directly or indirectly, for or on behalf of: (i) an
employee benefit plan or other retirement arrangement subject to the Employee
Retirement Income Security Act of 1974, as amended, and/or Section 4975 of the
Internal Revenue Code of 1986, as amended, or (ii) any entity, the assets of
which would be deemed plan assets under the Department of Labor regulations set
forth at 29 C.F.R. (S)2510.3-101. We are aware that the sale to us is being made
in reliance on Rule 144A. We are acquiring the Certificates for our own account
or for resale pursuant to Rule 144A and further, understand that such
Certificates may be resold, pledged or transferred only (i) to a person
reasonably believed to be a qualified institutional buyer that purchases for its
own account or for the account of a qualified institutional buyer to whom notice
is given that the resale, pledge or transfer is being made in reliance on Rule
144A, or (ii) pursuant to another exemption from registration under the Act.
Very truly yours,
_______________________________
Print Name of Transferee
By:____________________________
Authorized Officer
O-2-2
<PAGE>
ANNEX 1 TO EXHIBIT O-2
----------------------
[FORM OF CERTIFICATION]
[Date]
First National Bank of New England
as Servicer
One Commercial Plaza
Hartford, Connecticut 06103
Attention: Leslie Galbraith
Marine Midland Bank, as Trustee
140 Broadway, 12th Floor
New York, New York 10005
Attention: Corporate Trust Administration
Re: First National Bank of New England
SBA Loan-Backed Adjustable Rate
Certificates, Series 1998-1, Class [A] [B]
(the "Confidentially Offered Securities")
-----------------------------------------
Ladies and Gentlemen:
In connection with our purchase of Confidentially Offered Securities,
the undersigned certifies to each of the parties to whom this letter is
addressed that it is a qualified institutional buyer (as defined in Rule 144A
under the Securities Act of 1933, as amended (the "Act")) as follows:
1. It owns and/or invests on a discretionary basis eligible securities
(excluding affiliate's securities, bank deposit notes and CD's, loan
participations, repurchase agreements, securities owned but subject to a
repurchase agreement and currency, interest rate and commodity swaps), as
described below:
Amount:/1/ $_________________; and
2. The dollar amount set forth above is:
a. greater than $100 million and the undersigned is one of the following
entities:
___________________
/1/ Must be calculated using only securities which the undersigned beneficially
held as of the date below.
O-2-3
<PAGE>
(1) [_] an insurance company as defined in Section 2(13) of the
Act;* or
(2) [_] an investment company registered under the Investment
Company Act or any business development company as defined
in Section 2(a)(48) of the Investment Company Act of 1940 or
as defined in Section 202(a)(22) of the Investment Advisers
Act of 1940; or
(3) [_] a Small Business Investment Company licensed by the U.S.
Small Business Administration under Section 301(c) or (d) of
the Small Business Investment Act of 1958; or
(4) [_] a plan (i) established and maintained by a state, its
political subdivisions, or any agency or instrumentality of
a state or its political subdivisions, the laws of which
permit the purchase of securities of this type, for the
benefit of its employees and (ii) the governing investment
guidelines of which permit the purchase of securities of
this type; or
(5) [_] a corporation (other than a U.S. bank, savings and loan
association or equivalent foreign institution), partnership,
Massachusetts or similar business trust, or an organization
described in Section 501(c)(3) of the Internal Revenue Code;
or
(6) [_] a U.S. bank, savings and loan association or equivalent
foreign institution, which has an audited net worth of at
least $25 million as demonstrated in its latest annual
financial statements as of a date not more than 16 months
preceding the date of sale in the case of a U.S. institution
or 18 months in the case of a foreign institution.; or
* A purchase by an insurance company for one or more of its separate accounts,
as defined by section 2(a)(37) of the Investment Company Act of 1940, which
are neither registered nor required to be registered thereunder, shall be
deemed to be a purchase for the account of such insurance company.
O-2-4
<PAGE>
date of sale in the case of a U.S. institution or 18
months in the case of a foreign institution.; or
(7) [_] an investment adviser registered under the Investment
Advisers Act; or
b. [_] greater than $10 million, and the undersigned is a broker-dealer
registered with the SEC; or
c. [_] less than $10 million, and the undersigned is a broker-dealer
registered with the SEC and will only purchase Rule 144A
securities in riskless principal transactions (as defined in Rule
144A); or
d. [_] less than $100 million, and the undersigned is an investment
company registered under the Investment Company Act of 1940,
which, together with one or more registered investment companies
having the same or an affiliated investment adviser, owns at
least $100 million of eligible securities; or
e. [_] less than $100 million, and the undersigned is an entity, all the
equity owners of which are qualified institutional buyers.
The undersigned further certifies that it is purchasing Confidentially
Offered Securities for its own account or for the account of others that
independently qualify as "Qualified Institutional Buyers" as defined in Rule
144A. It is aware that the sale of the Confidentially Offered Securities are
being made in reliance on its continued compliance with Rule 144A. It is aware
that the transferor may rely on the exemption from the provisions of Section 5
of the Act provided by Rule 144A. The undersigned understands that the
Confidentially Offered Securities may be resold, pledged or transferred only to
a person reasonably believed to be a Qualified Institutional Buyer that
purchases for its own account or for the account of a Qualified Institutional
Buyer to whom notice is given that the resale, pledge or transfer is being made
in reliance in Rule 144A.
O-2-5
<PAGE>
The undersigned agrees that if at some time before the expiration of
the holding period described in Rule 144 it wishes to dispose of or exchange any
of the Confidentially Offered Securities, it will not transfer or exchange any
of the Confidentially Offered Securities to a Qualified Institutional Buyer
without first obtaining a letter in the form hereof from the transferee and
delivering such certificate to the addressees hereof.
IN WITNESS WHEREOF, this document has been executed by the undersigned
who is duly authorized to do so on behalf of the undersigned Qualified
Institutional Buyer on the _____ day of ___________, 1998.
Name of Institution
Signature
Name
Title**
________________________
** Must be President, Chief Financial Officer, or other executive officer.
O-2-6
<PAGE>
EXHIBIT P
LIST OF SBA LOANS WITH LOST SBA NOTES
[SEE TAB 38]
P-1
<PAGE>
EXECUTION COPY
EXHIBIT 10.15
SALE AND SERVICING AGREEMENT
Dated as of December 1, 1998
Between
FNBNE BUSINESS LOAN TRUST 1998-A
(Trust)
and
FIRST NATIONAL BANK OF NEW ENGLAND
(Seller and Servicer)
FNBNE Business Loan Notes, Series 1998-A
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
ARTICLE I
DEFINITIONS
-----------
Section 1.01 Definitions........................................................................... 2
-----------
Section 1.02 Use of Words and Phrases.............................................................. 2
------------------------
Section 1.03 Captions; Table of Contents........................................................... 2
---------------------------
ARTICLE II
SALE AND CONVEYANCE OF THE TRUST FUND
-------------------------------------
Section 2.01 Sale and Conveyance of Trust Fund............................................... 3
---------------------------------
Section 2.02 Possession of Business Files.................................................... 3
----------------------------
Section 2.03 Books and Records............................................................... 3
Section 2.04 Delivery of Business Loan Documents............................................. 3
-----------------------------------
Section 2.05 Acceptance by Trustee of the Trust Fund; Certain Substitutions; Certification by
--------------------------------------------------------------------------------
Indenture Trustee............................................................... 6
-----------------
Section 2.06 [Reserved]...................................................................... 7
Section 2.07 [Reserved]...................................................................... 7
Section 2.08 Fees and Expenses of the Owner Trustee and the Indenture Trustee................ 7
----------------------------------------------------------------
Section 2.09 Transfer and Conveyance of the Subsequent Business Loans........................ 8
--------------------------------------------------------
Section 2.10 Optional Repurchase of Defaulted Business Loans................................. 10
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.01 Representations of the Seller................................................... 11
Section 3.02 Individual Business Loans....................................................... 14
-------------------------
Section 3.03 Purchase and Substitution of Defective Loans.................................... 18
--------------------------------------------
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
ARTICLE IV
ADMINISTRATION AND SERVICING OF BUSINESS LOANS
----------------------------------------------
Section 4.01 Duties of the Servicer.......................................................... 21
----------------------
Section 4.02 Liquidation of Business Loans................................................... 24
-----------------------------
Section 4.03 Establishment of Principal and Interest Accounts; Deposits in Principal and
---------------------------------------------------------------------------
Interest Accounts............................................................... 25
-----------------
Section 4.04 Permitted Withdrawals From the Applicable Principal and Interest Account........ 26
------------------------------------------------------------------------
Section 4.05 [Intentionally Omitted]......................................................... 27
Section 4.06 Transfer of Accounts............................................................ 28
--------------------
Section 4.07 Maintenance of Hazard Insurance................................................. 28
-------------------------------
Section 4.08 [Intentionally Omitted]......................................................... 28
Section 4.09 Fidelity Bond................................................................... 28
-------------
Section 4.10 Title, Management and Disposition of Foreclosed Property........................ 29
--------------------------------------------------------
Section 4.11 [Intentionally Omitted]......................................................... 29
---------------------
Section 4.12 Collection of Certain Business Loan Payments.................................... 29
--------------------------------------------
Section 4.13 Access to Certain Documentation and............................................. 30
-----------------------------------
ARTICLE V
PAYMENTS TO THE CERTIFICATEHOLDERS
----------------------------------
Section 5.01 Establishment of Note Distribution Account; Deposits in Note Distribution
-------------------------------------------------------------------------
Account; Permitted Withdrawals from Note Distribution Account.................. 31
--------------------------------------------------------------
Section 5.02 Establishment of Spread Account; Deposits in Spread Account; Permitted
----------------------------------------------------------------------
Withdrawals from Spread Account................................................. 32
-------------------------------
Section 5.03 Establishment of Expense Account; Deposits in Expense Account; Permitted
------------------------------------------------------------------------
Withdrawals from Expense Account................................................ 33
--------------------------------
Section 5.04 Pre-Funding Account and Capitalized Interest Account............................ 35
----------------------------------------------------
Section 5.05 [Intentionally Omitted]......................................................... 36
Section 5.06 Investment of Accounts.......................................................... 36
----------------------
Section 5.07 Distributions................................................................... 37
-------------
Section 5.08 [Intentionally Omitted]......................................................... 39
----------------------
Section 5.09 Statements...................................................................... 39
----------
Section 5.10 Advances by the Servicer........................................................ 42
------------------------
Section 5.11 Compensating Interest........................................................... 42
---------------------
Section 5.12 Reports of Foreclosure and Abandonment.......................................... 43
--------------------------------------
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI
GENERAL SERVICING PROCEDURE
---------------------------
Section 6.01 [Omitted]........................................................................ 44
Section 6.02 Satisfaction of Mortgages and Collateral and Release of Business Files........... 44
----------------------------------------------------------------------
Section 6.03 Servicing Compensation........................................................... 45
----------------------
Section 6.04 Annual Statement as to Compliance................................................ 45
---------------------------------
Section 6.05 Annual Independent Public........................................................ 46
-------------------------
Section 6.06 Trustee's Right to Examine Servicer Records and Audit Operations................. 46
----------------------------------------------------------------
Section 6.07 Reports to the Trustee; Principal and Interest Account Statements................ 46
-----------------------------------------------------------------
ARTICLE VII
REPORTS TO BE PROVIDED BY SERVICER
----------------------------------
Section 7.01 Financial Statements............................................................. 47
--------------------
ARTICLE VIII
THE SERVICER
------------
Section 8.01 Indemnification; Third Party Claims.............................................. 48
-----------------------------------
Section 8.02 Merger or Consolidation of the Servicer.......................................... 49
---------------------------------------
Section 8.03 Limitation on Liability of the Servicer and Others............................... 49
--------------------------------------------------
Section 8.04 Servicer Not to Resign........................................................... 49
----------------------
ARTICLE IX
DEFAULT
-------
Section 9.01 Events of Default................................................................ 51
-----------------
Section 9.02 Trustee to Act; Appointment of Successor......................................... 52
----------------------------------------
Section 9.03 Waiver of Defaults............................................................... 54
------------------
Section 9.04. Control by Majority Noteholders.................................................. 54
-------------------------------
ARTICLE X
TERMINATION
-----------
Section 10.01 Termination...................................................................... 56
-----------
</TABLE>
(iii)
<PAGE>
<TABLE>
<S> <C>
Section 10.02 Accounting Upon Termination of Servicer.......................................... 57
---------------------------------------
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
Section 11.01 Acts of Noteholders.............................................................. 58
-------------------
Section 11.02 Amendment........................................................................ 58
---------
Section 11.03 Recordation of Agreement......................................................... 58
------------------------
Section 11.04 Duration of Agreement............................................................ 59
---------------------
Section 11.05 Governing Law.................................................................... 59
Section 11.06 Notices.......................................................................... 59
-------
Section 11.07 Severability of Provisions....................................................... 59
--------------------------
Section 11.08 No Partnership................................................................... 60
--------------
Section 11.09 Counterparts..................................................................... 60
------------
Section 11.10 Successors and Assigns........................................................... 60
----------------------
Section 11.11 Headings......................................................................... 60
--------
Section 11.12 Notification to Rating Agencies.................................................. 60
-------------------------------
Section 11.13. Limitation of Liability.......................................................... 60
-----------------------
</TABLE>
(iv)
<PAGE>
APPENDIX A Definitions and Usage
EXHIBIT INDEX
-------------
EXHIBIT A Contents of Business File
EXHIBIT B [Intentionally Omitted]
EXHIBIT C Principal and Interest Account
Letter Agreement
EXHIBIT D [Intentionally Omitted]
EXHIBIT E [Intentionally Omitted]
EXHIBIT F Initial Certification
EXHIBIT F-1 Interim Certification
EXHIBIT F-2 Final Certification
EXHIBIT G [Intentionally Omitted]
EXHIBIT H Business Loan Schedule
EXHIBIT I Request for Release of Documents
EXHIBIT J Form of Liquidation Report
EXHIBIT K Form of Delinquency Report
EXHIBIT L Servicer's Monthly Computer Tape Format
(v)
<PAGE>
Sale and Servicing Agreement dated as of December 1, 1998, between
FNBNE Business Loan Trust 1998-A (the "Trust"), and First National Bank of New
England, as Seller (the "Seller") and as Servicer (the "Servicer").
PRELIMINARY STATEMENT
The Trust was formed for the purpose of issuing asset backed notes and
asset backed certificates secured by the Business Loans. The Issuer has entered
into a trust indenture, dated as of December 1, 1998 (the "Indenture"), between
the Trust and the Indenture Trustee, pursuant to which the Trust intends to
issue its FNBNE Business Loan Notes, Series 1998-A, Adjustable Rate Class A,
Adjustable Rate Class M-1, Adjustable Rate Class M-2 and Adjustable Rate Class B
in the aggregate initial principal amounts of $55,250,000, $3,250,000,
$3,250,000, and $3,250,000, respectively (collectively, the "Notes"). Pursuant
to the Indenture, as security for the indebtedness represented by the Notes, the
Issuer is and will be pledging to the Indenture Trustee, or granting the
Indenture Trustee a security interest in, among other things, certain Business
Loans and Subsequent Business Loans and its rights under this Agreement.
The parties desire to enter into this Agreement to provide, among
other things, for the servicing of the Business Loans by the Servicer. The
Servicer acknowledges that, in order further to secure the Notes, the Trust is
and will be granting to the Indenture Trustee a security interest in, among
other things, its rights under this Agreement, and the Servicer agrees that all
covenants and agreements made by the Servicer herein with respect to the
Business Loans shall also be for the benefit and security of the Indenture
Trustee and Holders of the Notes. For its services hereunder, the Servicer will
receive a Servicing Fee (as defined herein) with respect to each Business Loan
serviced hereunder.
<PAGE>
ARTICLE I
DEFINITIONS
-----------
Section 1.01 Definitions. For all purposes of this Agreement, capitalized
-----------
terms used herein shall have the meanings set forth in Appendix A, unless the
context clearly indicates otherwise.
Section 1.02 Use of Words and Phrases. "Herein", "hereby", "hereunder",
------------------------
"hereof", "hereinbefore", "hereinafter" and other equivalent words refer to this
Agreement as a whole and not solely to the particular section of this Agreement
in which any such word is used.
Section 1.03 Captions; Table of Contents. The captions or headings in
---------------------------
this Agreement and the Table of Contents are for convenience only and in no way
define, limit or describe the scope and intent of any provisions of this
Agreement.
2
<PAGE>
ARTICLE II
SALE AND CONVEYANCE OF THE TRUST FUND
-------------------------------------
Section 2.01 Sale and Conveyance of Trust Fund.
---------------------------------
The Seller hereby sells, transfers, assigns, sets over and conveys to
the Trust without recourse, subject to the terms of this Agreement, all of the
right, title and interest of the Seller in and to the Initial Business Loans and
all other assets included or to be included in the Trust Fund in exchange for
the Notes and the Certificates.
Section 2.02 Possession of Business Files.
----------------------------
(a) Upon the issuance of the Notes and Certificates, the ownership of
each Business Note, the Mortgage, if applicable, and the contents of the related
Business File relating to the Initial Business Loans is, and upon each
Subsequent Transfer Date the ownership of each Business Note, the Mortgage, if
applicable, and the contents of the related Business File relating to the
applicable Subsequent Business Loans will be, vested in the Trust for the
benefit of the Noteholders and Certificateholders, as the case may be.
(b) Pursuant to Section 2.04, with respect to the Initial Business
Loans the Seller has delivered or caused to be delivered, and, on each
Subsequent Transfer Date, the Seller will deliver or cause to be delivered, each
Business File to the Indenture Trustee.
Section 2.03 Books and Records.
-----------------
The transfer of each Business Loan shall be reflected on the Seller's
balance sheet and other financial statements and for tax purposes as a sale of
assets by the Seller and the Seller shall respond to any third-party inquiry
that such transfer is so reflected as a sale. The Seller shall be responsible
for maintaining, and shall maintain, a complete set of books and records for
each Business Loan which shall be clearly marked to reflect the ownership of
each Business Loan by the Trust for the benefit of the Noteholders and
Certificateholders.
Section 2.04 Delivery of Business Loan Documents.
-----------------------------------
The Seller, (i) contemporaneously with the delivery of this Agreement,
has delivered or caused to be delivered to the Indenture Trustee and (ii) on
each Subsequent Transfer Date, will deliver or cause to be delivered to the
Indenture Trustee, each of the following documents:
(a) For each Initial Business Loan or Subsequent Business Loan,
as the case may be:
3
<PAGE>
(1) The original Business Note, endorsed by means of an allonge as
follows: "Pay to the order of Marine Midland Bank, and its successors and
assigns, as indenture trustee under that certain Indenture dated as of December
1, 1998 relating to FNBNE Business Loan Trust, 1998-A, without recourse" and
signed, by facsimile or manual signature, in the name of the Seller by a
Responsible Officer, with all prior and intervening endorsements showing a
complete chain of endorsement from the originator to the Seller, if the Seller
was not the originator;
(2) Blanket assignment of all Collateral securing the Business Loan,
including without limitation, all rights under applicable guarantees and
insurance policies;
(3) Irrevocable power of attorney of the Seller to the Indenture
Trustee to execute, deliver, file or record and otherwise deal with the
Collateral for the Business Loans in accordance with this Agreement. The power
of attorney will be delegable by the Indenture Trustee to the Servicer and any
successor servicer and will permit the Indenture Trustee or its delegate to
prepare, execute and file or record UCC financing statements and notices to
insurers; and
(4) Blanket UCC-1 financing statements identifying by type all
Collateral for the Business Loans and naming the Indenture Trustee, as assignee
of the Trust, as Secured Party and the Seller as the Debtor. The UCC-1
financing statements will be filed promptly following the Closing Date in
Connecticut and will be in the nature of protective notice filings rather than
true financing statements.
(b) For each Initial Business Loan or Subsequent Business Loan
secured by Commercial Property or Residential Property, as the case may be:
(1) Either: (i) the original Mortgage, with evidence of recording
thereon, (ii) a copy of the Mortgage certified as a true copy by a Responsible
Officer of the Seller where the original has been transmitted for recording
until such time as the original is returned by the public recording office or
duly licensed title or escrow officer or (iii) a copy of the Mortgage certified
by the public recording office in those instances where the original recorded
Mortgage has been lost;
(2) Either: (i) the original Assignment of Mortgage from the Seller
endorsed as follows: "Marine Midland Bank ("Assignee"), its successors and
assigns, as indenture trustee under the Indenture dated as of December 1, 1998
relating to FNBNE Business Loan Trust 1998-A" with evidence of recording thereon
(provided, however, that where permitted under the laws of the jurisdiction
wherein the Mortgaged Property is located, the Assignment of Mortgage may be
effected by one or more blanket assignments for Business Loans secured by
Mortgaged Properties located in the same county), or (ii) a copy of such
Assignment of Mortgage certified as a true copy by a Responsible Officer of the
Seller where the original has been transmitted for recording (provided, however,
-------- -------
that where the original Assignment of Mortgage is not being delivered to the
Indenture Trustee, the Responsible Officer may complete one or more blanket
4
<PAGE>
certificates attaching copies of one or more Assignments of Mortgage relating to
the Mortgages originated by the Seller);
(3) Either: (i) originals of all intervening assignments, if any,
showing a complete chain of title from the originator to the Seller, including
warehousing assignments, with evidence of recording thereon if such assignments
were recorded, (ii) copies of any assignments certified as true copies by a
Responsible Officer of the Seller where the originals have been submitted for
recording until such time as the originals are returned by the public recording
officer, or (iii) copies of any assignments certified by the public recording
office in any instances where the original recorded assignments have been lost;
(4) Either: (i) originals of all title insurance policies relating to
the Mortgaged Properties to the extent the Seller obtained such policies or (ii)
copies of any title insurance policies or other evidence of lien position,
including but not limited to PIRT policies, limited liability reports and lot
book reports, to the extent the Seller obtain such policies or other evidence of
lien position, certified as true by the Seller;
The Seller shall, within ten Business Days after the receipt thereof,
and in any event, within one year of the Closing Date (or, with respect to the
Subsequent Business Loans, within one year of the related Subsequent Transfer
Date), deliver or cause to be delivered to the Indenture Trustee: (i) the
original recorded Mortgage in those instances where a copy thereof certified by
the Seller was delivered to the Indenture Trustee; (ii) the original recorded
Assignment of Mortgage from the Seller to the Indenture Trustee, which, together
with any intervening assignments of Mortgage, evidences a complete chain of
title from the originator to the Indenture Trustee in those instances where
copies thereof certified by the Seller were delivered to the Indenture Trustee;
and (iii) any intervening assignments of Mortgage in those instances where
copies thereof certified by the Seller were delivered to the Indenture Trustee.
Notwithstanding anything to the contrary contained in this Section 2.04, in
those instances where the public recording office retains the original Mortgage,
Assignment of Mortgage or the intervening assignments of the Mortgage after it
has been recorded, the Seller shall be deemed to have satisfied its obligations
hereunder upon delivery to the Indenture Trustee of a copy of such Mortgage,
Assignment of Mortgage or assignments of Mortgage certified by the public
recording office to be a true copy of the recorded original thereof. All
Business Loan documents held by the Indenture Trustee as to each Business Loan
are referred to herein as the "Indenture Trustee's Document File."
Although it is the intent of the parties to this Agreement that the
conveyance of the Seller's right, title and interest in and to the Business
Loans and other assets in the Trust Fund pursuant to this Agreement shall
constitute a purchase and sale and not a loan, in the event that such conveyance
is deemed to be a loan, it is the intent of the parties to this Agreement that
the Seller shall be deemed to have granted, and hereby does grant, to the Trust
a first priority perfected security interest in all of the Seller's right, title
and interest in, to and under the Business Loans and other assets in the Trust
Fund, and that this Agreement shall constitute a security agreement under
applicable law.
5
<PAGE>
All recording required pursuant to this Section 2.04 shall be
accomplished by and at the expense of the Servicer.
Section 2.05 Acceptance by Indenture Trustee of the Trust Fund;
--------------------------------------------------
Certain Substitutions; Certification by
---------------------------------------
Indenture Trustee.
-----------------
(a) The Indenture Trustee shall execute and deliver on the Closing
Date (or, with respect to the Subsequent Business Loans, on the related
Subsequent Closing Date), an acknowledgment of receipt in the form attached as
Exhibit F hereto, stating that it has received, for each Business Loan, a
Business Note, and a file, and declares that the Indenture Trustee will hold
such documents and any amendments, replacements or supplements thereto, for the
benefit of the Noteholders and the Certificateholders. The Indenture Trustee
agrees, for the benefit of the Noteholders and the Certificateholders, to review
each Indenture Trustee's Document File within 90 days after the Closing Date or
Subsequent Closing Date, as the case may be, (or, with respect to any Qualified
Substitute Business Loan, within 45 days after the assignment thereof), and to
deliver to the Seller and the Servicer a certification in the form attached
hereto as Exhibit F-1. Within 360 days after the Closing Date (or, with respect
to any Qualified Substitute Business Loan, within 360 days after the assignment
thereof), the Indenture Trustee shall deliver to the Servicer, the Seller, the
Rating Agencies and any Noteholder who requests a copy from the Indenture
Trustee a final certification in the form attached hereto as Exhibit F-2
evidencing the completeness of the Indenture Trustee's Document Files.
(b) If the Indenture Trustee, during the process of reviewing the
Indenture Trustee's Document Files finds any document constituting a part of a
Indenture Trustee's Document File which is not properly executed, has not been
received, is unrelated to a Business Loan identified in the Business Loan
Schedule, or does not conform in a material respect to the requirements of
Section 2.04 or the description thereof as set forth in the Business Loan
Schedule, the Indenture Trustee shall promptly so notify the Servicer and the
Seller. In performing any such review, the Indenture Trustee may conclusively
rely on the Seller as to the purported genuineness of any such document and any
signature thereon. It is understood that the scope of the Indenture Trustee's
review of the Indenture Trustee's Document Files is limited solely to confirming
that the documents listed in Section 2.04 have been executed and received and
relate to the Business Loans identified in the Business Loan Schedule. The
Seller agrees to use reasonable efforts to remedy a material defect in a
document constituting part of a Business File of which it is so notified by the
Indenture Trustee. If, however, within 60 days after the Indenture Trustee's
notice to it respecting such material defect the Seller has not remedied the
defect and such defect materially and adversely affects the value of the related
Business Loan, the Seller will (i) substitute in lieu of such Business Loan a
Qualified Substitute Business Loan in the manner and subject to the conditions
set forth in Section 3.03 or (ii) purchase such Business Loan at a purchase
price equal to the Principal Balance of such Business Loan as of the date of
purchase, plus 30 days' interest on such Principal Balance, computed at the
Adjusted Business Loan Remittance Rate as of the next succeeding Determination
Date, plus any accrued unpaid
6
<PAGE>
Servicing Fees, Monthly Advances and Servicing Advances reimbursable to the
Servicer, which purchase price shall be deposited in the Principal and Interest
Account on the next succeeding Determination Date.
(c) Upon receipt by the Indenture Trustee of a certification of a
Servicing Officer of the Servicer of such purchase and the deposit of the
amounts described above in the Principal and Interest Account (which
certification shall be in the form of Exhibit I hereto), the Indenture Trustee
shall release to the Servicer for release to the Seller the related Indenture
Trustee's Document File and the Indenture Trustee shall execute, without
recourse, and deliver such instruments of transfer necessary to transfer such
Business Loan to the Seller. All costs of any such transfer shall be borne by
the Servicer.
(d) If in connection with taking any action the Servicer requires any
item constituting part of the Indenture Trustee's Document File, or the release
from the lien of the related Business Loan of all or part of any Mortgaged
Property or other Collateral, the Servicer shall deliver to the Indenture
Trustee a certificate to such effect in the form attached as Exhibit I hereto.
Upon receipt of such certification, the Indenture Trustee shall deliver to the
Servicer the requested documentation and the Indenture Trustee shall execute,
without recourse, and deliver such instruments of transfer necessary to release
all or the requested part of the Mortgaged Property or other Collateral from the
lien of the related Business Loan.
On the Remittance Date in March of each year commencing March 2000,
the Indenture Trustee shall deliver to the Seller and the Servicer a
certification detailing all transactions with respect to the Business Loans for
which the Indenture Trustee holds a Indenture Trustee's Document File pursuant
to this Agreement during the prior calendar year. Such certification shall list
all Indenture Trustee's Document Files which were released by or returned to the
Indenture Trustee during the prior calendar year, the date of such release or
return and the reason for such release or return.
Section 2.06 [Reserved].
--------
Section 2.07 [Reserved].
----------
Section 2.08 Fees and Expenses of the Owner Trustee and the
----------------------------------------------
Indenture Trustee.
- -----------------
The fees and expenses of the Owner Trustee and the Indenture Trustee
including (i) the annual fees of the Owner Trustee and the Indenture Trustee,
payable quarterly in advance, and subject to rebate to the Servicer as
additional servicing compensation hereunder for any fraction of a calendar
quarter in which this Agreement terminates, (ii) any other fees and expenses to
which the Owner Trustee and the Indenture Trustee are entitled, and (iii)
reimbursements to the Servicer for any advances made by the Servicer to the
Expense Account pursuant to Section 5.03 hereof, shall be paid from the Expense
Account in the manner set forth in Section 5.03 hereof; provided, however, that
-------- -------
the Seller shall be liable for any expenses of the Trust Fund incurred prior to
the Closing Date. The Servicer, the Indenture
7
<PAGE>
Trustee and the Owner Trustee hereby covenant with the Noteholders and the
Certificateholders that every material contract or other material agreement
entered into by the Owner Trustee, the Indenture Trustee, or the Servicer,
acting as attorney-in-fact for the Indenture Trustee or the Owner Trustee, on
behalf of the Trust Fund shall expressly state therein that no Noteholder or
Certificateholder shall be personally liable in connection with such contract or
agreement.
Section 2.09 Transfer and Conveyance of the Subsequent
-----------------------------------------
Business Loans.
--------------
(a) Subject to the conditions set forth in paragraph (b) below, in
consideration of the Indenture Trustee's delivery on the related Subsequent
Transfer Dates to or upon the order of the Seller of all or a portion of the
balance of funds in the Pre-Funding Account, the Seller shall on any Subsequent
Transfer Date contribute, transfer, assign, set over and otherwise convey
without recourse, to the Trust all right, title and interest of the Seller in
and to each Subsequent Business Loan listed on the Business Loan Schedule
delivered by the Seller on such Subsequent Transfer Date, all its right, title
and interest in and to principal collected and interest accruing on each such
Subsequent Business Loan on and after the related Subsequent Cut-Off Date and
all its right, title and interest in and to all insurance policies; provided,
--------
however, that the Seller reserves and retains all its right, title and interest
- -------
in and to principal (including Principal Prepayments) collected and interest
accruing on each such Subsequent Business Loan prior to the related Subsequent
Cut-Off Date. The transfer by the Seller of the Subsequent Business Loans set
forth on the Business Loan Schedule to the Trust shall be absolute and shall be
intended by all parties hereto to be treated as a contribution by the Seller.
The amount released from the Pre-Funding Account shall be one-hundred
percent (100%) of the aggregate Principal Balances as of the related Subsequent
Transfer Date of the Subsequent Business Loans so transferred.
(b) The Seller shall transfer to the Trust the Subsequent Business
Loans and the other property and rights related thereto described in paragraph
(a) above only upon the satisfaction of each of the following conditions on or
prior to the related Subsequent Transfer Date:
(i) the Seller shall have provided the Indenture Trustee with a
timely Addition Notice and shall have provided any information
reasonably requested by it with respect to the Subsequent Business
Loans;
(ii) the Seller shall have delivered to the Indenture Trustee a
duly executed written assignment (including an acceptance by the
Indenture Trustee) that shall include a Business Loan Schedule,
listing the Subsequent Business Loans and any other exhibits listed
thereon;
8
<PAGE>
(iii) the Seller shall have deposited in the applicable
Principal and Interest Account all collections in respect of the
Subsequent Business Loans received on or after the related Subsequent
Cut-Off Date;
(iv) as of each Subsequent Transfer Date, neither the Seller
nor the Servicer was insolvent nor will either of them have been made
insolvent by such transfer nor is either of them aware of any pending
insolvency;
(v) such addition will not result in a material adverse tax
consequence to the Trust Fund or the Holders of the Notes and the
Certificates;
(vi) the Pre-Funding Period shall not have terminated;
(vii) the Seller shall have delivered to the Indenture Trustee
an Officer's Certificate confirming the satisfaction of each condition
precedent specified in this paragraph (b) and in the related
Subsequent Transfer Agreement;
(viii) the Seller shall have delivered to the Rating Agencies,
the Owner Trustee and the Indenture Trustee, Opinions of Counsel with
respect to the transfer of the Subsequent Business Loans substantially
in the form of the Opinions of Counsel delivered to the Indenture
Trustee and the Owner Trustee on the Closing Date (bankruptcy,
corporate and tax opinions);
(ix) such addition will not cause the Principal Balance of the
Business Loans secured by accounts receivables and inventory to be
greater than 25% of the aggregate Principal Balance of the Business
Loans; and
(x) such addition will not cause the Principal Balance of the
Business Loans secured by first liens on commercial real estate or
machinery and equipment to be less than 70% of the aggregate Principal
Balance of the Business Loans; provided however, in no event shall any
such transfer cause 50% or more of the aggregate Principal Balance of
the Business Loans to be "real estate mortgages (or interest therein)"
within the meaning of Section 7701(i)(A)(i) of the Code and Treasury
Regulations Section 301.7701-1(d).
(c) The obligation of the Trust to purchase a Subsequent Business
Loan on any Subsequent Transfer Date is subject to the requirement, as evidenced
by a certificate from a Responsible Officer of the Seller, that such Subsequent
Business Loan conforms in all material respects to the representations and
warranties concerning the individual Initial Business Loans set forth in
Sections 3.01 and 3.02 (except that any reference therein to the Cut-Off Date
shall be deemed a reference to the applicable Subsequent Cut-Off Date) or in the
Private Placement Memorandum under the heading "The Business Loan Pool-
Subsequent Business Loans" and that the inclusion of all Subsequent Business
Loans being transferred to the Trust on such
9
<PAGE>
Subsequent Transfer Date will not change, in any material respect, the
characteristics of the Initial Business Loans in the aggregate, set forth in
Sections 3.01 and 3.02.
(d) In connection with the transfer and assignment of the Subsequent
Business Loans, the Seller agrees to satisfy the conditions set forth in
Sections 2.02, 2.03, 2.04 and 2.05.
(e) In connection with each Subsequent Transfer Date, on the
Remittance Dates in January, February and March 1999 and the Special Remittance
Date, the Seller shall determine, and the Indenture Trustee shall cooperate with
the Seller in determining (i) the amount and correct dispositions of the
Capitalized Interest Requirements and the Pre-Funding Earnings and (ii) any
other necessary matters in connection with the administration of the Pre-Funding
Account and of the Capitalized Interest Account. If any amounts are incorrectly
released to the Seller from the Capitalized Interest Account, the Seller shall
immediately repay such amounts to the Indenture Trustee.
(f) No later than March 31, 1999, the Seller shall obtain a letter
from an independent accountant stating whether or not the characteristics of the
Subsequent Business Loans conform to the characteristics set forth herein.
Section 2.10 Optional Purchase of Defaulted Business Loans.
The Servicer shall have the right, but not the obligation, to purchase
any Defaulted Business Loan for a purchase price equal to the then outstanding
principal balance of such Defaulted Business Loan as of the date of such
purchase plus accrued interest thereon at the Adjusted Business Loan Remittance
Rate, which purchase price shall be deposited in the Principal and Interest
Account on the next succeeding Determination Date. In no event, however, may
the aggregate principal balance of all Defaulted Business Loans purchased
pursuant to this Section 2.10 exceed 5% of the sum of (i) the Original Pool
Principal Balance and (ii) the initial Pre-Funded Amount.
10
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 3.01 Representations of the Seller.
-----------------------------
The Seller hereby represents and warrants to the Indenture Trustee,
the Owner Trustee, the Certificateholders and the Noteholders as of the Closing
Date:
(a) The Seller is a nationally chartered 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 and
qualified in each state where the laws of such state require licensing or
qualification in order to conduct business of the type conducted by the Seller
and perform its obligations hereunder; the Seller has all requisite power and
authority to execute and deliver this Agreement and each other Basic Document to
which it is a party and to perform in accordance herewith and therewith; the
execution, delivery and performance of this Agreement and each other Basic
Document to which it is a party (including all instruments of transfer to be
delivered pursuant to this Agreement) by the Seller and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary corporate action; this Agreement and each other
Basic Document to which it is a party evidence the valid, binding and
enforceable obligations of the Seller; and all requisite corporate action has
been taken by the Seller to make this Agreement and each other Basic Document to
which it is a party valid, binding and enforceable upon the Seller in accordance
with its respective terms, subject to the effect of bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or affecting
creditors' rights generally or the application of equitable principles in any
proceeding, whether at law or in equity, none of which will affect the ownership
of the Business Loans by the Trust.
(b) All actions, approvals, consents, waivers, exemptions, variances,
franchises, orders, permits, authorizations, rights and licenses required to be
taken, given or obtained, as the case may be, by or from any federal, state or
other governmental authority or agency (other than any such actions, approvals,
etc., under any state securities laws, real estate syndication or "Blue Sky"
statutes, as to which the Seller makes no such representation or warranty), that
are necessary or advisable in connection with the purchase and sale of the Notes
and the execution and delivery by the Seller of the documents to which it is a
party, have been duly taken, given or obtained, as the case may be, are in full
force and effect on the date hereof, are not subject to any pending proceedings
or appeals (administrative, judicial or otherwise) and either the time within
which any appeal therefrom may be taken or review thereof may be obtained has
expired or no review thereof may be obtained or appeal therefrom taken, and are
adequate to authorize the consummation of the transactions contemplated by this
Agreement and each other Basic Document to which it is a party and the other
documents on the part of the Seller and the performance by the Seller of its
obligations under this Agreement and the other Basic Documents to which it is a
party;
11
<PAGE>
(c) The consummation of the transactions contemplated by this
Agreement and the other Basic Documents to which the Seller is a party will not
result in the breach of any terms or provisions of the articles of association
or by-laws of the Seller or result in the breach of any term or provision of, or
conflict with or constitute a default under or result in the acceleration of any
obligation under, any material agreement, indenture or loan or credit agreement
or other material instrument to which the Seller or its property is subject, or
result in the violation of any law, rule, regulation, order, judgment or decree
to which the or its property is subject;
(d) Neither this Agreement or any other Basic Document to which the
Seller is a party nor any statement, report or other document furnished or to be
furnished pursuant to this Agreement or any other Basic Document to which the
Seller is a party or in connection with the transactions contemplated hereby and
thereby contains any untrue statement of material fact or omits to state a
material fact necessary to make the statements contained herein or therein not
misleading in light of the circumstances under which they were made;
(e) 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 or any other Basic Document to which the Seller is a party;
(f) There is no action, suit, proceeding or investigation pending or,
to the best of the Seller's knowledge, threatened against the Seller which,
either in any one instance or in the aggregate, may (i) 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 to carry on its business substantially as now conducted, or in any material
liability on the part of the Seller 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 or any other Basic Document to which the Seller is a
party or (ii) which would draw into question the validity of this Agreement or
any other Basic Document to which the Seller is a party or the Business Loans;
(g) The Trust will not constitute an "investment company" within the
meaning of the Investment Company Act of 1940, as amended;
(h) The Seller is not in default with respect to any order or decree
of any court or any order, regulation or demand of any federal, state, municipal
or governmental agency, which default might have consequences that would
materially and adversely affect the condition (financial or other) or operations
of the Seller or its properties or might have consequences that would materially
and adversely affect its performance hereunder;
(i) The statements contained in the Private Placement Memorandum which
describe the Seller or the Business Loans or matters or activities for which the
Seller is responsible in accordance with the Private Placement Memorandum, this
Agreement or any other Basic Document to which the Seller is a party and all
documents referred to therein or herein or delivered in connection therewith or
herewith, or which are attributable to the Seller therein or
12
<PAGE>
herein are true and correct in all material respects, and the Private Placement
Memorandum does not contain any untrue statement of a material fact with respect
to the Seller or the Business Loans and does not omit to state a material fact
necessary to make the statements contained therein with respect to the Seller or
the Business Loans not misleading in light of the circumstances under which they
were made. The Seller is not aware that the Private Placement Memorandum
contains any untrue statement of a material fact or omits to state any material
fact necessary to make the statements contained therein not misleading in light
of the circumstances under which they were made. There is no fact peculiar to
the Seller or the Business Loans and known to the Seller that materially
adversely affects or in the future may (so far as the Seller can now reasonably
foresee) materially adversely affect the Seller or the Business Loans that has
not been set forth in the Private Placement Memorandum;
(j) No Noteholder or Certificateholder is subject to Connecticut state
licensing requirements solely by virtue of holding the Notes or the
Certificates;
(k) The transfer, assignment and conveyance of the Business Notes and
the Mortgages by the Seller pursuant to this Agreement are not or, with respect
to the Subsequent Business Loans, will not be, subject to the bulk transfer laws
or any similar statutory provisions in effect in any applicable jurisdiction;
(l) The origination and collection practices used by the Seller with
respect to each Business Note and Mortgage relating to the Initial Business
Loans have been, and the origination and collection practices to be used by the
Seller with respect to each Business Note and Mortgage relating to the
Subsequent Business Loans will have been, in all material respects legal,
proper, prudent and customary in the business loan origination and servicing
business;
(m) Each Initial Business Loan was, and each Subsequent Business Loan
will be, selected from among the existing business loans in the Seller's
portfolio at the date hereof or, in the case of the Subsequent Business Loans,
at the related Subsequent Cut-Off Date, in a manner not designed to adversely
affect the Noteholders or the Certificateholders;
(n) The Seller received fair consideration and reasonably equivalent
value or, in the case of the Subsequent Business Loans, will have received fair
consideration and reasonably equivalent value, in exchange for the sale of the
Business Loans;
(o) Neither the Seller nor any of its affiliates sold or, in the case
of the Subsequent Business Loans, will have sold any interest in any Business
Loan with any intent to hinder, delay or defraud any of their respective
creditors;
(p) The Seller is solvent, and the Seller will not be rendered
insolvent as a result of the transfer of the Business Loans to the Trust or the
sale of the Notes; and
(q) The chief executive office and legal name of the Seller is as set
forth on the respective UCC-1 financing statement filed on behalf of the Seller
pursuant to Section 2.04(a)(4),
13
<PAGE>
such office is the place where the Seller is "located" for the purposes of
Section 9-103(3)(d) of the Uniform Commercial Code as in effect in the State of
New York, and neither the location of such office nor the legal name of the
Seller has changed in the past four months.
Section 3.02 Individual Business Loans.
-------------------------
The Seller hereby represents and warrants to the Indenture Trustee and
the Noteholders, with respect to each Initial Business Loan as of the Closing
Date, and with respect to each Subsequent Business Loan, as of the related
Subsequent Transfer Date:
(a) The information with respect to each Business Loan set forth in
the Business Loan Schedule is true and correct;
(b) All of the original or certified documentation set forth in
Section 2.04 (including all material documents related thereto) has been or will
be delivered to the Indenture Trustee on the Closing Date or as otherwise
provided in Section 2.04;
(c) Each Mortgaged Property serving as the primary collateral is
improved by a Commercial Property or a Residential Property and does not
constitute other than real property under state law;
(d) Each Initial Business Loan was (and each Subsequent Business Loan
will be) originated and underwritten by the Seller, in its capacity as Seller
and each Business Loan is being serviced by the Seller, in its capacity as
Servicer;
(e) [Intentionally Omitted];
(f) Approximately 27.06% of the Initial Business Loans (by Principal
Balance) bear fixed rates of interest and approximately 54.00%, .46%, 11.48% and
7.00% of the Business Loans (by Principal Balance) bear interest that adjusts
monthly based on the Prime Rate, annually based on One-Year CMT, every five
years based on Five-Year CMT, and every ten years based on Ten-Year CMT,
respectively. Except for up to approximately 9.7% of the Business Loans (by
Principal Balance) that are Balloon Loans, each Business Note will, with respect
to principal payments, provide for a schedule of Monthly Payments which are, if
timely paid, sufficient to fully amortize the principal balance of such Business
Loan on its respective maturity date;
(g) With respect to those Business Loans secured by a Mortgaged
Property, each Mortgage is a valid and subsisting lien of record on the
Mortgaged Property subject only to any applicable Prior Liens on such Mortgaged
Property and subject in all cases to such exceptions that are generally
acceptable to banking institutions in connection with their regular commercial
lending activities, and such other exceptions to which similar properties are
commonly subject and which do not individually, or in the aggregate, materially
and adversely affect the benefits of the security intended to be provided by
such Mortgage;
14
<PAGE>
(h) Immediately prior to the transfer and assignment herein
contemplated, the Seller held good and indefeasible title to, and was the sole
owner of, each Business Loan conveyed by the Seller subject to no liens,
charges, mortgages, encumbrances or rights of others except liens which will be
released simultaneously with such transfer and assignment; and immediately upon
the transfer and assignment herein contemplated, the Trust will hold good and
indefeasible title, to, and be the sole owner of, each Business Loan subject to
no liens, charges, mortgages, encumbrances or rights of others except liens
which will be released simultaneously with such transfer and assignment;
(i) As of the Cut-Off Date (or, with respect to any Subsequent
Business Loan, as of the related Subsequent Cut-Off Date), no Business Loan is
more than 30 days delinquent in payment;
(j) To the best of the Seller's knowledge, there is no delinquent tax
or assessment lien on any Mortgaged Property which is the primary Collateral for
the related Business Loan, and each Mortgaged Property is free of material
damage and is in good repair;
(k) No Business Loan is subject to any right of rescission, set-off,
counterclaim or defense, including the defense of usury, nor will the operation
of any of the terms of the Business Note or any related Mortgage, or the
exercise of any right thereunder, render either the Business Note or any related
Mortgage unenforceable in whole or in part, or subject to any right of
rescission, set-off, counterclaim or defense, including the defense of usury,
and no such right of rescission, set-off, counterclaim or defense has been
asserted with respect thereto;
(l) Each Business Loan at the time it was made complied, and as of the
Closing Date complies, in all material respects with applicable state and
federal laws and regulations, including, without limitation, usury, equal credit
opportunity, disclosure and recording laws;
(m) Each Initial Business Loan was (and each Subsequent Business Loan
will be) originated and underwritten or purchased and reunderwritten by the
Business in accordance with the underwriting criteria set forth in the Private
Placement Memorandum;
(n) The Seller requires that the improvements upon each Mortgaged
Property are covered by a valid and existing hazard insurance policy with a
generally acceptable carrier that provides for fire and extended coverage
representing coverage described in Section 4.07;
(o) The Seller requires that if a Mortgaged Property is in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards, a flood insurance policy is in effect with respect
to such Mortgaged Property with a generally acceptable carrier in an amount
representing coverage described in Section 4.07;
(p) Each Business Note, any related Mortgage and any other agreement
pursuant to which Collateral is pledged to the Seller is the legal, valid and
binding obligation of the maker thereof and is enforceable in accordance with
its terms, except only as such enforcement may be
15
<PAGE>
limited by bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting the enforcement of creditors' rights generally and by general
principles of equity (whether considered in a proceeding or action in equity or
at law), none of which will prevent the ultimate realization of the security
provided by the Collateral or other agreement, and all parties to each Business
Loan had full legal capacity to execute all Business Loan documents and convey
the estate therein purported to be conveyed;
(q) The Seller has caused and will cause to be performed any and all
acts reasonably required to be performed to preserve the rights and remedies of
the Indenture Trustee and the Owner Trustee in any insurance policies applicable
to the Business Loans including, without limitation, in each case, any necessary
notifications of insurers, assignments of policies or interests therein, and
establishments of co-insured, joint loss payee and mortgagee rights in favor of
the Indenture Trustee or the Seller, respectively;
(r) Each original Mortgage was recorded, and all subsequent
assignments of the original Mortgage have been recorded in the appropriate
jurisdictions wherein such recordation is necessary to perfect the lien thereof
as against creditors of the Seller (or, subject to Section 2.04 hereof, are in
the process of being recorded);
(s) Each Business Loan conforms, and all such Business Loans in the
aggregate conform, to the description thereof set forth in the Private Placement
Memorandum;
(t) The terms of the Business Note and the related Mortgage or other
security agreement pursuant to which Collateral was pledged have not been
impaired, altered or modified in any respect, except by a written instrument
which has been recorded, if necessary, to protect the interest of the
Noteholders and the Certificateholders and which has been delivered to the
Indenture Trustee;
(u) There are no material defaults in complying with the terms of any
applicable 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;
(v) There is no proceeding pending or threatened for the total or
partial condemnation of any Mortgaged Property, nor is such a proceeding
currently occurring, and such 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 Business Loan
or the use for which the premises were intended;
(w) Each Mortgaged Property which is the primary collateral for the
related Business Loan underwent, at the time of origination of such Business
Loan, the standard environmental studies and such studies revealed that such
Mortgaged Property was free of
16
<PAGE>
contamination from toxic substances or hazardous wastes requiring action under
applicable laws or is subject to ongoing environmental rehabilitation
satisfactory to the Seller;
(x) The proceeds of the Business Loan have been fully disbursed, and
there is no obligation on the part of the Seller to make future advances
thereunder. Any and all requirements as to disbursements of any escrow funds
therefor have been complied with. All costs, fees and expenses incurred in
making or closing or recording the Business Loans were paid;
(y) There is no obligation on the part of the Seller or any other
party (except for any guarantor of a Business Loan) to make Monthly Payments
(except for Monthly Advances) in addition to those made by the Obligor;
(z) No statement, report or other document signed by the Seller
constituting a part of the Business File contains any untrue statement of a
material fact or omits to state a material fact necessary to make the statements
contained therein not misleading in light of the circumstances under which they
were made;
(aa) With respect to each Mortgage constituting a deed of trust, a
trustee, duly qualified under applicable law to serve as such, has been properly
designated and currently so serves and is named in such Mortgage, and no fees or
expenses are or will become payable by the Noteholders and/or the
Certificateholders to the trustee under the deed of trust, except in connection
with a trustee's sale after default by the Obligor;
(bb) No Business Loan has a shared appreciation feature, or other
contingent interest feature;
(cc) With respect to each Business Loan secured by a Mortgaged
Property or other Collateral and that is not a first priority lien, either (i)
no consent for the Business Loan is required by the holder of any related Prior
Lien or (ii) such consent has been obtained;
(dd) Each Business Loan was originated to a business located in the
State identified in the Business Loan Schedule;
(ee) All parties which have had any interest in the Business 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
any Mortgaged Property is located, and (2)(A) organized under the laws of such
state, or (B) qualified to do business in such state, or (C) federal savings and
loan associations or national banks having principal offices in such state, or
(D) not doing business in such state;
(ff) Any related Mortgage contains customary and enforceable
provisions which render the rights and remedies of the holder thereof adequate
for the realization against the
17
<PAGE>
Mortgaged Property of the benefits of the security, including, (i) in the case
of a Mortgage designated as a deed of trust, by trustee's sale, and (ii)
otherwise by judicial foreclosure. There is no homestead or other exemption
available to the Mortgagor which would materially interfere with the right to
sell the Mortgaged Property at a trustee's sale or the right to foreclose the
Mortgage;
(gg) There is no default, breach, violation or event of acceleration
existing under the Business Note and no event which, with the passage of time or
with notice and the expiration of any grace or cure period, would constitute a
default, breach, violation or event of acceleration; and the Seller, in its
capacity as either Servicer or Seller, has not waived any default, breach,
violation or event of acceleration;
(hh) All parties to the Business Note and any related Mortgage or
other document pursuant to which Collateral was pledged had legal capacity to
execute the Business Note and any such Mortgage or other document and each
Business Note and Mortgage or other document have been duly and properly
executed by such parties;
(ii) The Business Loan was not selected for inclusion under this
Agreement from the Seller's portfolio of comparable business loans on any basis
which would have a material adverse affect on a Noteholder or Certificateholder;
(jj) All amounts received on or after the Cut-Off Date (or, with
respect to the Subsequent Business Loans, on or after the related Subsequent
Cut-Off Date) with respect to the Business Loans have been, to the extent
required by this Agreement, deposited into the Principal and Interest Account
and are, as of the Closing Date (or with respect to the Subsequent Business
Loans, as of the related Subsequent Closing Date), in the Principal and Interest
Account;
(kk) With respect to those Business Loans secured by Collateral other
than a Mortgaged Property, the related Business Note, security agreements, if
any, and UCC-1 filed with respect to such Collateral creates a valid and
subsisting lien of record on such Collateral subject only to any Prior Liens, if
any, on such Collateral and subject in all cases to such exceptions that are
generally acceptable to lending institutions in connection with their regular
commercial lending activities, and such other exceptions to which similar
Collateral is commonly subject and which do not individually, or in the
aggregate, materially and adversely affect the benefits of the security intended
to be provided by such Business Note, security agreement and UCC-1; and
(ll) As of the Closing Date, less than 50% of the Business Loans, by
Principal Balance, are (and after the Funding Period less than 50% of Initial
Business Loans and Subsequent Business Loans will be) "real estate mortgages (or
interests therein)" within the meaning of Section 7701(i)(A)(i) of the Code and
Treasury regulations Section 301.7701-1(d).
Section 3.03 Purchase and Substitution of Defective
--------------------------------------
Loans.
-----
18
<PAGE>
It is understood and agreed that the representations and warranties
set forth in Sections 3.01 and 3.02 shall survive delivery of the Notes to the
Noteholders and the Certificates to the Certificateholders. Upon discovery by
the Servicer, any Subservicer, the Owner Trustee or the Indenture Trustee of a
breach of any of such representations and warranties which materially and
adversely affects the value of the Business Loans or the interest of the Notes
and Certificates therein or which materially and adversely affects the interests
of the Notes and Certificates in the related Business Loan in the case of a
representation and warranty relating to a particular Business Loan
(notwithstanding that such representation and warranty was made to the Seller's
best knowledge), the party discovering such breach shall give prompt written
notice to the others. Within 60 days of the earlier of its discovery or its
receipt of notice of any breach of a representation or warranty, the Seller
shall (a) promptly cure such breach in all material respects, (b) purchase such
Business Loan by depositing in the applicable Principal and Interest Account, on
the next succeeding Determination Date, an amount in the manner specified in
Section 2.05(b), or (c) if within two years of the Closing Date, remove such
Business Loan from the Trust Fund (in which case it shall become a Deleted
Business Loan) and substitute one or more Qualified Substitute Business Loans
provided such substitution is effected not later than the date which is two
years after the Closing Date or at such later date, if the Indenture Trustee
receives an Opinion of Counsel that such substitution would not constitute a
Prohibited Transaction at any time the Notes are outstanding. Any such
substitution shall be accompanied by payment by the Seller of the Substitution
Adjustment, if any.
As to any Deleted Business Loan for which the Seller substitutes a
Qualified Substitute Business Loan or Loans, the Servicer shall effect such
substitution by delivering to the Indenture Trustee a certification in the form
attached hereto as Exhibit I, executed by a Servicing Officer, and shall also
deliver to the Indenture Trustee, the documents constituting the Indenture
Trustee's Document File for such Qualified Substitute Business Loan or Loans.
The Servicer shall deposit in the applicable Principal and Interest
Account all payments of principal received in connection with such Qualified
Substitute Business Loan or Loans after the date of such substitution together
with all interest (net of the Servicing Fee). Monthly Payments received with
respect to Qualified Substitute Business Loans on or before the date of
substitution will be retained by the Seller. The Trust will own all payments
received with respect to the Deleted Business Loan on or before the date of
substitution, and the Seller shall thereafter be entitled to retain all amounts
subsequently received in respect of such Deleted Business Loan. The Servicer
shall give written notice to the Indenture Trustee that such substitution has
taken place and shall amend the Business Loan Schedule to reflect the removal of
such Deleted Business Loan from the terms of this Agreement and the substitution
of the Qualified Substitute Business Loan or Loans. Upon such substitution, such
Qualified Substitute Business Loan or Loans shall be subject to the terms of
this Agreement in all respects, including Sections 2.04 and 2.05, and the Seller
shall be deemed to have made with respect to such Qualified Substitute Business
Loan or Loans, as of the date of substitution, the covenants, representations
and warranties set forth in Sections 3.01 and 3.02. On the date of such
19
<PAGE>
substitution, the Seller will remit to the Servicer, and the Servicer will
deposit into the applicable Principal and Interest Account an amount equal to
the Substitution Adjustment.
In addition to the cure, purchase and substitution obligation in
Section 2.05 and this Section 3.03, the Seller shall indemnify and hold harmless
the Trust, the Indenture Trustee, the Noteholders and the Certificateholders
against any loss, damages, penalties, fines, forfeitures, reasonable 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's representations and warranties contained in this
Agreement. It is understood and agreed that the obligations of the Seller set
forth in Sections 2.05 and 3.03 to cure, purchase or substitute for a defective
Business Loan and to indemnify the Noteholders, the Certificateholders, the
Indenture Trustee and the Owner Trustee as provided in Sections 2.05 and 3.03
constitute the sole remedies of the Indenture Trustee, the Noteholders, the
Certificateholders and the Owner Trustee, respecting a breach of the foregoing
representations and warranties.
Any cause of action against the Servicer or the Seller relating to or
arising out of the breach of any representations and warranties made in Sections
2.05, 3.01 or 3.02 shall accrue as to any Business Loan upon (i) discovery of
such breach by any party and notice thereof to the Seller and or notice thereof
by the Seller to the Indenture Trustee, (ii) failure by the Seller to cure such
breach or purchase or substitute such Business Loan as specified above, and
(iii) demand upon the Seller by the Indenture Trustee for all amounts payable
hereunder in respect of such Business Loan.
20
<PAGE>
ARTICLE IV.
ADMINISTRATION AND SERVICING OF BUSINESS LOANS
----------------------------------------------
Section 4.01 Duties of the Servicer.
----------------------
(a) The Servicer, as an independent contract servicer, shall service
and administer the Business 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 and consistent
with the terms of this Agreement. The Servicer may enter into Subservicing
Agreements for any servicing and administration of Business Loans so long as the
Rating Agency Condition is satisfied. The Servicer shall be entitled to
terminate any Subservicing Agreement in accordance with the terms and conditions
of such Subservicing Agreement and to either itself directly service the related
Business Loans or enter into a Subservicing Agreement with a successor
subservicer which qualifies hereunder.
(b) Notwithstanding any Subservicing Agreement, any of the provisions
of this Agreement relating to agreements or arrangements between the Servicer
and Subservicer or reference to actions taken through a Subservicer or
otherwise, the Servicer shall remain obligated and primarily liable to the
Indenture Trustee and the Noteholders for the servicing and administering of the
Business Loans in accordance with the provisions of this Agreement, without
diminution of such obligation or liability by virtue of such Subservicing
Agreements or arrangements or by virtue of indemnification from the Subservicer
and to the same extent and under the same terms and conditions as if the
Servicer alone were servicing and administering the Business Loans. For
purposes of this Agreement, the Servicer shall be deemed to have received
payments on Business Loans when any Subservicer has received such payments. The
Servicer shall be entitled to enter into any agreement with a Subservicer for
indemnification of the Servicer by such Subservicer, and nothing contained in
this Agreement shall be deemed to limit or modify such indemnification.
(d) Any Subservicing Agreement that may be entered into and any
transactions or services relating to the Business Loans involving a Subservicer
in its capacity as such and not as an originator shall be deemed to be between
the Subservicer and the Servicer alone, and the Indenture Trustee and the
Noteholders shall not be deemed parties thereto and shall have no claims,
rights, obligations, duties or liabilities with respect to the Subservicer
except as set forth in Section 4.01(e).
(e) In the event the Servicer shall for any reason no longer be the
Servicer (including by reason of a Servicer Termination Event), the Indenture
Trustee or its designee shall, subject to Section 9.02 hereof, thereupon assume
all of the rights and obligations of the Servicer under each Subservicing
Agreement that the Servicer may have entered into, unless the Indenture Trustee
is then permitted and elects to terminate any Subservicing Agreement in
accordance with its terms. The Indenture Trustee, its designee or the successor
servicer for the Indenture Trustee shall be deemed to have assumed all of the
Servicer's interest therein and to
21
<PAGE>
have replaced the Servicer as a party to each Subservicing Agreement to the same
extent as if the Subservicing Agreements had been assigned to the assuming
party, except that the Servicer shall not thereby be relieved of any liability
or obligations under the Subservicing Agreements. The Servicer at its expense
and without right of reimbursement therefor, shall, upon request of the
Indenture Trustee, deliver to the assuming party all documents and records
relating to each Subservicing Agreement and the Business Loans then being
serviced and an accounting of amounts collected and held by it and otherwise use
its best efforts to effect the orderly and efficient transfer of the
Subservicing Agreements to the assuming party.
(f) Consistent with the terms of this Agreement, the Servicer may
waive, modify or vary any term of any Business Loan or consent to the
postponement of strict compliance with any such term or in any manner grant
indulgence to any Obligor if in the Servicer's determination such waiver,
modification, postponement or indulgence is not materially adverse to the
interests of the Noteholders, provided, however, that (unless (x) the Obligor is
-------- -------
in default with respect to the Business Loan, or such default is, in the
judgment of the Servicer, imminent and (y) the Servicer determines that any
modification would not be considered a new loan for federal income tax purposes)
the Servicer may not permit any modification with respect to any Business Loan
that would change the Business Loan Interest Rate, defer (subject to Section
4.12), or forgive the payment of any principal or interest (unless in connection
with the liquidation of the related Business Loan), or extend the final maturity
date on such Business Loan. No costs incurred by the Servicer or any
Subservicer in respect of Servicing Advances shall for the purposes of
distributions to Noteholders be added to the amount owing under the related
Business Loan. Without limiting the generality of the foregoing, the Servicer
shall continue, and is hereby authorized and empowered to execute and deliver on
behalf of the Trust, the Indenture Trustee, the Owner Trustee, each Noteholder
and each Certificateholder, all instruments of satisfaction or cancellation, or
of partial or full release, discharge and all other comparable instruments, with
respect to the Business Loans and with respect to any Mortgaged Properties or
other Collateral. If reasonably required by the Servicer, the Indenture
Trustee, on behalf of the Trust, shall furnish the Servicer, within 5 Business
Days of receipt of the Servicer's request, 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. Any such request to
the Indenture Trustee, on behalf of the Trust, shall be accompanied by a
certification in the form of Exhibit I attached hereto signed by a Servicing
Officer.
The Servicer, in servicing and administering the Business Loans, shall
employ or cause to be employed procedures (including collection, foreclosure and
Foreclosed Property management procedures) and exercise the same care that it
customarily employs and exercises in servicing and administering business loans
for its own account, giving due consideration to the Noteholders' and
Certificateholders' reliance on the Servicer.
(g) On and after such time as the Indenture Trustee and the Trust
receive the resignation of, or notice of the removal of, the Servicer from its
rights and obligations under this Agreement, and with respect to resignation
pursuant to Section 8.04, after receipt of the Opinion of Counsel required
pursuant to Section 8.04 addressed to the Indenture Trustee, the Indenture
22
<PAGE>
Trustee or its designee shall assume all of the rights and obligations of the
Servicer, subject to Section 9.02 hereof. The Servicer shall, upon request of
the Indenture Trustee but at the expense of the Servicer, deliver to the
Indenture Trustee all documents and records (including computer tapes and
diskettes) relating to the Business Loans and an accounting of amounts collected
and held by the Servicer and otherwise use its best efforts to effect the
orderly and efficient transfer of servicing rights and obligations to the
assuming party.
(h) The Servicer shall perform the duties of the Issuer and the Owner
Trustee under the Basic Documents. In furtherance of the foregoing, the
Servicer shall consult with the Owner Trustee as the Servicer deems appropriate
regarding the duties of the Issuer and the Owner Trustee under the Basic
Documents. The Servicer shall monitor the performance of the Issuer and the
Owner Trustee and shall advise the Owner Trustee when action is necessary to
comply with the Issuer's or the Owner Trustee's duties under the Basic
Documents. The Servicer shall prepare for execution by the Owner Trustee or
shall cause the preparation by other appropriate Persons of all such documents,
reports, filings, instruments, certificates and opinions as it shall be the duty
of the Issuer or the Owner Trustee to prepare, file or deliver pursuant to the
Basic Documents.
(i) In addition to the duties of the Servicer set forth in this
Agreement or any of the Basic Documents, the Servicer shall perform such
calculations and shall prepare for execution by the Issuer or the Owner Trustee
or shall cause the preparation by other appropriate Persons of all such
documents, reports, filings, instruments, certificates and opinions as it shall
be the duty of the Issuer to prepare, file or deliver pursuant to state and
federal tax and securities laws. In accordance with the directions of the
Issuer or the Owner Trustee, the Servicer shall administer, perform or supervise
the performance of such other activities in connection with the Issuer as are
not covered by any of the foregoing provisions and as are expressly requested by
the Issuer or the Owner Trustee and are reasonably within the capability of the
Servicer.
(j) Notwithstanding anything in this Agreement or any of the Basic
Documents to the contrary, the Servicer shall be responsible for promptly
notifying the Owner Trustee and the Paying Agent in the event that any
withholding tax is imposed on the Issuer's payments (or allocations of income)
to a Noteholder or a Certificateholder. Any such notice shall be in writing and
specify the amount of any withholding tax required to be withheld by the Owner
Trustee or the Paying Agent pursuant to such provision.
(k) The Servicer shall prepare and file, on behalf of the Issuer, all
tax returns tax elections, financial statements and such annual or other reports
of the Issuer as are necessary for the preparation of tax reports as provided in
the Trust Agreement or required by applicable law. All tax returns will be
signed by the Servicer on behalf of the Issuer.
(l) The Servicer shall maintain appropriate books of account and
records relating to services performed under this Agreement, which books of
account and records shall be accessible for inspection by the Owner Trustee at
any time during normal business hours.
23
<PAGE>
(m) The Servicer shall furnish to the Owner Trustee from time to time
such additional information regarding the Issuer or the Basic Documents as the
Owner Trustee shall reasonably request.
For so long as any of the Notes are outstanding and are "restricted
securities" within the meaning of Rule 144 (a) (3) of the Securities Act, (1)
the Servicer will provide or cause to be provided to any holder of such Notes
and any prospective purchaser thereof designated by such holder, upon the
request of such a holder or prospective purchaser, the information required to
be provided to such holder or prospective purchaser by Rule 144A(d) (4) under
the Securities Act; and (2) the Servicer shall update such information from time
to time in order to prevent such information from becoming false and misleading
and will take such other actions as are necessary to ensure that the safe harbor
exemption from the registration requirements of the Securities Act under Rule
144A is and will be available for resales of such Notes conducted in accordance
with Rule 144A.
Section 4.02 Liquidation of Business Loans.
-----------------------------
In the event that any payment due under any Business Loan and not
postponed pursuant to Section 4.01 is not paid when the same becomes due and
payable, or in the event the Obligor fails to perform any other covenant or
obligation under the Business Loan, the Servicer shall take such action as it
shall deem to be in the best interests of the Noteholders and
Certificateholders. The Servicer shall foreclose upon or otherwise comparably
effect the ownership in the name of the Trust of Mortgaged Properties or other
Collateral relating to defaulted Business Loans for which the related Business
Loan is still outstanding, as to which no satisfactory arrangements can be made
for collection of delinquent payments in accordance with the provisions of
Section 4.10. In connection with such foreclosure or other conversion, the
Servicer shall exercise collection and foreclosure procedures with the same
degree of care and skill in its exercise or use as it would exercise or use
under the circumstances in the conduct of its own affairs. Any amounts advanced
in connection with such foreclosure or other action shall constitute "Servicing
Advances." The Servicer shall take into account the existence of any hazardous
substances, hazardous wastes or solid wastes on Mortgaged Properties in
determining whether to foreclose upon or otherwise comparably convert the
ownership of such Mortgaged Property, and will not foreclose on a Mortgaged
Property where it has cause to believe such substances exist unless it (i) has
received a Phase I environmental report and such report reveals no environmental
problems, or (ii) any problems revealed by such Phase I environmental report
have been corrected or such Mortgaged Property is subject to an environmental
rehabilitation for which the Servicer is not responsible.
After a Business Loan has become a Liquidated Business Loan, the
Servicer shall promptly prepare and forward to the Indenture Trustee and upon
request, any Noteholder or Certificateholder, a Liquidation Report, in the form
attached hereto as Exhibit J, detailing the Liquidation Proceeds received from
the Liquidated Business Loan, expenses incurred with respect thereto, and any
loss incurred in connection therewith.
24
<PAGE>
Section 4.03 Establishment of Principal and
------------------------------
Interest Accounts; Deposits in
------------------------------
Principal and Interest Accounts.
-------------------------------
(a) The Servicer shall cause to be established and maintained one or
more Principal and Interest Accounts, in one or more Eligible Deposit Accounts,
in the form of time deposit or demand accounts, which may be interest-bearing or
such accounts may be trust accounts wherein the moneys therein are invested in
Permitted Instruments, titled "First National Bank of New England, as Servicer,
in trust for the registered holders of FNBNE Business Loan Notes, Series 1998-
A." All funds in such Principal and Interest Accounts shall be insured by the
BIF or SAIF administered by the FDIC to the maximum extent provided by law. The
creation of any Principal and Interest Account shall be evidenced by a letter
agreement in the form of Exhibit C hereto.
A copy of such letter agreement shall be furnished to the Indenture
Trustee, the Owner Trustee and, upon request, any Noteholder or
Certificateholder.
(b) The Servicer and each Subservicer shall deposit without
duplication (within two Business Days of receipt thereof) in the applicable
Principal and Interest Account and retain therein:
(i) all payments received on or after the Cut-Off Date on
account of principal on the Business Loans, including all Excess
Payments, Principal Prepayments and Curtailments collected on or after
the Cut-Off Date;
(ii) all payments received on or after the Cut-Off Date on
account of interest on the Business Loans (net of the Servicing Fee
with respect to each Business Loan and other servicing compensation
payable to the Servicer as permitted herein);
(iii) all Net Liquidation Proceeds;
(iv) all Insurance Proceeds (other than amounts to be applied
to restoration or repair of any related Mortgaged Property, or to be
released to the Obligor in accordance with customary servicing
procedures);
(v) all Released Mortgaged Property Proceeds and any other
proceeds from any other released property securing the Business Loans;
(vi) any amounts paid in connection with the repurchase of any
Business Loan and the amount of any Substitution Adjustment received
pursuant to Sections 2.05 and 3.03;
25
<PAGE>
(vii) any amount required to be deposited in the Principal and
Interest Account pursuant to Section 4.04 or 4.10; and
(viii) the amount of any losses incurred in connection with
investments in Permitted Instruments.
(c) The foregoing requirements for deposit in the applicable Principal
and Interest Account shall be exclusive, it being understood and agreed that,
without limiting the generality of the foregoing, payments with respect to the
Servicing Fee (to the extent received and permitted by Section 6.03), with
respect to each Business Loan, together with the difference between any
Liquidation Proceeds and the related Net Liquidation Proceeds, need not be
deposited by the Servicer in the applicable Principal and Interest Account.
(d) Any interest earnings on funds held in the applicable Principal
and Interest Account paid by an Eligible Deposit Account shall be for the
account of the Servicer and may only be withdrawn from the applicable Principal
and Interest Account by the Servicer immediately following its monthly
remittance to the Indenture Trustee pursuant to Section 4.04(a). Any reference
herein to amounts on deposit in the applicable Principal and Interest Account
shall refer to amounts net of such investment earnings.
Section 4.04 Permitted Withdrawals From the Applicable
------------------------------------------
Principal and Interest Account.
------------------------------
The Servicer shall withdraw funds from the applicable Principal and
Interest Account for the following purposes:
(a) to effect the remittance to the Indenture Trustee on each
Determination Date for deposit into the Note Distribution Account that portion
of the Available Funds for the related Remittance Date that is net of
Compensating Interest, the Monthly Advances and amounts then on deposit in the
Spread Account (and, with respect to the Determination Dates occurring during
the Funding Period, net of amounts then on deposit in the Pre-Funding Account
and the Capitalized Interest Account);
(b) to reimburse itself for any accrued unpaid Servicing Fees,
unreimbursed Monthly Advances and for unreimbursed Servicing Advances to the
extent deposited in the Principal and Interest Account (and not netted from
Monthly Payments received). The Servicer's right to reimbursement for unpaid
Servicing Fees and, except as provided in the following sentence, Servicing
Advances and Monthly Advances shall be limited to Liquidation Proceeds, Released
Mortgaged Property Proceeds, Insurance Proceeds and such other amounts as may be
collected by the Servicer from the Obligor or otherwise relating to the Business
Loan in respect of which such unreimbursed amounts are owed. The Servicer's
right to reimbursement for Servicing Advances and Monthly Advances in excess of
such amounts shall be limited to any late collections of interest received on
the Business Loans generally, including Liquidation Proceeds, Released Mortgaged
Property Proceeds, Insurance Proceeds and any other amounts;
26
<PAGE>
provided, however, that the Servicer's right to such reimbursement pursuant
- -------- -------
hereto shall be subordinate to the rights of the Noteholders and may be
exercised only if the Spread Balance equals the then applicable Specified
Spread Account Requirement;
(c) to withdraw any amount received from an Obligor that is
recoverable and sought to be recovered as a voidable preference by a trustee in
bankruptcy pursuant to the United States Bankruptcy Code in accordance with a
final, nonappealable order of a court having competent jurisdiction;
(d) (i) to make investments in Permitted Instruments and (ii) to pay
to itself, as permitted by Section 4.03(d), interest paid in respect of
Permitted Instruments or by an Eligible Deposit Account on funds deposited in
the Principal and Interest Account;
(e) to withdraw any funds deposited in the Principal and Interest
Account that were not required to be deposited therein or were deposited therein
in error;
(f) to pay itself servicing compensation pursuant to Section 6.03
hereof or interest as permitted under the definition of Excess Proceeds; and
(g) to clear and terminate the Principal and Interest Accounts upon
the termination of this Agreement.
So long as no default or Servicer Termination Event shall have
occurred and be continuing, and consistent with any requirements of the Code,
the Principal and Interest Accounts shall either be maintained with an Eligible
Deposit Account as an interest-bearing account meeting the requirements set
forth in Section 4.03(a), or the funds held therein may be invested by the
Servicer (to the extent practicable) in Permitted Instruments, as directed in
writing by the Servicer. In either case, funds in the Principal and Interest
Account must be available for withdrawal without penalty, and any Permitted
Instruments must mature not later than the Business Day immediately preceding
the Determination Date next following the date of such investment (except that
if such Permitted Instrument is an obligation of the institution that maintains
such account, then such Permitted Instrument shall mature not later than such
Determination Date) and shall not be sold or disposed of prior to its maturity.
All Permitted Instruments must be held by or registered in the name of "First
National Bank of New England, as Servicer, in trust for the registered holders
of FNBNE Business Loan Notes, Series 1998-A." All interest or other earnings
from funds on deposit in the Principal and Interest Account (or any Permitted
Instruments thereof) shall be the exclusive property of the Servicer, and may be
withdrawn from the Principal and Interest Account pursuant to clause (d) above.
The amount of any losses incurred in connection with the investment of funds in
the Principal and Interest Account in Permitted Instruments shall be deposited
in the Principal and Interest Account by the Servicer from its own funds
immediately as realized without reimbursement therefor.
Section 4.05 [Intentionally Omitted]
27
<PAGE>
Section 4.06 Transfer of Accounts.
--------------------
The Servicer may, upon written notice to the Indenture Trustee,
transfer any Principal and Interest Account to a different Eligible Deposit
Account.
Section 4.07 Maintenance of Hazard Insurance.
-------------------------------
The Servicer shall comply with the customary servicing procedures
concerning the issuance and maintenance of fire and hazard insurance with
extended coverage customary in the area where the Mortgaged Property is located.
If at origination of a Business Loan, to the best of the Servicer's knowledge
after reasonable investigation, the related Mortgaged Property is in an area
identified in the Federal Register by the Flood Emergency Management Agency as
having special flood hazards (and such flood insurance has been made available),
the Servicer will require the related Obligor to purchase a flood insurance
policy with a generally acceptable insurance carrier, in an amount representing
coverage not less than the least of (i) the full insurable value of the
Mortgaged Property, or (ii) the maximum amount of insurance available under the
National Flood Insurance Act of 1968, as amended. The Servicer shall also
maintain, to the extent such insurance is available, and in accordance with the
Servicer's policies, on Foreclosed Property constituting real property, fire and
hazard insurance in the amounts described above and liability insurance. Any
amounts collected by the Servicer under any such policies (other than amounts to
be applied to the restoration or repair of the Mortgaged Property, or to be
released to the Obligor in accordance with applicable law) shall be deposited in
the Principal and Interest Account, subject to withdrawal pursuant to Section
4.04. It is understood and agreed that no earthquake or other additional
insurance need be required by the Servicer of any Obligor or maintained on
Foreclosed Property, other than pursuant to such applicable laws and regulations
as shall at any time be in force and as shall require such additional insurance.
All policies required hereunder shall be endorsed with standard mortgagee
clauses with losses payable to the Servicer or its affiliates.
Section 4.08 [Intentionally Omitted].
Section 4.09 Fidelity Bond.
-------------
The Servicer shall maintain with a responsible company, and at its own
expense, a blanket fidelity bond and an errors and omissions insurance policy,
in a minimum amount equal to $1,500,000,and a maximum deductible of $100,000, if
commercially available, with coverage on all employees acting in any capacity
requiring such persons to handle funds, money, documents or papers relating to
the Business Loans ("Servicer Employees"). The fidelity bond shall insure the
Indenture Trustee and the Owner Trustee, their respective officers and employees
against losses resulting from forgery, theft, embezzlement or fraud by such
Servicer Employees. The errors and omissions policy shall insure against losses
resulting from the errors, omissions and negligent acts of such Servicer
employees. No provision of this Section 4.09 requiring such fidelity bond and
errors and omissions insurance shall relieve the Servicer from its duties as set
forth in this Agreement. Upon the request of the Indenture Trustee, the Owner
Trustee or any
28
<PAGE>
Noteholder or Certificateholder, the Servicer shall cause to be
delivered to the Indenture Trustee, Owner Trustee or such Noteholder or such
Certificateholder a certified true copy of such fidelity bond and insurance
policy. The current issuer of such fidelity bond and insurance policy is The
Hartford Underwriters Insurance Company.
Section 4.10 Title, Management and Disposition
---------------------------------
of Foreclosed Property.
----------------------
In the event that title to a Mortgaged Property or other Collateral is
acquired in foreclosure or by deed in lieu of foreclosure or by other legal
process (a "Foreclosed Property"), the deed or certificate of sale, or the
repossessed Collateral shall be taken in the name of the Trust for the benefit
of the Noteholders and Certificateholders.
The Servicer, subject to Sections 4.01 and 4.02 hereof, shall manage,
conserve, protect and operate each Foreclosed Property for the Noteholders and
the Certificateholders solely for the purpose of its prudent and prompt
disposition and sale. The Servicer shall, either itself or through an agent
selected by the Servicer, manage, conserve, protect and operate the Foreclosed
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 Foreclosed Property is managed.
The Servicer shall attempt to sell the same (and may temporarily rent the same)
on such terms and conditions as the Servicer deems to be in the best interest of
the Noteholders and Certificateholders.
The Servicer shall cause to be deposited in the Principal and Interest
Account, no later than five Business Days after the receipt thereof, all
revenues received with respect to the conservation and disposition of the
related Foreclosed Property net of Servicing Advances.
The disposition of Foreclosed 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 interest of the Noteholders and the Certificateholders.
The proceeds of sale of the Foreclosed Property shall promptly, but in no event
later than two Business Days after receipt, be deposited in the Principal and
Interest Account as received from time to time and, as soon as practicable
thereafter, the expenses of such sale shall be paid, the Servicer shall, subject
to Section 4.04, reimburse itself for any related unreimbursed Servicing
Advances, unpaid Servicing Fees and unreimbursed Monthly Advances, and the
Servicer shall deposit in the Principal and Interest Account the net cash
proceeds of such sale to be distributed to the Noteholders in accordance with
Section 5.07 hereof.
Section 4.11 [Intentionally Omitted].
---------------------
Section 4.12 Collection of Certain Business
------------------------------
Loan Payments.
-------------
29
<PAGE>
The Servicer shall make reasonable efforts to collect all payments
called for under the terms and provisions of the Business Loans, and shall, to
the extent such procedures shall be consistent with this Agreement, comply with
the terms and provisions of any applicable hazard insurance policy. Consistent
with the foregoing , the Servicer may in its discretion waive or permit to be
waived any fee or charge which the Servicer would be entitled to retain
hereunder as servicing compensation and extend the due date for payments due on
a Business Note for a period (with respect to each payment as to which the due
date is extended) not greater than 180 days after the initially scheduled due
date for such payment provided that the Servicer determines such extension would
not be considered a new mortgage loan for federal income tax purposes. In the
event the Servicer shall consent to the deferment of the due dates for payments
due on a Business Note, the Servicer shall nonetheless make payment of any
required Monthly Advance with respect to the payments so extended to the same
extent as if such installment were due, owing and delinquent and had not been
deferred, and shall be entitled to reimbursement therefor in accordance with
Section 4.04(b) hereof.
Section 4.13 Access to Certain Documentation and
------------------------------------
Information Regarding the Business Loans.
----------------------------------------
The Servicer shall provide to the Owner Trustee, the Indenture
Trustee, the FDIC, the OCC, the Federal Reserve, the Office of Thrift
Supervision and the supervisory agents and examiners of the foregoing, access to
the documentation regarding the Business Loans required by applicable local,
state and federal regulations, such access being afforded without charge but
only upon reasonable request and during normal business hours at the offices of
the Servicer designated by it.
30
<PAGE>
ARTICLE V
PAYMENTS TO THE CERTIFICATEHOLDERS
----------------------------------
Section 5.01 Establishment of Note Distribution Account; Deposits in
-------------------------------------------------------
Note Distribution Account; Permitted Withdrawals from
-----------------------------------------------------
Note Distribution Account .
-------------------------
(a) No later than the Closing Date, the Indenture Trustee will
establish and maintain with itself in its trust department a trust account,
which shall not be interest-bearing, titled "Note Distribution Account, Marine
Midland Bank, as Indenture Trustee for the registered holders of FNBNE Business
Loan Notes, Series 1998-A" (the " Note Distribution Account"). The Indenture
Trustee shall, promptly upon receipt, deposit in the Note Distribution Account
and retain therein:
(i) the Available Funds (net of the amount of Monthly Advances
and Compensating Interest deposited pursuant to subclause (ii) below);
(ii) the Compensating Interest and the portion of the Monthly
Advance remitted to the Indenture Trustee by the Servicer;
(iii) amounts transferred from the Spread Account pursuant to
Section 5.02(b)(i);
(iv) amounts required to be paid by the Servicer pursuant to
Section 5.06(e) in connection with losses on investments of amounts in
the Accounts; and
(v) amounts transferred from the Pre-Funding Account and the
Capitalized Interest Account on the Special Remittance Date pursuant
to Sections 5.04(c) and (h), respectively.
(b) Amounts on deposit in the Note Distribution Account shall be
withdrawn on each Remittance Date by the Indenture Trustee, or the Paying Agent,
on its behalf, to effect the distribution described in Section 5.07(b) and
thereafter by the following parties in no particular order of priority:
(i) by the Indenture Trustee, to invest amounts on deposit in
the Note Distribution Account in Permitted Instruments pursuant to
Section 5.06;
(ii) by the Indenture Trustee, to pay on a monthly basis to the
Servicer as additional servicing compensation interest paid and
earnings realized on Permitted Instruments;
31
<PAGE>
(iii) by the Indenture Trustee, to withdraw any amount not
required to be deposited in the Note Distribution Account or deposited
therein in error; and
(iv) by the Indenture Trustee, to clear and terminate the Note
Distribution Account upon the termination of this Agreement in
accordance with the terms of Section 10.01 hereof.
Section 5.02 Establishment of Spread Account;
--------------------------------
Deposits in Spread Account; Permitted
-------------------------------------
Withdrawals from Spread Account.
-------------------------------
(a) No later than the Closing Date, the Indenture Trustee will
establish and maintain with itself in its trust department a trust account,
which shall not be interest bearing, titled "Spread Account, Marine Midland
Bank, as Indenture Trustee for the registered holders of FNBNE Business Loan
Notes, Series 1998-A" (the "Spread Account"). The Spread Account shall
constitute part of the Trust Fund, and the funds held therein may be invested in
Permitted Instruments. On the Closing Date, the Indenture Trustee will make an
initial cash deposit from the proceeds of the sale of the Class A Notes into the
Spread Account in an amount equal to $4,550,000.00. Thereafter, on each
Remittance Date, the Indenture Trustee shall, promptly upon receipt, deposit
into the Spread Account:
(i) that portion of the Available Funds required to be deposited
into the Spread Account pursuant to Section 5.07(b)(xi) until the
Spread Balance equals the then applicable Specified Spread Account
Requirement; and
(ii) amounts required to be paid by the Servicer pursuant to
Section 5.06(e) in connection with losses on investments of amounts in
the Spread Account.
(b) Amounts on deposit in the Spread Account shall be withdrawn by
Indenture Trustee for distribution in the manner set forth in subclause (c)
below on each Remittance Date in the following order of priority:
(i) to deposit in the Note Distribution Account an amount by
which (a) the sum of (i) the Class A, Class M-1 and Class M-2 Interest
Distribution Amounts, (ii) the Class A, Class M-1 and Class M-2
Principal Distribution Amounts, (iii) the Class M-1 and Class M-2
Carry Forward Interest Amounts and (iv) the Class A, Class M-1 and
Class M-2 Carry Forward Amounts exceeds (b) the Available Funds for
such Remittance Date (but excluding from such definition, amounts in
the Spread Account);
(ii) to deposit in the Note Distribution Account the amount, if
any, required to make the full distribution to the Expense Account
pursuant to Section 5.07(b)(vii); and
32
<PAGE>
(iii) to the extent that the amount then on deposit in the Spread
Account after giving effect to all required transfers from the Spread
Account to the Note Distribution Account on such Remittance Date then
exceeds the Specified Spread Account Requirement as of such Remittance
Date (such excess, a "Spread Account Excess"), an amount equal to such
Spread Account Excess shall be distributed first, to make any payments
required pursuant to Section 5.07(b)(xii) -- (xix), in that order,
and then, to the Holders of the Certificates;
and also, in no particular order of priority:
(iv) to invest amounts on deposit in the Spread Account in
Permitted Instruments pursuant to Section 5.06;
(v) to withdraw any amount not required to be deposited in
the Spread Account or deposited therein in error; and
(vi) to clear and terminate the Spread Account upon the termination of
this Agreement in accordance with the terms of Section 10.01.
(c) Any amounts which are required to be withdrawn from the Spread
Account pursuant to paragraph (b) above shall be withdrawn from the Spread
Account in the following order of priority: (i) first, from any uninvested
-----
funds therein, and (ii) second, from the proceeds of the liquidation of any
------
investments therein pursuant to Section 5.06(b).
(d) Any amounts which are distributed by the Indenture Trustee to the
holders of the Certificates pursuant to paragraph (b) above will not be required
to be refunded, regardless of whether there are sufficient funds on a Subsequent
Remittance Date to make a full distribution to holders of the Notes on such
Remittance Date.
Section 5.03 Establishment of Expense Account;
---------------------------------
Deposits in Expense Account; Permitted
--------------------------------------
Withdrawals from Expense Account
--------------------------------
(a) No later than the Closing Date, the Indenture Trustee will
establish with itself an account (the "Expense Account"). The Expense Account
shall not constitute part of the Trust Fund and is for the benefit of the
Indenture Trustee and the Owner Trustee to pay their fees and expenses related
to the Trust and, on a subordinate basis, for the benefit of the Servicer as
described in (b)(ii) and (c) below. The Indenture Trustee shall deposit into
the Expense Account:
(i) on each Remittance Date from the amounts on deposit in
the Note Distribution Account an amount equal to one-twelfth of the
Annual Expense Escrow Amount; and
33
<PAGE>
(ii) upon receipt, amounts required to be paid by the Servicer
pursuant to Section 5.06(e) in connection with losses on investments
of amounts in the Expense Account.
If, at any time the amount then on deposit in the Expense Accounts shall be
insufficient to pay in full the fees and expenses of the Indenture Trustee and
the Owner Trustee then due, the Indenture Trustee and the Owner Trustee shall
make demand on the Servicer to advance the amount of such insufficiency, and the
Servicer shall promptly advance such amount. Thereafter, the Servicer shall be
entitled to reimbursement from the Expense Account for the amount of any such
advance from any excess funds available pursuant to subclause (c)(ii) below.
Without limiting the obligation of the Servicer to advance such insufficiency,
in the event the Servicer does not advance the full amount of such insufficiency
by the Business Day immediately preceding the Determination Date, the amount of
such insufficiency shall be deposited into the Expense Account for payment to
the Indenture Trustee pursuant to Section 5.07(b)(vii), to the extent of
available funds in the Note Distribution Account.
(b) The Indenture Trustee may invest amounts on deposit in the
Expense Accounts in Permitted Instruments pursuant to Section 5.06 hereof, and
the Indenture Trustee shall withdraw amounts on deposit in the Expense Accounts
to:
(i) pay the Indenture Trustee's and Owner Trustee's fees and
expenses as described in Section 2.08 hereof;
(ii) pay on a monthly basis to the Servicer as additional
servicing compensation interest paid and earnings realized on
Permitted Instruments;
(iii) withdraw any amounts not required to be deposited in the
Expense Accounts or deposited therein in error; and
(iv) clear and terminate the Expense Account upon the
termination of this Agreement in accordance with the terms of Section
10.01.
(c) On the twelfth Remittance Date following the Closing Date, and on
each twelfth Remittance Date thereafter, the Indenture Trustee shall determine
that all payments required to be made during the prior twelve month period
pursuant to subclauses (b)(i), (b)(ii) and (b)(iii) above, have been made, and,
if all such payments have been made, from the amounts remaining in the Expense
Accounts, the Indenture Trustee shall (in the following order of priority):
(i) reimburse the Servicer and/or the Seller, for reimbursable
advances made pursuant to Section 8.01;
(ii) reimburse the Servicer for advances made by it pursuant to
the last paragraph of subclause (a) above; and
34
<PAGE>
(iii) remit to the Servicer as additional servicing
compensation any amounts remaining in the Expense Account after
payments made pursuant to subclauses (b)(i), (b)(ii), (b)(iii), (c)(i)
and (c)(ii), above.
Section 5.04 Pre-Funding Account and Capitalized
-----------------------------------
Interest Account
----------------
(a) No later than the Closing Date, the Indenture Trustee shall
establish and maintain in its trust department a trust account, which shall not
be interest-bearing, titled "FNBNE Business Loan Pre-Funding Account 1998-A"
(the "Pre-Funding Account"). The Pre-Funding Account shall constitute part of
the Trust Fund and may only be invested in Permitted Investments. The Indenture
Trustee shall, promptly upon receipt, deposit into the Pre-Funding Account and
retain therein the Original Pre-Funded Amount in an amount equal to the sum of
$13,044,782.35 from the proceeds of the sale of the Class A Notes.
(b) On each Subsequent Transfer Date, the Servicer shall instruct the
Indenture Trustee to withdraw from the Pre-Funding Account an amount equal to
100% of the aggregate Principal Balances of the Subsequent Business Loans sold
to the Trust Fund on such Subsequent Transfer Date and pay such amount to or
upon the order of the Seller with respect to such transfer. In no event shall
the Servicer be permitted to instruct the Indenture Trustee to release from the
Pre-Funding Account in excess of $13,044,782.35.
(c) If at the end of the Funding Period amounts still remain in the
Pre-Funding Account, the Servicer shall instruct the Indenture Trustee to
withdraw from the Pre-Funding Account on the immediately following Remittance
Date and deposit such amounts in the Note Distribution Account. However, if at
the close of business on the Determination Date in March 1999 amounts still
remain in the Pre-Funding Account, the Servicer shall instruct the Indenture
Trustee to withdraw from the Pre-Funding Account on the Special Remittance Date
and deposit in the Note Distribution Account any Pre-Funded Amount then
remaining in the Pre-Funding Account.
(d) On the Remittance Dates occurring in January, February and March,
1999, the Indenture Trustee shall transfer from the Pre-Funding Account to the
Note Distribution Account, the Pre-Funding Earnings, if any, applicable to each
such Remittance Date.
(e) No later than the Closing Date, the Indenture Trustee shall
establish and maintain in its trust department a trust account which shall not
be interest-bearing, titled "FNBNE Business Loan Capitalized Interest Account
1998-A" (the " Capitalized Interest Account"). The Capitalized Interest Account
shall constitute part of the Trust Fund and may only be invested in Permitted
Investments. The Indenture Trustee shall, promptly upon receipt, deposit into
the Capitalized Interest Account $127,050.12. If prior to the end of the
Funding Period the funds on deposit in the Pre-Funding Account are invested in a
guaranteed investment contract, repurchase agreement or other arrangement
acceptable to the Rating Agencies, that
35
<PAGE>
constitutes a Permitted Instrument, the Indenture Trustee shall, within one
Business Day of its receipt of notification of satisfaction of the Rating Agency
Condition, withdraw from the Capitalized Interest Account and pay to the Seller
the amount set forth in such notification.
(f) On the Remittance Dates occurring in January, February and March,
the Indenture Trustee shall transfer from the Capitalized Interest Account to
the Note Distribution Account, the Capitalized Interest Requirement, if any,
for such Remittance Dates.
(g) On the Special Remittance Date, the Indenture Trustee shall
transfer from the Capitalized Interest Account to the Note Distribution Account
the Capitalized Interest Requirement, if any, for such Special Remittance Date.
Any amounts remaining in the Capitalized Interest Account after taking into
account such transfer shall be paid on such Special Remittance Date to the
Certificateholders, and the Capitalized Interest Account shall be closed.
Section 5.05 [Intentionally Omitted]
Section 5.06 Investment of Accounts.
----------------------
(a) So long as no default or Event of Default shall have occurred and
be continuing, and consistent with any requirements of the Code, all or a
portion of any Account which by the terms of this Agreement shall be invested in
Permitted Instruments by the Indenture Trustee, as directed in writing by the
Servicer, in one or more Permitted Instruments in the name of the Indenture
Trustee, bearing interest or sold at a discount. No such investment in the
Principal and Interest Account, Note Distribution Account, the Pre-Funding
Account, the Capitalized Interest Account and the Spread Account shall mature
later than the Business Day immediately preceding the next Remittance Date and
no such investment in the Expense Account shall mature later than the Business
Day immediately preceding the date such funds will be needed to pay fees or
premiums; provided, however, the Indenture Trustee or any affiliate thereof, may
-------- -------
be the obligor on any investment which otherwise qualifies as a Permitted
Instrument and any investment on which the Indenture Trustee is the obligor may
mature on such Remittance Date or date when needed, as the case may be.
(b) If any amounts are needed for disbursement from any Account held
by the Indenture Trustee and sufficient uninvested funds are not available to
make such disbursement, the Indenture Trustee shall cause to be sold or
otherwise converted to cash a sufficient amount of the investments in such
Account. The Indenture Trustee shall not be liable for any investment loss or
other charge resulting therefrom.
(c) The Indenture Trustee shall not in any way be held liable by
reason of any insufficiency in any Account held by the Indenture Trustee
resulting from any investment loss on any Permitted Instrument included therein
(except to the extent that the Indenture Trustee is the obligor thereon).
36
<PAGE>
(d) The Indenture Trustee shall invest and reinvest funds in the
Accounts held by the Indenture Trustee to the fullest extent practicable, in
such manner as the Servicer shall from time to time direct in writing, but only
in one or more Permitted Instruments.
(e) All income or other gain from investments in any Account held by
the Indenture Trustee shall be deposited in such Account, immediately on
receipt, and the Indenture Trustee shall notify the Servicer of any loss
resulting from such investments. The Servicer shall remit the amount of any
such loss from its own funds, without reimbursement therefor, to the Indenture
Trustee for deposit in the Account from which the related funds were withdrawn
for investment by the next Determination Date following receipt by the Servicer
of such notice.
Section 5.07 Distributions.
-------------
(a) The rights of the Noteholders and Certificateholders to receive
distributions from the proceeds of the Trust Fund, and all ownership interests
of the Certificateholders in such distributions, shall be as set forth in this
Agreement.
(b) On each Remittance Date the Indenture Trustee shall withdraw
from the Note Distribution Account an amount equal to (A) that portion of the
Available Funds received from the Servicer pursuant to Section 5.01(a)(i), (ii),
(iv) and (v), (B) the amounts deposited therein pursuant to Section 5.02(b)(i)
and make distributions thereof in the following order of priority:
(i) first, to the Class A Noteholders, in an amount up to the Class
A Interest Distribution Amount;
(ii) second, to the Class M-1 Noteholders, in an amount up to the
Class M-1 Interest Distribution Amount, minus the Class Carry Forward Interest
Amount for the Class M-1 Notes;
(iii) third, to the Class M-2 Noteholders, in an amount up to the
Class M-2 Interest Distribution Amount, minus the Class Carry Forward Interest
Amount for the Class M-2 Notes;
(iv) fourth, to the Class A Noteholders, in an amount up to the sum
of (a) the Class A Principal Distribution Amount for the Class A Notes and (b)
the Class Carry Forward Amount for the Class A Notes;
(v) fifth, to the Class M-1 Noteholders, in an amount up to the sum
of (a) the Class M-1 Principal Distribution Amount for the Class M-1 Notes and
(b) the Class Carry Forward Amount for the Class M-1 Notes;
37
<PAGE>
(vi) sixth, to the Class M-2 Noteholders, in an amount up to the
sum of (a) the Class M-2 Principal Distribution Amount for the Class M-2 Notes
and (b) the Class Carry Forward Amount for the Class M-2 Notes;
(vii) seventh, to the Expense Account in an amount up to one-twelfth
of the Annual Expense Escrow Amount plus any amount required to be paid to the
Owner Trustee and the Indenture Trustee pursuant to this Agreement;
(viii) eighth, to the Class M-1 Noteholders, the Class Carry Forward
Interest Amount for the Class M-1 Notes;
(ix) ninth, to the Class M-2 Noteholders, the Class Carry Forward
Interest Amount for the Class M-2 Notes;
(x) tenth, to the Servicer, certain amounts reimbursable pursuant
to the Sale and Servicing Agreement;
(xi) eleventh, to the Spread Account, unless and until the amount
therein equals the Specified Spread Account Requirement;
(xii) twelfth, to the Class A Noteholders, any Interest Carryover
for the Class A Notes;
(xiii) thirteenth, to the Class M-1 Noteholders, any Interest
Carryover for the Class M-1 Notes;
(xiv) fourteenth, to the Class M-2 Noteholders, any Interest
Carryover for the Class M-2 Notes;
(xv) fifteenth, to the Class B Noteholders, in an amount up to the
Class B Interest Distribution Amount, minus the Class Carry Forward Interest
Amount for the Class B Notes;
(xvi) sixteenth, to the Class B Noteholders, in an amount up to the
Class B Principal Distribution Amount for the Class B Notes;
(xvii) seventeenth, to the Class B Noteholders, the Class Carry
Forward Interest Amount for the Class B Notes;
(xviii) eighteenth, to the Class B Noteholders, the Class Carry
Forward Amount for the Class B Notes;
(xix) nineteenth, to the Class B Noteholders, any Interest Carryover
for the Class B Notes; and
38
<PAGE>
(xx) twentieth, to the Owner Trustee, for Distribution to the
Certificateholders, any excess.
Additionally, on the Special Remittance Date, the Indenture Trustee
shall withdraw from the Note Distribution Account the amount, if any, deposited
therein pursuant to Section 5.01(a)(v) and make distributions thereof to
Noteholders as follows: (i) from amounts transferred from the Pre-Funding
Account, distributions of principal to the Notes of each Class pro rata based
upon the applicable Class A, Class M-1, Class M-2 and Class B Percentages and
(ii) from amounts transferred from the Capitalized Interest Account,
distributions of interest to the Holders of each Class of Notes equal to the
Capitalized Interest Requirement.
(c) All distributions made to the Noteholders of a particular Class
will be made on a pro rata basis among the Noteholders of record of the
applicable Class on the next preceding Record Date based on the Percentage
Interest represented by their respective Notes, and shall be made by check or,
upon request by a Noteholders, by wire transfer of immediately available funds
to the account of such Noteholders at a bank or other entity having appropriate
facilities therefor, and, in the case of wire transfers, at the expense of such
Noteholder unless such Noteholder shall own of record Notes which have initial
principal balances aggregating at least $1,000,000.
Section 5.08 [Intentionally Omitted].
---------------------
Section 5.09 Statements.
----------
Each month, not later than 12:00 noon New York time on the
Determination Date, the Servicer shall deliver to the Indenture Trustee, by
telecopy, for distribution to the Noteholders, the receipt and legibility of
which shall be confirmed telephonically, with hard copy thereof and the
Servicer's Monthly Computer Tape in the form attached hereto as Exhibit L (both
in hard copy and in computer tape form) to be delivered on the Business Day
following the Determination Date, a certificate signed by a Servicing Officer (a
"Servicer's Certificate") stating the date (day, month and year), the Series
number of the Notes, the date of this Agreement, and, as of the close of
business on the Record Date for such month:
(i) Available Funds for the related Remittance Date;
(ii) The Aggregate Class A Note Principal Balance, the Aggregate
Class M-1 Note Principal Balance, the Aggregate Class M-2 Note Principal
Balance, and the Aggregate Class B Note Principal Balance as reported in the
prior Servicer's Certificate pursuant to subclause (xi) below, or, in the case
of the first Determination Date, the Original Class A, Class M-1, Class M-2, and
Class B Note Principal Balance;
(iii) The number and Principal Balances of all Business Loans which
were the subject of Principal Prepayments during the Due Period and the number
and Principal Balances of all Defaulted Business Loans purchased by the Servicer
during the Due Period;
39
<PAGE>
(iv) The amount of all Curtailments which were received during the
Due Period;
(v) The amount of all Excess Payments and the amount of all Monthly
Payments in respect of principal received during the Due Period;
(vi) The aggregate amount of interest received on Business Loans;
(vii) The amount of the Monthly Advances to be made on the
Determination Date and the Compensating Interest payment to be made on the
Determination Date;
(viii) The delinquency and foreclosure information set forth in the
form attached hereto as Exhibit K;
(ix) The Interest Distribution Amounts and Principal Distribution
Amounts for each Class for the Remittance Date with the components thereof
stated separately;
(x) The amount available in the Spread Account as of the related
Record Date in cash and from liquidation of Permitted Instruments and the
amount, if any, to be transferred from the Spread Account to the Note
Distribution Account pursuant to Section 5.02(b)(i);
(xi) The Aggregate Class A Note Principal Balance, Aggregate
Class M-1 Note Principal Balance, Aggregate Class M-2 Note Principal Balance and
Aggregate Class B Note Principal Balance after giving effect to the distribution
to be made on the Remittance Date;
(xii) The weighted average maturity and weighted average Business
Loan Interest Rate;
(xiii) The Servicing Fees and amounts to be deposited to the Expense
Account;
(xiv) The amount of all payments and reimbursements to the Servicer;
(xv) The Class A, Class M-1, Class M-2 and Class B Remittance Rates
with respect to such Remittance Date;
(xvi) During the Funding Period, the aggregate Principal Balance of
the Subsequent Business Loans purchased during the prior Due Period and the
amount on deposit in the Pre-Funding Account as of the end of such Due Period;
(xvii) The Net Interest Cap with respect to the Remittance Date;
40
<PAGE>
(xviii) If the Class Remittance Rate for a Class of Notes for such
Remittance Date is based on the Net Interest Cap, the amount of any Interest
Carryover for such Class of Notes for such Remittance Date;
(xix) the amount of the distribution, if any, allocable to
Interest Carryover and the amount of any Interest Carryover for all prior
Remittance Dates after giving effect to such distribution (in each case, stated
separately by Class and in the aggregate); and
(xx) Such other information as the Indenture Trustee, the
Noteholders and the Certificateholders or the Rating Agencies may reasonably
require.
The Indenture Trustee shall forward such report to the Noteholders,
the Certificateholders, the Owner Trustee and the Rating Agencies on the
Remittance Date, together with a separate report indicating the amount of funds
deposited in each Note Distribution Account pursuant to Section 5.01(a)(iv); and
the amounts which are reimbursable to the Servicer or the Seller pursuant to
Sections 5.03(c)(i), 5.03(c)(ii) and 5.07(b)(x) (all reports prepared by the
Indenture Trustee of such withdrawals and deposits will be based in whole or in
part upon the information provided to the Indenture Trustee by the Servicer).
To the extent that there are inconsistencies between the telecopy of
the Servicer's Certificate and the hard copy thereof, the Indenture Trustee
shall be entitled to rely upon the telecopy. In the case of information
furnished pursuant to subclauses (ii), (iii), (iv), (v), (ix) and (xi), above,
the amounts shall be expressed in a separate section of the report as a dollar
amount for each Class per $1,000 original dollar amount as of the Cut-Off Date.
Additionally, on the Special Remittance Date the Indenture Trustee
shall, based upon information received from the Servicer, forward to the
Noteholders, the Owner Trustee and the Rating Agencies a report setting forth
the amount of principal and interest, if any, being paid to each Class of Notes
on the Special Remittance Date.
(a) Within a reasonable period of time after the end of each calendar
year, the Servicer shall furnish to the Indenture Trustee and the Owner Trustee
for distribution to each Person who at any time during the calendar year was a
Noteholder or a Certificateholder such information as is reasonably necessary to
provide to such Person a statement containing the information set forth in
subclauses (vi), (ix), and (xiv), above, aggregated for such calendar year or
applicable portion thereof during which such Person was a Noteholder or a
Certificateholder. 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.
(b) Upon reasonable advance notice in writing, the Servicer will
provide to each Noteholder or Certificateholder which is a savings and loan
association, bank or insurance company certain reports and access to information
and documentation regarding the Business Loans sufficient to permit such
Noteholder or Certificateholder to comply with applicable
41
<PAGE>
regulations of the Office of Thrift Supervision or other regulatory authorities
with respect to investment in the Notes or Certificates, as applicable.
(c) The Servicer shall furnish to each Noteholder and
Certificateholder, during the term of this Agreement, 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 Noteholder and
Certificateholder or otherwise with respect to the purposes of this Agreement,
all such reports or information to be provided by and in accordance with such
applicable instructions and directions as the Noteholder and Certificateholder
may reasonably require; provided, that the Servicer shall be entitled to be
reimbursed by such Noteholder or Certificateholder for the Servicer's actual
expenses incurred in providing such reports if such reports are not producable
in the ordinary course of the Servicer's business. The Rating Agencies shall
receive copies of any such reports or information furnished to the Noteholders
and Certificateholders.
Section 5.10 Advances by the Servicer.
------------------------
Not later than the close of business on each Determination Date, the
Servicer shall remit to the Indenture Trustee for deposit in the Note
Distribution Account an amount (as indicated in the Servicer's Certificate
prepared pursuant to Section 5.09), to be distributed on the related Remittance
Date pursuant to Section 5.07, equal to the amount by which (i) 30 days'
interest at a rate equal to the then applicable Adjusted Business Loan
Remittance Rate on the Aggregate Class A, Class M-1, Class M-2 and Class B Note
Principal Balances immediately prior to the related Remittance Date exceeds (ii)
the amount received by the Servicer as of the related Record Date in respect of
interest on the Business Loans (plus, for the Remittance Dates during the
Funding Period, the sum of (i) all funds to be transferred to the Note
Distribution Account from the Capitalized Interest Account for such Remittance
Date pursuant to Section 5.04(g) and (ii) the Pre-Funding Earnings for the
applicable Remittance Date), such excess being defined herein as the "Monthly
Advance." The Servicer may reimburse itself for Monthly Advances made pursuant
to Section 4.04. Notwithstanding the foregoing, the Servicer shall not be
required to make a Monthly Advance with respect to a Business Loan if it
determines, in good faith, that such advance would be nonrecoverable from
amounts received in respect of the Business Loans.
Section 5.11 Compensating Interest.
---------------------
Each Class of Notes shall be entitled to a full month's interest on
the principal portion of each Business Loan at the then applicable Class A,
Class M-1, Class M-2 or Class B Remittance Rate for such Class, as the case may
be. Not later than the close of business on each Determination Date, with
respect to each Business Loan for which a Principal Prepayment or Curtailment
was received during the related Due Period, the Servicer shall remit to the
Indenture Trustee for deposit in the Note Distribution Account from amounts
otherwise payable to it as servicing compensation, an amount (such amount
required to be delivered to the Indenture Trustee is referred to herein as
"Compensating Interest") (as indicated in the Servicer's Certificate prepared
pursuant to Section 5.09) equal to the difference between (a) 30 days' interest
at the
42
<PAGE>
Adjusted Business Loan Remittance Rate on the Principal Balance of each related
Business Loan as of the beginning of the Due Period applicable to the Remittance
Date on which such amount will be distributed, and (b) the amount of interest
actually received on each such Business Loan for such Due Period net of the
Servicing Fee, and the fees and expenses of the Owner Trsutee and the Indenture
Trustee allocable to such interest.
Section 5.12 Reports of Foreclosure and Abandonment of Mortgaged
---------------------------------------------------
Property
--------
Each year the Servicer shall make the reports of foreclosures and
abandonment of any Mortgaged Property required by Section 6050J of the Code.
Promptly after filing each such report with the Internal Revenue Service, the
Servicer shall provide the Indenture Trustee with an Officer's Certificate
certifying that such report has been filed.
43
<PAGE>
ARTICLE VI
GENERAL SERVICING PROCEDURE
---------------------------
Section 6.01 [Intentionally Omitted]
Section 6.02 Satisfaction of Mortgages and Collateral and Release of
-------------------------------------------------------
Business Files
--------------
The Servicer shall maintain the Fidelity Bond as provided for in
Section 4.09 insuring the Servicer against any loss it may sustain with respect
to any Business Loan not satisfied in accordance with the procedures set forth
herein.
Upon the payment in full of any Business 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 will immediately notify the Indenture
Trustee by a certification in the form of Exhibit I attached hereto (which
certification shall include a statement to the effect that all amounts received
or to be received in connection with such payment which are required to be
deposited in the Principal and Interest Account pursuant to Section 4.03 have
been or will be so deposited) of a Servicing Officer and shall request delivery
to it of the Indenture Trustee's Document File. Upon receipt of such
certification and request, the Indenture Trustee shall release, within 3
Business Days, the related Indenture Trustee's Document File to the Servicer.
Expenses incurred in connection with any instrument of satisfaction or deed of
reconveyance shall be payable only from and to the extent of servicing
compensation and shall not be chargeable to the Principal and Interest Account
or the Note Distribution Account.
From time to time and as appropriate for the servicing or foreclosure
of any Business Loan, the Indenture Trustee shall, upon request of the Servicer
and delivery to the Indenture Trustee of a certification in the form of Exhibit
I attached hereto signed by a Servicing Officer, release the related Indenture
Trustee's Document File to the Servicer within 3 Business Days, and the
Indenture Trustee shall execute such documents as shall be necessary to the
prosecution of any such proceedings. Such servicing receipt shall obligate the
Servicer to return the Indenture Trustee's Document File to the Indenture
Trustee when the need therefor by the Servicer no longer exists, unless the
Business Loan has been liquidated and the Liquidation Proceeds relating to the
Business Loan have been deposited in the Principal and Interest Account and
remitted to the Indenture Trustee for deposit in the Note Distribution Account
or the Business File or such document has been delivered to an attorney, or to a
public Indenture Trustee or other public official as required by law, for
purposes of initiating or pursuing legal action or other proceedings for the
foreclosure of the Mortgaged Property or other Collateral either judicially or
non-judicially, and the Servicer has delivered to the Indenture Trustee a
certificate of a Servicing Officer certifying as to the name and address of the
Person to which such Business File or such document was delivered and the
purpose or purposes of such delivery. Upon receipt of a certificate of a
Servicing Officer stating that such Business Loan was liquidated, the servicing
receipt shall be released by the Indenture Trustee to the Servicer.
44
<PAGE>
The Indenture Trustee shall execute and deliver to the Servicer any
court pleadings, requests for Indenture Trustee's sale or other documents
necessary to the foreclosure or Indenture Trustee's sale in respect of a
Mortgaged Property or other Collateral or to any legal action brought to obtain
judgment against any Obligor on the Business Note or Mortgage or other agreement
securing Collateral or to obtain a deficiency judgment, or to enforce any other
remedies or rights provided by the Business Note or Mortgage or other agreement
securing Collateral or otherwise available at law or in equity. Together with
such documents or pleadings, the Servicer shall deliver to the Indenture Trustee
a certificate of a Servicing Officer requesting that such pleadings or documents
be executed by the Indenture Trustee and certifying as to the reason such
documents or pleadings are required and that the execution and delivery thereof
by the Indenture Trustee will not invalidate or otherwise affect the lien of the
Mortgage or other agreement securing Collateral, except for the termination of
such a lien upon completion of the foreclosure or Indenture Trustee's sale. The
Indenture Trustee shall, upon receipt of a written request from a Servicing
Officer, execute any document provided to the Indenture Trustee by the Servicer
or take any other action requested in such request, that is, in the opinion of
the Servicer as evidenced by such request, required by any state or other
jurisdiction to discharge the lien of a Mortgage or other agreement securing
Collateral upon the satisfaction thereof and the Indenture Trustee will sign and
post, but will not guarantee receipt of, any such documents to the Servicer, or
such other party as the Servicer may direct, within five Business Days of the
Indenture Trustee's receipt of such certificate or documents. Such certificate
or documents shall establish to the Indenture Trustee's satisfaction that the
related Business Loan has been paid in full by or on behalf of the Obligor and
that such payment has been deposited in the Principal and Interest Account.
Section 6.03 Servicing Compensation.
----------------------
As compensation for its services hereunder, the Servicer shall be
entitled to withdraw from the Principal and Interest Account or to retain from
interest payments on the Business Loans the Servicer's Servicing Fee; provided,
however, that the Servicer only may withdraw from the Principal and Interest
Account the Servicer's Servicing Fee related to the Business Loan for which
Servicing Fee was received. Additional servicing compensation in the form of
assumption and other administrative fees, prepayment penalties, interest paid on
funds on deposit in the Principal and Interest Account, interest paid and
earnings realized on Permitted Instruments and amounts remitted pursuant to
Section 5.03(c)(iii) shall be retained by or remitted to the Servicer to the
extent not required to be remitted to the Indenture Trustee for deposit in the
Note Distribution Account. 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 therefor except as specifically provided for
herein.
Section 6.04 Annual Statement as to Compliance.
---------------------------------
The Servicer will deliver to the Indenture Trustee, the Rating
Agencies and the Owner Trustee on or before March 31 of each year beginning
March 31, 2000, an Officer's
45
<PAGE>
Certificate stating that (i) the Servicer has fully complied with the provisions
of Articles IV, V, VI and VII, (ii) a review of the activities of the Servicer
during the preceding calendar year and of performance under this Agreement has
been made under such officers' supervision, and (iii) to the best of such
officers' knowledge, based on such review, the Servicer has fulfilled all its
obligations under this Agreement throughout such year, or, if there has been a
default in the fulfillment of any such obligation, specifying each such default
known to such officers and the nature and status thereof including the steps
being taken by the Servicer to remedy such default.
Section 6.05 Annual Independent Public Accountants' Servicing
------------------------------------------------
Report
------
On or before March 31 of each year beginning March 31, 2000, the
Servicer, at its expense, shall cause a firm of nationally recognized
independent public accountants reasonably acceptable to the Indenture Trustee to
furnish a letter or letters to the Indenture Trustee, the Owner Trustee and the
Rating Agencies to the effect that such firm has with respect to the Servicer's
overall servicing operations examined such operations in accordance with the
requirements of the Uniform Single Audit Program for Mortgage Bankers, and
stating such firm's conclusions relating thereto.
Section 6.06 Indenture Trustee's and Owner Trustee's Right to
------------------------------------------------
Examine Servicer Records and Audit Operations
---------------------------------------------
The Indenture Trustee, the Owner Trustee and the Rating Agencies shall
have the right upon reasonable prior notice, during normal business hours and as
often as reasonably required, 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 behalf of the Servicer, which may be relevant to the performance or
observance by the Servicer of the terms, covenants or conditions of this
Agreement. No amounts payable in respect of the foregoing shall be paid from
the Trust Fund.
Section 6.07 Reports to the Indenture Trustee; Principal and
-----------------------------------------------
Interest Account Statements.
---------------------------
Not later than 20 days after each Record Date, the Servicer shall
forward to the Indenture Trustee a statement, certified by a Servicing Officer,
setting forth the status of the Principal and Interest Account as of the close
of business on the preceding Record Date and showing, for the period covered by
such statement, the aggregate of deposits into the Principal and Interest
Account for each category of deposit specified in Section 4.03, the aggregate of
withdrawals from the Principal and Interest Account for each category of
withdrawal specified in Section 4.04, the aggregate amount of permitted
withdrawals not made in the related Due Period, and the amount of any Monthly
Advances or payments of Compensating Interest, in each case, for the related Due
Period.
46
<PAGE>
ARTICLE VII
REPORTS TO BE PROVIDED BY SERVICER
----------------------------------
Section 7.01 Financial Statements.
--------------------
The Servicer understands that, in connection with the transfer of the
Notes and the Certificates, Noteholders and Certificateholders may request that
the Servicer make available to prospective Noteholders and Certificateholders
the annual audited financial statements of the Servicer's parent (First
International Bancorp, Inc. and any successor thereto) for one or more of the
most recently completed five fiscal years for which such statements are publicly
available, which request shall not be unreasonably denied. Such audited
financial statements shall also be provided to the Rating Agencies by the
Servicer upon request.
The Servicer also agrees to make available on a reasonable basis to
any prospective Noteholder a knowledgeable financial or accounting officer for
the purpose of answering reasonable questions respecting recent developments
affecting the Servicer or the financial statements of the Servicer and its
parent (First International Bancorp, Inc. and any successor thereto) and to
permit any prospective Noteholder to inspect the Servicer's servicing facilities
during normal business hours for the purpose of satisfying such prospective
Noteholder that the Servicer has the ability to service the Business Loans in
accordance with this Agreement.
47
<PAGE>
ARTICLE VIII
THE SERVICER
------------
Section 8.01 Indemnification; Third Party Claims.
-----------------------------------
(a) The Servicer agrees to indemnify and hold the Indenture Trustee,
the Owner Trustee, and each Noteholder and Certificateholder harmless against
any and all claims, losses, penalties, fines, forfeitures, legal fees and
related costs, judgments, and any other costs, fees and expenses that the
Indenture Trustee, the Owner Trustee, and any Noteholder or Certificateholder
may sustain in any way related to the failure of the Servicer to perform its
duties and service the Business Loans in compliance with the terms of this
Agreement. The Servicer shall immediately notify the Indenture Trustee and the
Owner Trustee if a claim is made by any party with respect to this Agreement,
and the Servicer shall assume (with the consent of the Indenture Trustee) the
defense of any such claim and pay all expenses in connection therewith,
including reasonable counsel fees, and promptly pay, discharge and satisfy any
judgment or decree which may be entered against the Servicer, the Indenture
Trustee, the Owner Trustee, and/or a Noteholder or Certificateholder in respect
of such claim. The Indenture Trustee may reimburse the Servicer from the
Expense Account pursuant to Section 5.03(c)(i) for all amounts advanced by it
pursuant to the preceding sentence except when the claim relates directly to the
failure of the Servicer to service and administer the Business Loans in
compliance with the terms of this Agreement.
(b) The Seller agrees to indemnify and hold the Indenture Trustee,
the Owner Trustee and each Noteholder and Certificateholder harmless against any
and all claims, losses, penalties, fines, forfeitures, legal fees and related
costs, judgments, and any other costs, fees and expenses that the Indenture
Trustee, the Owner Trustee, and any Noteholder or Certificateholder may sustain
in any way related to the failure of the Seller to perform its duties in
compliance with the terms of this Agreement and in the best interests of the
Noteholders and Certificateholders. The Seller shall immediately notify the
Indenture Trustee and the Owner Trustee, if a claim is made by a third party
with respect to this Agreement, and the Seller shall assume (with the consent of
the Indenture Trustee) the defense of any such claim and pay all expenses in
connection therewith, including reasonable counsel fees, and promptly pay,
discharge and satisfy any judgment or decree which may be entered against the
Servicer, the Seller, the Indenture Trustee, the Owner Trustee and/or a
Noteholder or Certificateholder in respect of such claim. The Indenture Trustee
may reimburse the Seller from the Expense Account pursuant to Section 5.03(c)(i)
for all amounts advanced by it pursuant to the preceding sentence except when
the claim relates directly to the Seller indemnification pursuant to Section
2.05 and Section 3.03 or to the failure of the Servicer, if it is an affiliate
of the Seller, to perform its obligations to service and administer the Business
Loans in compliance with the terms of this Agreement, or the failure of the
Seller to perform its duties in compliance with the terms of this Agreement and
in the best interests of the Noteholders and Certificateholders.
48
<PAGE>
Section 8.02 Merger or Consolidation of the Servicer.
---------------------------------------
The Servicer will keep in full effect its existence, rights and
franchises as a corporation, bank or association and if required by applicable
law will obtain and preserve its qualification to do business as a foreign
entity, in each jurisdiction necessary to protect the validity and
enforceability of this Agreement or any of the Business 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 an established mortgage loan servicing institution that has a
net worth of at least $15,000,000, and 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 parties hereto, anything herein to the contrary
notwithstanding. The Servicer shall send notice of any such merger or
consolidation to the Indenture Trustee and the Rating Agency.
Subject to the satisfaction of the Rating Agency Condition, the
Servicer is permitted to assign its rights and duties hereunder to, and such
rights and duties can be assumed by, an affiliate of the Servicer having a net
worth of at least $15,000,000 (the "Assignee") (in which case all of the
provisions of this Agreement shall, to the same extent as they apply to the
Servicer hereunder, apply to the Assignee rather than the Servicer), without the
execution or filing of any paper or any further act on the part of any parties
hereto, anything herein to the contrary notwithstanding. The Servicer shall send
notice of any such assignment to the Indenture Trustee, the Owner Trustee, and
the Rating Agencies.
Section 8.03 Limitation on Liability of the Servicer and Others.
--------------------------------------------------
The Servicer and any director, officer, employee or agent of the
Servicer may rely on any document of any kind which it in good faith reasonably
believes to be genuine and to have been adopted or signed by the proper
authorities respecting any matters arising hereunder. Subject to the terms of
Section 8.01 herein, the Servicer shall have no obligation to appear with
respect to, prosecute or defend any legal action which is not incidental to the
Servicer's duty to service the Business Loans in accordance with this Agreement.
Section 8.04 Servicer Not to Resign.
----------------------
The Servicer shall not assign this Agreement nor resign from the
obligations and duties hereby imposed on it except (i) by mutual consent of the
Servicer, the Indenture Trustee, the Owner Trustee and the Majority Noteholders,
or (ii) in connection with a merger, conversion or consolidation permitted
pursuant to Section 8.02 and upon satisfaction of the Rating Agency Condition
(in which case the Person resulting from the merger, conversion or consolidation
shall
49
<PAGE>
be the successor of the Servicer), or (iii) in connection with an assignment
permitted pursuant to Section 8.02 and upon satisfaction of the Rating Agency
Condition (in which case the Assignee shall be the successor of the Servicer) or
(iv) upon the determination that the Servicer's duties hereunder are no longer
permissible under applicable law or administrative determination and such
incapacity cannot be cured by the Servicer. Any such determination permitting
the resignation of the Servicer shall be evidenced by a written Opinion of
Counsel (who may be counsel for the Servicer) to such effect delivered to the
Indenture Trustee and the Owner Trustee, which Opinion of Counsel shall be in
form and substance acceptable to the Indenture Trustee and the Owner Trustee. No
such resignation shall become effective until a successor has assumed the
Servicer's responsibilities and obligations hereunder in accordance with Section
9.02.
50
<PAGE>
ARTICLE IX
SERVICER TERMINATION
--------------------
Section 9.01 Servicer Termination Events.
---------------------------
(a) In case one or more of the following events (each a "Servicer
Termination Event") by the Servicer shall occur and be continuing, that is to
say:
(i) (A) the failure by the Servicer to make any required
Servicing Advance, to the extent such failure materially and adversely
affects the interests of the Noteholders; (B) the failure by the
Servicer to make any required Monthly Advance to the extent such
failure materially and adversely affects the interests of the
Noteholders; (C) the failure by the Servicer to remit any Compensating
Interest to the extent such failure materially and adversely affects
the interests of the Noteholders; or (D) any failure by the Servicer
to remit to Noteholders, or to the Indenture Trustee for the benefit
of the Noteholders, or to the Owner Trustee for the benefit of the
Certificateholders, any payment required to be made under the terms of
this Agreement which continues unremedied 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 Indenture Trustee or to
the Servicer and the Indenture Trustee by any Noteholder or
Certificateholder; or
(ii) failure by the Servicer or the Seller duly to observe or
perform, in any material respect, any other covenants, obligations or
agreements of the Servicer or the Seller as set forth in this
Agreement, which failure continues unremedied for a period of 60 days
after the date on which written notice of such failure, requiring the
same to be remedied, shall have been given to the Servicer or the
Seller, as the case may be, by the Indenture Trustee or to the
Servicer, or the Seller, as the case may be, and the Indenture Trustee
by any Noteholder or Certificateholder; or
(iii) 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, 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 60 days; or
(iv) the Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, 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 the Servicer's property; or
51
<PAGE>
(v) the Servicer shall admit in writing its inability to pay its
debts 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;
(b) then, and in each and every such case, so long as a Servicer
Termination Event shall not have been remedied, and in the case of clause (i)
above (except for clause (i)(B)), if such Servicer Termination Event shall not
have been remedied within 30 days after the Servicer has received notice of such
Servicer Termination Event, (x) with respect solely to clause (i)(B) above, if
such Monthly Advance is not made earlier than 4:00 p.m. New York time on the
Determination Date, the Indenture Trustee shall give immediate telephonic notice
of such failure to a Servicing Officer of the Servicer and, unless such failure
is cured, either by receipt of payment or receipt of evidence (e.g., a wire
----
reference number communicated by the sending bank) that such funds have been
sent, by 12:00 Noon New York time on the following Business Day, the Indenture
Trustee shall immediately assume, pursuant to Section 9.02 hereof, the duties of
a successor Servicer; and (y) in the case of clauses (i)(A), (i)(C), (i)(D),
(iii), (iv) and (v), the Majority Noteholders, by notice in writing to the
Servicer (except with respect to (iii), (iv) and (v) for which no notice is
required) may, in addition to whatever rights such Noteholders may have at law
or equity including damages, injunctive relief and specific performance, in each
case immediately terminate all the rights and obligations of the Servicer under
this Agreement and in and to the Business Loans and the proceeds thereof, as
Servicer. Upon such receipt by the Servicer of a second written notice from the
Majority Noteholders stating that they or it intend to terminate the Servicer as
a result of such Servicer Termination Event, all authority and power of the
Servicer under this Agreement, whether with respect to the Business Loans or
otherwise, shall, subject to Section 9.02, pass to and be vested in the
Indenture Trustee and the Indenture Trustee is hereby authorized and empowered
to execute and deliver, on behalf of the Servicer, as attorney-in-fact or
otherwise, any and all documents and other instruments and do or cause to be
done all other acts or things necessary or appropriate to effect the purposes of
such notice of termination, including, but not limited to, the transfer and
endorsement or assignment of the Business Loans and related documents. The
Servicer agrees to cooperate with the Indenture Trustee in effecting the
termination of the Servicer's responsibilities and rights hereunder, including,
without limitation, the transfer to the Indenture Trustee for administration by
it of all amounts which shall at the time be credited by the Servicer to each
Principal and Interest Account or thereafter received with respect to the
Business Loans.
Section 9.02 Indenture Trustee to Act; Appointment of Successor
--------------------------------------------------
On and after the time of the Servicer's immediate termination, or the
Servicer's receipt of notice if required by Section 9.01, or at any time if the
Indenture Trustee receives the resignation of the Servicer evidenced by an
Opinion of Counsel pursuant to Section 8.04 or the Servicer is removed as
Servicer pursuant to this Article IX, the Indenture Trustee shall be the
successor in all respects to the Servicer in its capacity as Servicer under this
Agreement and the transactions set forth or provided for herein and shall be
subject to all the responsibilities, duties
52
<PAGE>
and liabilities relating thereto placed on the Servicer by the terms and
provisions hereof; provided, however, that the Indenture Trustee shall not be
liable for any actions of any Servicer prior to it, and that the Indenture
Trustee shall not be obligated to make advances or payments pursuant to Sections
4.03, 4.10, 5.03, 5.10 or 5.11 but only to the extent the Indenture Trustee
determines reasonably and in good faith that such advances would not be
recoverable, such determination to be evidenced with respect to each such
advance by a certification of a Responsible Officer of the Indenture Trustee. As
compensation therefor, the Indenture Trustee shall be entitled to all funds
relating to the Business Loans which the Servicer would have been entitled to
receive from the Principal and Interest Account pursuant to Section 4.04 if the
Servicer had continued to act as Servicer hereunder, together with other
servicing compensation in the form of assumption fees, late payment charges or
otherwise as provided in Sections 5.01 and 5.03.
Notwithstanding the above, the Indenture Trustee shall, if it is
unable to so act, appoint, or petition a court of competent jurisdiction to
appoint, any established servicing institution acceptable to the Rating Agencies
that has a net worth of not less than $15,000,000, as the successor to the
Servicer hereunder in the assumption of all or any part of the responsibilities,
duties or liabilities of the Servicer hereunder. Any collections received by
the Servicer after removal or resignation shall be endorsed by it to the
Indenture Trustee and remitted directly to the Indenture Trustee or, at the
direction of the Indenture Trustee, to the successor servicer. The compensation
of any successor servicer (including, without limitation, the Indenture Trustee)
so appointed shall be the aggregate Servicing Fees and other servicing
compensation in the form of assumption fees, late payment charges or otherwise.
In the event the Indenture Trustee is required to solicit bids as provided
herein, the Indenture Trustee shall solicit, by public announcement, bids from
banks and mortgage servicing institutions meeting the qualifications set forth
above. Such public announcement shall specify that the successor servicer shall
be entitled to the full amount of the aggregate Servicing Fees as servicing
compensation, together with the other servicing compensation in the form of
assumption fees, late payment charges or otherwise. Within thirty days after
any such public announcement, the Indenture Trustee shall negotiate and effect
the sale, transfer and assignment of the servicing rights and responsibilities
hereunder to the qualified party submitting the highest qualifying bid. The
Indenture Trustee shall deduct from any sum received by the Indenture Trustee
from the successor to the Servicer in respect of such sale, transfer and
assignment all costs and expenses of any public announcement and of any sale,
transfer and assignment of the servicing rights and responsibilities hereunder
and the amount of any unreimbursed Servicing Advances and Monthly Advances.
After such deductions, the remainder of such sum shall be paid by the Indenture
Trustee to the Servicer at the time of such sale, transfer and assignment to the
Servicer's successor. The Indenture Trustee and such successor shall take such
action, consistent with this Agreement, as shall be necessary to effectuate any
such succession. The Servicer agrees to cooperate with the Indenture Trustee
and any successor servicer in effecting the termination of the Servicer's
servicing responsibilities and rights hereunder and shall promptly provide the
Indenture Trustee or such successor servicer, as applicable, all documents and
records reasonably requested by it to enable it to assume the Servicer's
functions hereunder and shall promptly also transfer to the Indenture Trustee or
such successor servicer, as applicable, all amounts which then have been or
should have been
53
<PAGE>
deposited in the Principal and Interest Account or Spread Account by the
Servicer or which are thereafter received with respect to the Business Loans.
Neither the Indenture Trustee nor any other successor servicer shall be held
liable by reason of any failure to make, or any delay in making, any
distribution hereunder or any portion thereof caused by (i) the failure of the
Servicer to deliver, or any delay in delivering, cash, documents or records to
it, or (ii) restrictions imposed by any regulatory authority having jurisdiction
over the Servicer hereunder. No appointment of a successor to the Servicer
hereunder shall be effective until written notice of such proposed appointment
shall have been provided by the Indenture Trustee to each Noteholder and
Certificateholder and the Indenture Trustee shall have consented thereto. The
Indenture Trustee shall not resign as servicer until a successor servicer has
been appointed.
Pending appointment of a successor to the Servicer hereunder, the
Indenture Trustee shall act in such capacity as hereinabove provided. In
connection with such appointment and assumption, the Indenture Trustee may make
such arrangements for the compensation of such successor out of payments on
Business Loans as it and such successor shall agree; provided, however, that no
such compensation shall be in excess of that permitted the Servicer pursuant to
Section 5.03 or otherwise as provided in this Agreement. The Servicer, the
Indenture Trustee and such successor shall take such action, consistent with
this Agreement, as shall be necessary to effectuate any such succession.
Section 9.03 Waiver of Defaults.
------------------
The Majority Noteholders may, and subject to satisfaction of the
Rating Agency Condition, waive any events permitting removal of the Servicer
pursuant to this Article IX; provided, however, that the Majority Noteholders
may not waive a default in making a required distribution on a Note without the
consent of the holder of such Note. Upon any 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 thereto except to the extent expressly so waived.
Section 9.04. Control by Majority Noteholders.
-------------------------------
The Majority Noteholders may direct the time, method and place of
conducting any proceeding relating to the Trust or the Notes or for any remedy
available to the Indenture Trustee or the Owner Trustee with respect to the
Trust or exercising any trust or power conferred on the Indenture Trustee or the
Owner Trustee with respect to the Trust provided that:
-------- ----
(i) such direction shall not be in conflict with any rule of law
or with this Agreement;
(ii) the Indenture Trustee shall have been provided with
indemnity satisfactory to it; and
54
<PAGE>
(iii) the Indenture Trustee or the Owner Trustee may take any
other action deemed proper by the Indenture Trustee or the Owner
Trustee which is not inconsistent with such direction; provided,
--------
however, that the Indenture Trustee or the Owner Trustee, as the case
-------
may be, need not take any action which it determines might involve it
in liability or may be unjustly prejudicial to the Holders not so
directing.
55
<PAGE>
ARTICLE X
TERMINATION
-----------
Section 10.01 Termination.
-----------
This Agreement shall terminate upon notice to the Indenture Trustee of
the earlier of the following events: (a) the final payment or other liquidation
of the last Business Loan or the disposition of all property acquired upon
foreclosure or deed in lieu of foreclosure of any Business Loan and the
remittance of all funds due thereunder, or (b) mutual consent of the Servicer
and all Noteholders and Certificateholders in writing; provided, however, that
in no event shall this Agreement terminate later than twenty-one years after the
death of the last surviving lineal descendant of Joseph P. Kennedy, late
Ambassador of the United States to the Court of St. James, alive as of the date
hereof.
The Servicer may, at its option, terminate this Agreement on any date
on which the Pool Principal Balance is less than 5% of the sum of (i) the
Original Pool Principal Balance and (ii) the Original Pre-Funded Amount by
purchasing, on the next succeeding Remittance Date, all of the Business Loans
and Foreclosed Properties at a price equal to the sum of (i) 100% of the then
outstanding Aggregate Class A, Aggregate Class M-1, Aggregate Class M-2 and
Aggregate Class B Note Principal Balances, and (ii) 30 days' interest thereon at
the then applicable weighted average Class A, Class M-1, Class M-2 and Class B
Remittance Rates, as the case may be (the "Termination Price"). Notwithstanding
the prior sentence, if at the time the Servicer determines to exercise such
option the unsecured long-term debt obligations of the Servicer are not rated at
least Baa3 by Moody's, if the Rating Agencies are still rating the Notes, the
Servicer shall give the Rating Agencies prior written notice of the Servicer's
determination to exercise such option and shall not exercise such option,
without the consent of the Rating Agencies, prior to furnishing the Rating
Agencies with an Opinion of Counsel, in form and substance reasonably
satisfactory to the Rating Agencies, that the exercise of such option would not
be deemed a fraudulent conveyance by the Servicer.
Notice of any termination, specifying the Remittance Date upon which
the Trust Fund will terminate and that the Noteholders shall surrender their
Notes to the Indenture Trustee for payment of the final distribution and
cancellation shall be given promptly by the Servicer by letter to Noteholders
mailed during the month of such final distribution before the Determination Date
in such month, specifying (i) the Remittance Date upon which final payment of
the Notes will be made upon presentation and surrender of Notes at the office of
the Indenture Trustee therein designated, (ii) the amount of any such final
payment and (iii) that the Record Date otherwise applicable to such Remittance
Date is not applicable, payments being made only upon presentation and surrender
of the Notes at the office of the Indenture Trustee therein specified. The
Servicer shall give such notice to the Indenture Trustee therein specified. The
Servicer shall give such notice to the Indenture Trustee and the Rating Agencies
at the time such notice is given to Noteholders. Any obligation of the Servicer
to pay amounts due to the Indenture Trustee shall survive the termination of
this Agreement.
56
<PAGE>
Section 10.02 Accounting Upon Termination of Servicer
---------------------------------------
Upon termination of the Servicer under Article IX hereof, the Servicer
shall:
(a) deliver to its successor or, if none shall yet have been
appointed, to the Indenture Trustee the funds in any Principal and Interest
Account;
(b) deliver to its successor or, if none shall yet have been
appointed, to the Indenture Trustee all Business Files and related documents and
statements held by it hereunder and a Business Loan portfolio computer diskette;
(c) deliver to its successor or, if none shall yet have been
appointed, to the Indenture Trustee and, upon request, to the Noteholders a full
accounting of all funds, including a statement showing the Monthly Payments
collected by it and a statement of monies held in trust by it for the payments
or charges with respect to the Business Loans; and
(d) execute and deliver such instruments and perform all acts
reasonably requested in order to effect the orderly and efficient transfer of
servicing of the Business Loans to its successor and to more fully and
definitively vest in such successor all rights, powers, duties,
responsibilities, obligations and liabilities of the Servicer under this
Agreement.
57
<PAGE>
ARTICLE XI
MISCELLANEOUS PROVISIONS
------------------------
Section 11.01 Acts of Noteholders.
-------------------
Except as otherwise specifically provided herein, whenever Noteholder
action, consent or approval is required under this Agreement, such action,
consent or approval shall be deemed to have been taken or given on behalf of,
and shall be binding upon, all Noteholders if the Majority Noteholders agree to
take such action or give such consent or approval.
Section 11.02 Amendment.
---------
(a) This Agreement may be amended from time to time by the Servicer
and the Owner Trustee with the consent of the Indenture Trustee (which consent
may not be unreasonably withheld), without notice to or consent of the
Noteholders or Certificateholders, to cure any ambiguity, to correct or
supplement any provisions herein, to comply with any changes in the Code, or to
make any other provisions with respect to matters or questions arising under
this Agreement which shall not be inconsistent with the provisions of this
Agreement; provided, however, that such action shall not, as evidenced by an
Opinion of Counsel delivered to the Indenture Trustee, adversely affect the
interests of any Noteholder or Certificateholder or any other party and further
provided that no such amendment shall reduce in any manner the amount of, or
delay the timing of, any amounts received on Business Loans which are required
to be distributed on any Note Certificate without the consent of the Holder of
such Note or Certificate, or change the rights or obligations of any other party
hereto without the consent of such party.
(b) This Agreement may be amended from time to time by the Servicer
and the Owner Trustee with the consent of the Indenture Trustee and the consent
of the Majority Noteholders, for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement or
of modifying in any manner the rights of the Holders such amendment shall reduce
in any manner the amount of, or delay the timing of, any amounts which are
required to be distributed on any Note without the consent of the Holder of such
Note or reduce the percentage of Holders which are required to consent to any
such amendment without the consent of the Holders of 100% of the Notes and
Certificates affected thereby and, provided further, that no amendment affecting
only one or more Classes of Notes shall require the approval of holders of Notes
of the other Classes.
(c) It shall not be necessary for the consent of Holders under this
Section to approve the particular form of any proposed amendment, but it shall
be sufficient if such consent shall approve the substance thereof.
Section 11.03 Recordation of Agreement.
------------------------
58
<PAGE>
To the extent permitted by applicable law, this Agreement is subject
to recordation in all appropriate public offices for real property records in
all of the counties or other comparable jurisdictions in which any or all of the
properties subject to the Mortgages are situated, and in any other appropriate
public recording office or elsewhere, such recordation to be effected by the
Servicer at the Noteholders' expense on direction of the Majority Noteholders,
but only when accompanied by an Opinion of Counsel to the effect that such
recordation materially and beneficially affects the interests of the Noteholders
or is necessary for the administration or servicing of the Business Loans.
Section 11.04 Duration of Agreement.
---------------------
This Agreement shall continue in existence and effect until terminated
as herein provided.
SECTION 11.05 GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF NEW YORK AND THE OBLIGATIONS, RIGHTS AND REMEDIES OF THE PARTIES
HEREUNDER SHALL BE DETERMINED IN ACCORDANCE WITH SUCH LAWS, WITHOUT GIVING
EFFECT TO PRINCIPLES OF CONFLICTS OF LAW.
Section 11.06 Notices.
-------
All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by overnight mail, certified mail or registered mail, postage prepaid, to (i) in
the case of the Servicer and the Seller, First National Bank of New England, One
Commercial Plaza, Hartford, Connecticut 06103, Attention: Theodore J. Horan, or
such other addresses as may hereafter be furnished to the Noteholders in writing
by the Seller and the Servicer, (ii) in the case of the Indenture Trustee,
Marine Midland Bank, 140 Broadway, New York, New York 10005, 12th Floor,
Attention: Corporate Trust Department, (iii) in the case of the Owner Trustee,
Wilmington Trust Company, Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890, (iv) in the case of the Noteholders, as set forth in
the Note Register, (v) in the case of Moody's, to Moody's Investors Service, ABS
Monitoring Department, 99 Church Street, 4th Floor, New York, New York 10007 and
(vi) in the case of Duff & Phelps, Duff & Phelps Credit Rating Co., 55 East
Monroe Street, Chicago, Illinois 60603, Attention: ABS Monitoring Group. Any
such notices shall be deemed to be effective with respect to any party hereto
upon the receipt of such notice by such party, except that notices to the
Noteholders shall be effective upon mailing or personal delivery.
Section 11.07 Severability of Provisions.
--------------------------
59
<PAGE>
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 covenants,
agreements, provisions or terms of this Agreement.
Section 11.08 No Partnership.
--------------
Nothing herein contained shall be deemed or construed to create a co-
partnership or joint venture between the parties hereto and the services of the
Servicer shall be rendered as an independent contractor and not as agent for the
Noteholders.
Section 11.09 Counterparts.
------------
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.
Section 11.10 Successors and Assigns.
----------------------
This Agreement shall inure to the benefit of and be binding upon the
Seller and the Servicer, the Indenture Trustee and the Noteholders and their
respective successors and assigns.
Section 11.11 Headings.
--------
The headings of the various sections of this Agreement have been
inserted for convenience of reference only and shall not be deemed to be part of
this Agreement.
Section 11.12 Notification to Rating Agencies.
-------------------------------
The Indenture Trustee shall give prompt notice to the Rating Agencies
of the occurrence of any of the following events of which it has received
notice: (1) any modification or amendment to this Agreement, (2) any change of
the Indenture Trustee, the Servicer or Paying Agent, (3) any Event of Default,
and (4) the final payment of all the Notes. The Servicer shall promptly deliver
to the Rating Agencies a copy of each of the Servicer's Certificates. Further,
the Servicer shall give prompt notice to the Rating Agencies if the Servicer or
any of its affiliates acquire any Notes.
Section 11.13. Limitation of Liability.
-----------------------
It is expressly understood and agreed by the parties hereto that (a)
this Agreement is executed and delivered by Wilmington Trust Company, not
individually or personally but solely as Owner Trustee on behalf of the Issuer
under the Trust Agreement, in the exercise of the
60
<PAGE>
powers and authority conferred and vested in it, (b) each of the
representations, undertaking and agreements herein made on the part of the
Issuer is made and intended not as personal representations, undertakings and
agreements by Wilmington Trust Company but is made and intended for the purpose
of binding only the Issuer, (c) nothing herein contained shall be construed as
creating any liability on Wilmington Trust Company individually or personally,
to perform any covenant either expressed or implied contained herein, all such
liability, if any, being expressly waived by the parties to the Agreement and by
any person claiming by, through or under them and (d) under no circumstances
shall Wilmington Trust Company be personally liable for the payment of any
indebtedness or expenses of the Issuer or be liable for the payment of any
indebtedness or expenses of the Issuer or be liable for the breach or failure of
any obligation, representation, warranty or covenant made or undertaking by the
Issuer under this Agreement or any related documents.
[REMAINDER OF PAGE INTENTIONALLY BLANK]
61
<PAGE>
IN WITNESS WHEREOF, the Seller, the Servicer and the Trust have caused
their names to be signed hereto by their respective officers thereunto duly
authorized as of the day and year first above written.
FIRST NATIONAL BANK OF NEW ENGLAND
as Seller and Servicer
By: ________________________________
Name:
Title:
FNBNE BUSINESS LOAN TRUST 1998-A,
By: Wilmington Trust Company, not in its
individual capacity but solely as Owner
Trustee on behalf of the Trust
By: ________________________________
Name:
Title:
62
<PAGE>
Accepted and Agreed to:
MARINE MIDLAND BANK, not in its individual
capacity, but solely as Indenture Trustee
By:_________________________________
Name:
Title:
63
<PAGE>
STATE OF NEW YORK )
: ss.:
COUNTY OF NEW YORK )
On the 30th day of December, 1998 before me, a Notary Public in and
for said State, personally appeared Emmett R. Harmon known to me to be an
officer of Wilmington Trust Company, the trust company that executed the within
instrument, and also known to me to be the person who executed it on behalf of
said banking corporation, and acknowledged to me that such banking corporation
executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
____________________
Notary Public
My Commission expires ___________
<PAGE>
STATE OF __________ )
: ss.:
COUNTY OF ________ )
On the 30th day of December, 1998 before me, a Notary Public in and
for the State of ________, personally appeared ______________ known to me to be
the ________________________ of First National Bank of New England, one of the
corporations that executed the within instrument and also known to me to be the
person who executed it on behalf of said corporation, and acknowledged to me
that such corporation executed the within instrument.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my
official seal the day and year in this certificate first above written.
______________________
Notary Public
My Commission expires ________
<PAGE>
EXHIBIT A
CONTENTS OF BUSINESS FILE
With respect to each Business Loan, the Business File shall include a
copy of any of the following items delivered to the Indenture Trustee:
1. The original Business Note, endorsed by means of an allonge as
follows: "Pay to the order of Marine Midland Bank, and its
successors and assigns, as Indenture trustee under that certain
Indenture dated as of December 1, 1998, relating to FNBNE
Business Loan Trust 1998-A, without recourse" and signed, by
facsimile or manual signature, in the name of the Seller by a
Responsible Officer, with all prior and intervening endorsements
showing a complete chain of endorsement from the originator to
the Seller, if the Seller was not the originator; provided,
--------
however, that in lieu of the original Business Note relating to
one Business Loan, where the original Business Note has been lost
the Seller may deliver a lost note affidavit and, if a copy
exists, a copy of the original Business Note;
2. With respect to those Business Loans secured by Mortgaged
Properties, either: (i) the original Mortgage, with evidence of
recording thereon, (ii) a copy of the Mortgage certified as a
true copy by a Responsible Officer of the Seller where the
original has been transmitted for recording until such time as
the original is returned by the public recording office or duly
licensed title or escrow officer or (iii) a copy of the Mortgage
certified by the public recording office in those instances where
the original recorded Mortgage has been lost;
3. With respect to those Business Loans secured by Mortgaged
Properties, either: (i) the original Assignment of Mortgage from
the Seller endorsed as follows: "Marine Midland Bank,
("Assignee") its successors and assigns, as Indenture Trustee
under the Indenture dated as of December 1, 1998 relating to
FNBNE Business Loan Trust 1998-A" with evidence of recording
thereon (provided, however, that where permitted under the laws
of the jurisdiction wherein the Mortgaged Property is located,
the Assignment of Mortgage may be
A-1
<PAGE>
effected by one or more blanket assignments for Business Loans
secured by Mortgaged Properties located in the same county), or
(ii) a copy of such Assignment of Mortgage certified as a true
copy by a Responsible Officer of the Seller where the original
has been transmitted for recording (provided, however, that where
-------- -------
the original Assignment of Mortgage is not being delivered to the
Trustee, each such Responsible Officer may complete one or more
blanket certificates attaching copies of one or more Assignments
of Mortgage relating to the Mortgages originated by the Seller);
4. With respect to those Business Loans secured by Mortgaged
Properties, either: (i) originals of all intervening
assignments, if any, showing a complete chain of title from the
originator to the Seller, including warehousing assignments, with
evidence of recording thereon if such assignments were recorded,
(ii) copies of any assignments certified as true copies by a
Responsible Officer of the Seller where the originals have been
submitted for recording until such time as the originals are
returned by the public recording officer, or (iii) copies of any
assignments certified by the public recording office in any
instances where the original recorded assignments have been lost;
5. With respect to those Business Loans secured by Mortgaged
Properties, either: (i) originals of all title insurance
policies relating to the Mortgaged Properties to the extent the
Seller obtained such policies or (ii) copies of any title
insurance policies or other evidence of lien position, including
but not limited to PIRT policies, limited liability reports and
lot book reports, to the extent the Seller obtains such policies
or other evidence of lien position, certified as true by the
Seller;
6. With respect to these Business Loans secured by other items of
Collateral, the original or certified copy of all filed UCC
financing statements securing such Collateral naming the Seller
as "Secured Party;"
7. For all Business Loans, blanket assignment of all Collateral
securing the Business Loan, including
A-2
<PAGE>
without limitation, all rights under applicable guarantees and
insurance policies;
8. For all Business Loans, irrevocable power of attorney of the
Seller to the Trustee to execute, deliver, file or record and
otherwise deal with the Collateral for the Business Loans in
accordance with the Agreement. The power of attorney will be
delegable by the Trustee to the Servicer and any successor
servicer and will permit the Trustee or its delegate to prepare,
execute and file or record UCC financing statements and notices
to insurers; and
9. For all Business Loans, blanket UCC-1 financing statements
identifying by type all Collateral for the Business Loans in the
Business Loan Pool and naming the Trustee as Secured Party and
the Seller as the Debtor. The UCC-1 financing statements will be
filed promptly following the Closing Date in New York and
Connecticut and will be in the nature of protective notice
filings rather than a true financing statement.
A-3
<PAGE>
EXHIBIT B
[INTENTIONALLY OMITTED]
B-1
<PAGE>
EXHIBIT C
PRINCIPAL AND INTEREST ACCOUNT LETTER AGREEMENT
(date)
To: Marine Midland Bank
140 Broadway, 12th Floor
New York, New York 10005 (the "Depository")
As "Servicer" under the Sale and Servicing Agreement, dated as of
December 1, 1998, relating to the FNBNE Business Loan Notes, Series 1998-A (the
"Agreement"), we hereby authorize and request you to establish an account, as a
Principal and Interest Account pursuant to Section 4.03 of the Agreement, to be
designated as "First National Bank of New England, as Servicer, in trust for the
registered holders of FNBNE Business Loan Notes, Series 1998-A." 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.
FIRST NATIONAL BANK OF NEW ENGLAND
By:_______________________________
Name:
Title:
C-1
<PAGE>
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 amounts deposited at any time in the
account will be insured to the maximum amount provided by applicable law by the
Federal Deposit Insurance Corporation.
MARINE MIDLAND BANK
-------------------
(Name of Depository)
By:______________________________
Name:
Title:
C-2
<PAGE>
EXHIBIT D
[Intentionally Omitted]
D-1
<PAGE>
EXHIBIT E
[INTENTIONALLY OMITTED]
E-1
<PAGE>
EXHIBIT F
FORM OF INITIAL CERTIFICATION
___________, 1998
[Seller]
[Servicer]
Re: Sale and Servicing Agreement FNBNE Business
Notes, Series 1998-A, dated as of
December 1, 1998 between FNBNE Business
Loan Trust 1998-A,and First National Bank
of New England,as Seller and Servicer
-------------------------------------
Gentlemen:
In accordance with Section 2.05 of the above-captioned Sale and
Servicing Agreement (the "Agreement"), the undersigned, as Indenture Trustee,
hereby certifies that, except as noted on the attachment hereto, if any (the
"Loan Exception Report"), it has received for each Business Loan, a Business
Note and a Business File and does declare that the Indenture Trustee will hold
such documents and any amendments, replacements or supplements thereto, for the
benefit of the Noteholders and the Certificateholders. The documents contained
therein appear to bear original signatures. Capitalized but undefined terms
have the meanings set forth in the Sale and Servicing Agreement.
The Indenture Trustee has made no independent examination of any such
documents beyond the review specifically required in the above-referenced Sale
and Servicing Agreement.
F-1
<PAGE>
The Indenture Trustee makes no representations as to: (i) the
validity, legality, sufficiency, enforceability or genuineness of any such
documents or any of the Business Loans identified on the Business Loan Schedule,
or (ii) the collectibility, insurability, effectiveness or suitability of any
such Business Loan.
MARINE MIDLAND BANK,
as Indenture Trustee
By:______________________________
Name: Susan Barstock
Title: Assistant Vice President
F-2
<PAGE>
EXHIBIT F-1
FORM OF INTERIM CERTIFICATION
_________, 1998
[Servicer]
[Seller]
Re: Sale and Servicing Agreement
FNBNE Business Loan Notes, Series 1998-A, dated as of December 1,
1998 between FNBNE Business Loan Trust 1998-A and First National
Bank of New England, as Seller and Servicer
----------------------------------------------------------------
Gentlemen:
In accordance with Section 2.05 of the above-captioned Sale and
Servicing Agreement (the "Agreement"), the undersigned, as Indenture Trustee,
hereby certifies that, except as noted on the attachment hereto, if any (the
"Loan Report"), it has received each of the documents required to be delivered
to it pursuant to Section 2.04 of the Agreement with respect to each [Initial]
[Subsequent] Business Loan listed in the Business Schedules and the documents
contained therein appear to bear original signatures.
The Indenture Trustee has made no independent examination of any such
documents beyond the review specifically required in the above-referenced Sale
and Servicing Agreement.
F-1-1
<PAGE>
The Indenture Trustee makes no representations as to: (i) the
validity, legality, enforceability or genuineness of any such documents or any
of the Business Loans identified on the Business Loan Schedule, or (ii) the
collectibility, insurability, effectiveness or suitability of any such Business
Loan.
MARINE MIDLAND BANK,
as Indenture Trustee
By:______________________________
Name: Susan Barstock
Title: Assistant Vice President
F-1-2
<PAGE>
EXHIBIT F-2
FORM OF FINAL CERTIFICATION
[date]
[Servicer]
[Seller]
Re: Sale and Servicing Agreement dated as of
December 1, 1998 between FNBNE Business Loan Trust 1998-A and
First National Bank of New England, as Seller and Servicer,
relating to FNBNE Business Loan, Series 1998-A
-------------------------------------------------------------
Gentlemen:
In accordance with Section 2.05 of the above-captioned Sale and
Servicing Agreement, the undersigned, as Indenture Trustee, hereby certifies
that, except as noted on the attachment hereto, as to each Business Loan listed
in the Business Loan Schedule (other than any Business Loan paid in full or
listed on the attachment hereto) it has reviewed the documents delivered to it
pursuant to Section 2.04 of the Sale and Servicing Agreement and has determined
that (i) all such documents are in its possession, (ii) such documents have been
reviewed by it and have not been mutilated, damaged, torn or otherwise
physically altered and relate to such Business Loan and (iii) based on its
examination, and only as to the foregoing documents, the information set forth
in the Business Loan Schedule respecting such Business Loan is correct.
MARINE MIDLAND BANK,
as Indenture Trustee
By:______________________________
Name: Susan Barstock
Title: Assistant Vice President
F-2-1
<PAGE>
EXHIBIT G
[INTENTIONALLY OMITTED]
G-1
<PAGE>
EXHIBIT H
BUSINESS LOAN SCHEDULE
H-1
<PAGE>
EXHIBIT I
REQUEST FOR RELEASE OF DOCUMENTS
To: Marine Midland Bank
Corporate Trust Administration
140 Broadway, 12th Floor
New York, New York 10005-1180
Re: Sale and Servicing Agreement relating to FNBNE Business Loan
Notes, Series 1998-A, dated as of December 1, 1998
----------------
In connection with the administration of the pool of Business Loans
held by you, we request the release, and acknowledge receipt, of the (Trustee's
Business File/[specify document]) for the Business Loan described below, for the
reason indicated.
Obligor's Name, Address & Zip Code:
- ----------------------------------
Business Loan Number:
- --------------------
Reason for Requesting Documents (check one)
- -------------------------------
____ 1. Business Loan Paid in Full
(Servicer hereby certifies that all amounts
received in connection therewith have been credited to the
Principal and Interest Account and remitted to the Trustee for
deposit into the Note Distribution Account pursuant to the Sale
and Servicing Agreement.)
____ 2. Business Loan Liquidated
(Servicer hereby certifies that all proceeds of
foreclosure, insurance or other liquidation have been finally
received and credited to the Principal and Interest Account and
remitted to the Indenture Trustee for deposit into the Note
Distribution Account pursuant to the Sale and Servicing
Agreement.)
____ 3. Business Loan in Foreclosure
_____4. Business Loan Repurchased Pursuant to Section 10.01
of the Sale and Servicing Agreement.
I-1
<PAGE>
_____5. Business Loan Repurchased or Substituted Pursuant to Article II or III
of the Sale and Servicing Agreement (Servicer hereby certifies that
the repurchase price or Substitution Adjustment has been credited to
the Principal and Interest Account and/or remitted to the Indenture
Trustee for deposit into the Note Distribution Account pursuant to the
Sale and Servicing Agreement.)
____ 6. Collateral Being Released Pursuant to Section 6.02(f) of the Sale and
Servicing Agreement.
____ 7. Other (explain) ____________________________
_________________________________
If box 1 or 2 above is checked, and if all or part of the Indenture
Trustee's Business File was previously released to us, please release to us our
previous receipt on file with you, as well as any additional documents in your
possession relating to the above specified Business Loan.
If box 3, 4, 5, 6 or 7 above is checked, upon our return of all of the
above documents to you, please acknowledge your receipt by signing in the space
indicated below, and returning this form.
FIRST NATIONAL BANK OF NEW ENGLAND,
As Servicer
By:____________________________
Name: William H. McGaughey
Date:
Documents returned to Indenture Trustee:
Marine Midland Bank
--------------------
Indenture Trustee
By: Susan Barstock
Date:
I-2
<PAGE>
EXHIBIT J
FORM OF LIQUIDATION REPORT
Customer Name:
Account number:
Original Principal Balance:
1. Liquidation Proceeds
Principal Prepayment $________
Property Sale Proceeds _________
Insurance Proceeds ________
Other (Itemize) ________
2. Servicing Advances $________
Monthly Advances ________
Total Advances $________
3. Net Liquidation Proceeds $________
(Line 1 minus Line 2)
4. Principal Balance of the Business
Loan on date of liquidation $________
5. Realized (Loss) or Gain $________
(Line 3 minus Line 4)
J-1
<PAGE>
EXHIBIT K
FORM OF DELINQUENCY REPORT
DELINQUENCY, REO PROPERTY AND FORECLOSURE INFORMATION
<TABLE>
<CAPTION>
Total
Ranges Total Gross Unguaranteed
Series (in days) Acct Loan Amount Interest Amount Ungtd Pct
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 to 29 Days
30 to 59 Days
60 to 89 Days
90 to 179 Days
180 to 719 Days
720 and Over
Foreclosure
REO Property
Total Delinquency
Outstanding by Category
</TABLE>
K-1
<PAGE>
EXHIBIT L
SERVICER'S MONTHLY COMPUTER TAPE FORMAT
The computer tape to be delivered to the Indenture Trustee pursuant to
Section 5.09 shall contain the following information for each Business Loan as
of the related Record Date:
1. Name of the Obligor, address of the Mortgaged Property, if
applicable, and Account Number.
2. The Business Loan Interest Rate.
3. The Monthly Payment.
4. The dates on which the payments were received for the applicable
Due Period and the amount of such payments segregated into the
following categories; (a) total interest received (including
Servicing Fee); (b) principal received; (c) Curtailments received;
and (d) Principal Prepayments received.
5. The Business Loan principal balance at the beginning and end of the
period.
6. The original disbursement date and current maturity date.
7. A "Delinquency Flag" noting that the Business Loan is current or
delinquent. If delinquent, state the date on which the last
payment was received.
8. For any Business Loan that is not either 24 months delinquent or
otherwise determined to be uncollectible, a "Foreclosure Flag"
noting that the Business Loan is the subject of foreclosure
proceedings.
9. For any Business Loan that is not either 24 months delinquent or
otherwise determined to be uncollectible, an "REO Flag" noting that
the Mortgaged Property is an REO Property.
L-1
<PAGE>
10. A "Liquidated Business Loan Flag" noting that the Business Loan is
a Liquidated Business Loan and the Net Liquidation Proceeds
received in connection therewith.
11. Any additional information reasonably requested by the Indenture
Trustee.
L-2
<PAGE>
EXHIBIT 13.1
Financing Manufacturers Worldwide(R)
[GRAPHIC APPEARS HERE]
First International
Bancorp
First International
Bank
1998 Annual Report
<PAGE>
Corporate Profile
First International Bancorp, Inc. and First International Bank, N.A., both
headquartered in Hartford, Connecticut, specialize in providing innovative
credit, trade and financial solutions to small and medium size manufacturing
companies located in the United States and international emerging markets. The
Company offers flexible and attractive terms to borrowers and is a national
leader in the use of commercial loan guarantee programs made available by the
U. S. Small Business Administration, the U. S. Department of Agriculture and the
Export-Import Bank of the U. S. The Company maintains preferred status under
these programs in several jurisdictions and received Ex-Im Bank's "Small
Business Bank of the Year" award for 1997.
[LOGO OF FIRST INTERNATIONAL BANK APPEARS HERE]
www.FirstInterBank.com
<PAGE>
First International Bancorp, Inc.
Index to Consolidated Financial Statements
2 Letter to Shareholders and Clients
4 Summary Financial Highlights
5 Management's Discussion and Analysis of Financial Condition and Results of
Operations
21 Report of Independent Accountants
22 Consolidated Balance Sheets as of December 31, 1998 and 1997
23 Consolidated Statements of Income for the years ended December 31, 1998,
1997 and 1996
24 Consolidated Statements of Changes in Stockholders' Equity for the years
ended December 31, 1998, 1997 and 1996
25 Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997 and 1996
26 Notes to Consolidated Financial Statements
44 Directors and Officers and General Information
1
<PAGE>
To Our Shareholders and Clients
I am pleased to report that 1998 was a year of excellent performance and major
strategic accomplishments for First International Bancorp, Inc. and First
International Bank. Our Company's net income increased approximately 60% to $7.0
million ($.86 per share), which represents the fifth consecutive year of record
earnings. Return on average equity for 1998 was 16% calculated on an equity base
that had grown significantly following our September 1997 public offering.
As a reflection of our Company's continuing geographical expansion and
commitment to financing small and medium size manufacturers worldwide, we
adopted a new logo and changed the banking subsidiary's name to First
International Bank from First National Bank of New England in early 1999. We
have also launched a new interactive website, www.FirstInterBank.com, and invite
you to visit this useful source of information about our Company's products,
resources and initiatives.
In 1998 the Company once again achieved the status of the largest combined
user in the United States of the three primary federal commercial loan guarantee
programs. First International Bank underwrote $121 million in SBA 7(a) loans,
ranking 10th in the nation overall and 4th among banks. The Company finished
second nationally under the USDA's Business & Industry program, with $37 million
in loan originations. For the second year in a row, we were also the largest
user of Ex-Im Bank guarantee and insurance programs in the United States
measured by number of transactions, with 103. The Bank enjoys SBA preferred
lender status in 19 U.S. locations, USDA certified lender status on a national
basis, and Ex-Im Bank AA delegated lending authority nationally for export
working capital lines of credit. We are proud to remain a leader in working with
these agencies to deliver their programs to qualifying manufacturing companies.
[GRAPHIC OF WORLD MAP APPEARS HERE]
Representatives Throughout The World
The Company opened new domestic representative offices during 1998 in
Cleveland, Ohio and Detroit, Michigan, bringing our network of U.S. offices to
11. We plan to open at least two more domestic offices this year in the Midwest,
where there is a high concentration of profile manufacturing companies.
Internationally, we established a new representative relationship with a firm
based in Ghana to cover West Africa. Our international representatives now total
12 and provide us with a presence in most of the major international emerging
markets.
The Company's marketing capabilities were further enhanced in 1998 through
the establishment of strategic alliances with large, national and international
organizations which are leaders in their fields. Products are (or will soon be)
available to our manufacturing clients for equipment finance in conjunction with
six chapters of the National Tooling & Machining Association, for energy finance
in conjunction with the National Rural Utilities Cooperative Finance Corporation
and North American Power Brokers, Inc., and for international trade finance in
association with Panalpina, Inc. In addition, we have entered into a business
relationship with CIGNA Financial Services, Inc. with respect to providing
investment, discount brokerage and cash management services. All investment
related services will be supported by CIGNA Financial Services' registered
representatives. These alliances will help leverage our resources in order to
identify prospects and serve existing clients.
The diversity of our Company's international capabilities in terms of both
locations and products has enabled us to turn global economic turbulence into a
business opportunity. First International Bank finances two-way trade flows, so
that in countries such as Korea and Brazil where currency devaluations have
negatively impacted local demand for U.S. exports, we are actively assisting our
local clients in their effort to export more to the U.S. and other countries.
Conversely, demand for U.S. exports in markets such as Mexico, which recovered
from earlier economic difficulties, is strong and represents a growing source of
export financing business for us. In 1998 our Company obtained private insurance
policies covering our trade financing activities in multiple countries and with
respect to multiple products and borrowers. These policies are complementary to
our use of Ex-Im Bank programs. We lend internationally only in U.S. dollars
(taking no currency
2
<PAGE>
risk), and we continue to see vast opportunities for our Company in the
international marketplace.
1998 was an important year for the Company in terms of increasing the
diversity of our funding sources. Despite volatility in the capital markets
during the second half of the year, we successfully completed two commercial
loan securitizations, obtained commitments for warehouse lines
totaling $125 million, and entered into a $65 million commercial paper conduit
facility. The new funding sources provided us with the opportunity to sell our
last retail branch together with its checking, savings and money market
accounts. Following the closing of this sale, which is planned for March 1999,
the Company will fund its lending operations through a combination of
federally-insured certificates of deposit and capital markets activities. This
diversified wholesale funding strategy is more closely aligned with the
Company's overall business, and allows us to exit the operationally expensive
and highly regulated retail banking business.
I was pleased to announce in December 1998 that Leslie A. Galbraith, First
International Bank's Chief Financial Officer since 1990, was promoted to the
additional positions of President and Chief Operating Officer. Leslie has also
assumed the chairmanship of the Bank's Operating Committee, which is comprised
of Executive Vice Presidents Richard W. Bradshaw, Brian J. Charlebois, David J.
Etter, Paul J. Falvey, James G. Fortsch and Frank P. La Monaca. These management
changes have allowed me to focus more on our strategic direction and business
alliances, product innovation and delivery, and human resources development.
Beginning in February 1999, we welcomed to First International Bank's board of
directors two new members, Dean Goodermote, President and CEO of Process
Software Corporation, and Douglas Woods, President and CEO of Liberty Precision
Industries, Ltd. These two outside directors, who are "sitting" chief executive
officers of their companies, will provide valuable counsel and oversight with
respect to our business.
[PIE CHART APPEARS HERE]
Total Loans Managed at December 31, 1998
Ex-Im Bank 16%
SBA/USDA Loans Guaranteed 42%
Consumer 1%
Other Commercial 24%
Other International 2%
SBA/USDA Loans Unguaranteed 15%
$779 Million
[PHOTO APPEARS HERE]
First International Bank's Operating Committee; standing left to right Dave
Etter, Rich Bradshaw, Jim Fortsch and Paul Falvey; seated left to right Brian
Charlebois, Leslie Galbraith and Frank La Monaca.
Sadly, I must note the passing in August 1998 of Mr. Bernard M. Waldman, a
director of our Company since 1971. Much more than a director, Mr. Waldman was a
beloved friend and inspiration for all who knew him. Our achievements are his
legacy.
On behalf of our employees, I would like to thank you for continuing to
support the Company's exciting and challenging mission in the global
marketplace.
/s/ Brett N. Silvers
Brett N. Silvers
Chairman and Chief Executive Officer
March 1999
[PHOTO APPEARS HERE]
3
<PAGE>
Summary Financial Highlights
(Dollars in Thousands)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Year Ended December 31 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Loans Managed $779,055 $573,545 $380,432 $260,842 $193,369
Non-Interest Income to Net Revenue 68.5% 64.7% 50.6% 38.2% 42.7%
Return on Average Equity 15.9% 20.5% 25.5% 19.3% 11.7%
Return on Average Assets 3.0% 2.5% 2.1% 1.5% .9%
Interest Income $ 18,088 $ 14,625 $ 13,305 $ 11,601 $ 7,997
Interest Expense $ 7,924 $ 6,371 $ 5,741 $ 4,869 $ 3,150
Net Interest Income $ 10,164 $ 8,254 $ 7,564 $ 6,732 $ 4,847
Gain on Loan Sales $ 16,959 $ 11,810 $ 5,844 $ 2,859 $ 2,730
Loan Servicing Income and Other Fees $ 5,153 $ 3,300 $ 1,899 $ 1,294 $ 878
Total Net Revenues $ 32,276 $ 23,364 $ 17,509 $ 10,885 $ 8,455
Operating Expenses $ 17,700 $ 13,801 $ 8,425 $ 6,128 $ 5,129
Provision for Possible Loan Losses $ 3,071 $ 2,239 $ 3,487 $ 1,237 $ 1,683
Net Income $ 7,033 $ 4,429 $ 3,244 $ 2,026 $ 1,060
Basic Earnings Per Share $ .89 $ .70 $ .56 $ .35 $ .18
Diluted Earnings Per Share $ .86 $ .67 $ .56 $ .35 $ .18
Dividend Payout Ratio 13.5% 16.5% 20.3% 8.1% .0%
Average Equity to Average Assets 18.8% 12.2% 8.1% 7.8% 7.9%
Total Capital to Risk Weighted Assets 21.8% 17.6% 11.6% 10.7% 9.3%
Total Assets $273,726 $218,851 $161,642 $141,223 $125,609
Total Loans $113,946 $135,398 $114,627 $106,992 $ 95,118
Total Stockholders' Equity $ 49,071 $ 42,148 $ 14,216 $ 11,602 $ 9,675
Non-performing Loans $ 3,104 $ 2,364 $ 2,252 $ 1,258 $ 2,246
Allowance for Loan Losses $ 4,000 $ 3,100 $ 3,000 $ 2,000 $ 2,000
Allowance for Loan Losses to
Non-performing Loans 129% 131% 133% 159% 89%
Allowance to Total Loans 3.3% 2.3% 2.6% 1.9% 2.1%
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Net Income
[BAR CHART APPEARS HERE]
1998 $7,000,000
1997 $4,400,000
1996 $3,200,000
1995 $2,000,000
1994 $1,100,000
Total Loans Managed
[BAR CHART APPEARS HERE]
1998 $779,000,000
1997 $574,000,000
1996 $380,000,000
1995 $261,000,000
1994 $193,000,000
4
<PAGE>
Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis of the consolidated financial
condition and results of operations of First International Bancorp, Inc. (the
"Company") should be read in conjunction with the Company's consolidated
financial statements, including the related notes thereto, and other
information.
General
First International Bancorp, Inc., a Delaware corporation, is a one bank
holding company incorporated in 1985 and regulated by the Board of Governors of
the Federal Reserve System. Its principal asset and subsidiary is First
International Bank, N.A., (the "Bank") a national banking association
established in 1955 and regulated by the Office of the Comptroller of the
Currency (the "OCC"). The Bank changed its name from First National Bank of New
England on February 1, 1999 to more closely reflect the markets it serves.
In September 1997, the Company completed an underwritten public offering
whereby 1,955,000 shares of common stock were issued for net proceeds of $23.8
million.
On December 31, 1998 the Company entered into an agreement with Hudson
United Bank to sell the Company's last retail branch and its checking, savings
and money market deposits. The Company will retain its certificates of deposit
and continue to offer certificates of deposit to retail and brokered depositors.
The transaction is expected to close by the end of the first quarter of 1999.
(See "Anticipated Changes in Funding Sources" for further discussion of the
funding sources to be used by the Company.)
The Company specializes in providing credit, trade and financial solutions
to small and medium size manufacturing companies located in the United States
and international emerging markets. The Company serves its target market by
offering flexible and attractive terms to borrowers and manages its credit risk
through the combined utilization of commercial loan guarantee programs made
available by three U. S. federal agencies, the U. S. Small Business
Administration (the "SBA"), the U. S. Department of Agriculture (the "USDA") and
the Export-Import Bank of the U. S. ("Ex-Im Bank"), as well as through the use
of private credit insurance policies.
For the federal fiscal year ending September 30, 1998, the Company was the
country's largest Ex-Im Bank lender measured by number of transactions; the
second largest USDA Business and Industry lender measured by dollar volume; and
the tenth largest SBA 7(a) lender measured by dollar volume (and the largest in
New England). The Company maintains preferred status for government guaranteed
lending programs in several jurisdictions.
Except for historical information contained herein, certain matters
discussed in this annual report are "forward looking statements" as defined in
the Private Securities Litigation Reform Act (PSLRA) of 1995, which involve risk
and uncertainties that exist in the Company's operations and business
environment, and are subject to change based on various factors. The Company
wishes to take advantage of the "safe harbor" provisions of the PSLRA by
cautioning readers that numerous important factors discussed below, among
others, in some cases have caused and in the future could cause the Company's
actual results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company. The following include some,
but not all, of the factors or uncertainties that could cause actual results to
differ from projections:
. A general economic slowdown.
. Inability of the Company to continue its growth strategy either
domestically or internationally.
. Disruption in the U. S. capital markets, delaying or preventing the Company
from receiving funding under warehouse lines of credit or completing loan
sales or securitizations.
. Unpredictable delays or difficulties in the development and introduction of
new products and programs.
. Risks associated with government guarantee loan programs, since a
substantial portion of the Company's business still depends upon the
continuation of the various government guarantee loan programs as discussed
below.
The Company believes that it has the product offerings, facilities,
personnel and financial resources for continued business success in competitive
markets. However, future revenues, costs, margins and profits are all influenced
by a number of factors, including those discussed above.
Recent Growth
In contrast to many other banks, the Company derives a majority of its
revenues from non-interest income, principally gains on the sale of commercial
and international loans and related loan servicing income. During the past three
years of operations, the Company has achieved significant earnings growth
primarily as a result of increases in the sale and, most recently, the
securitization of government guaranteed and other commercial loans, net interest
income, which is the difference between interest earned on interest-earning
5
<PAGE>
assets (principally loans) and interest paid on interest-bearing liabilities
(principally deposits), and fee income on loans serviced for others. The Company
has expanded its domestic loan origination activities into the Northeast,
Mid-atlantic and Midwest regions of the United States and its international
presence in emerging markets. The Company plans to continue its U. S. expansion
in 1999 by opening additional representative offices.
- --------------------------------------------------------------------------------
December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(net income in thousands)
Net income ........................ $ 7,033 $ 4,429 $ 3,244
Basic earnings per share .......... $ .89 $ .70 $ .56
Diluted earnings per share ........ $ .86 $ .67 $ .56
Anticipated Changes in Funding Sources
During 1998 and the first quarter of 1999, the Company entered into
transactions that effected changes in the manner in which the Company obtains
funding for its lending business. Such transactions included:
. the sale of the Company's last branch, including checking, savings and
money market accounts;
. establishment of a warehouse loan facility, pursuant to which up to $75
million is available to the Company (based upon the contractual advance
rates against the qualifying principal balance of the loans pledged to
secure the facility);
. a commitment for a second warehouse loan facility pursuant to which up to
$50 million would be available to the Company (based upon the contractual
advance rates against the qualifying principal balance of the loans pledged
to secure the facility; the pledged loans will consist of the unguaranteed
portion of loans guaranteed by the SBA); the Company plans to establish
this facility once SBA approval is received;
. establishment of a commercial paper conduit facility, pursuant to which the
Company has the right to sell commercial revolving lines of credit and
other qualifying loans during the term of the facility. The Company will be
required to retain ownership of subordinated interests in the loans sold to
provide a credit enhancement to the purchaser in varying percentages
depending on the type of loan sold. The Company sold loans totaling
approximately $21 million in December 1998 under this facility;
. a securitization transaction completed in June 1998 pursuant to which the
Company received approximately $24 million from a sale of the unguaranteed
portions of loans originated by the Company that were guaranteed in part by
the SBA; and
. a securitization transaction in December 1998 pursuant to which the Company
received approximately $55 million from a sale of other loans originated by
the Company.
Following the sale of the Company's checking, savings and money market
accounts, the Company expects to obtain funding for its operations from retail
and brokered certificates of deposit, warehouse lines of credit, the sale of
loans on a loan-by-loan basis, through private placement securitizations and
from the sale of loans to a commercial paper conduit. See "Quantitative and
Qualitative Disclosures about Market Risk and Asset/Liability Management" for
further discussion of certain risks associated with such funding sources.
The following discussions make reference to average balances of certain
assets and liabilities as well as volume and rate changes. For further
information with respect to these matters see the tables set forth on pages 11
and 12.
Accounting for Loan Sales
Gains from loan sales, securitizations and servicing income represented
approximately 66% of the total net interest income and non-interest income for
the year ended December 31, 1998. Detailed below is a discussion of the relevant
accounting principles governing loan sales and securitizations and the Company's
servicing activities.
SBA and USDA Loan Sales
The majority of the Company's SBA and USDA guaranteed loans are variable
rate, indexed to the Prime Rate as quoted in The Wall Street Journal ("Prime").
The Company generally sells the guaranteed portions of these loans at
origination at a premium. For example, if the Company sells a 20-year SBA or
USDA guaranteed mortgage loan with an interest rate of Prime plus 1.50%, the
Company receives a premium because the market demands a yield of less than Prime
plus 1.50%. Investors in the guaranteed portions demand rates between U.S.
Treasury bills and commercial loans due to prepayment risks and other factors
inherent in the guaranteed loans. After the loan sale, an investor will receive
the pro rata principal and pro rata interest at the note rate less any ongoing
guarantee and Company servicing fees. When the Company sells an SBA loan for a
premium, it will generally retain the minimum required servicing fee of 1%. The
Company does elect from time to time to retain a higher servicing fee and sell a
loan for a lesser premium or at par.
The Company does sell the unguaranteed portions of the SBA and USDA loans
on a loan-by-loan basis at or above par. In accordance with SBA and USDA
regulations, the Company is required to retain a 5% interest in the unguaranteed
portion of the loan when some of the unguaranteed portion is sold on a
loan-by-loan basis. The SBA has recently published new rules regarding the
securitization of the unguaranteed portions of SBA loans which are discussed
below. In June 1998 the Company completed a securitization of the unguaranteed
portions of SBA loans and expects to utilize securitizations for the sale of the
unguaranteed portions of SBA and USDA loans. See "Securitization and Sale of
Loans."
When the Company sells part of a loan, the gain recognized is based on the
relative fair market value of the loan sold, the portion of the loan retained
and any other assets created in the transaction. The Company creates a servicing
asset when it sells loans on a servicing-retained basis with a
6
<PAGE>
servicing fee in excess of "adequate compensation." This servicing asset is
equal to the net present value of the estimated cash flows in excess of such
compensation. The original principal balance of a loan must be allocated between
the guaranteed portion sold, the unguaranteed portion retained and the servicing
asset, resulting in a discount being recognized on the unguaranteed retained
portion of the loan.
In connection with calculating gain on sale, the Company must make certain
assumptions which include (i) the amount of adequate compensation used to
determine the amount of the servicing asset that the Company will recognize at
the date of the sale, (ii) the estimated life of the underlying loan used in
projecting the time period over which the Company will receive the servicing
fee, and (iii) the discount rate used in the present value calculation of the
servicing asset.
Prior to January 1, 1998, management defined adequate compensation as 40
basis points because there was no efficient market to determine market price.
Effective January 1, 1998, based on estimates from potential sub-servicers,
adequate compensation was defined as 20 basis points. Furthermore, the Company
estimates its cost to service loans plus a normal profit to be less than 20
basis points. The constant prepayment rates utilized by the Company in
estimating the lives of the loans depend on the original term of the loan,
industry and Company historical data. Such constant prepayment rates range from
6% to 12% per annum. The discount rate utilized in the net present value
calculation is equal to 400 basis points above the then current two year U.S.
treasury rate, which for 1998 was approximately 8-10%.
Actual prepayment rates may be affected by a variety of economic and other
factors, including prevailing interest rates and the availability of alternative
financing. The effect of these factors varies depending on the types of loans.
Estimated prepayment rates are based on management's expectations of future
prepayments, and, while management believes that the term of amortization and
market interest rate on the variable rate loans somewhat reduce the prepayment
risk, there can be no assurance that management's prepayment estimates are
accurate. If the actual prepayment rate of loans sold is higher than projected
at the time such loans were sold, the carrying value of the servicing asset
would be reduced by a charge to earnings. Because the Company also recognizes a
discount on the retained loan, an adjustment to the discount would be made which
would partially offset the effect of the negative servicing adjustment. If the
actual prepayment rate for loans sold is lower than estimated, the carrying
value of the servicing asset is not increased, although the total income would
exceed previously estimated amounts.
The servicing asset is amortized against the servicing fee income received
monthly, on an effective interest method, and the discount on the retained loan
is accreted to interest income on an effective interest method. The servicing
asset is carried at the lower of amortized cost or net realizable value.
Ex-Im Bank and Other Commercial Loan Sales
Sales of 100% of Ex-Im Bank guaranteed medium term loans are generally made
at the carrying value, although the Company receives a servicing fee above the
20 basis points defined as adequate compensation resulting in the recognition of
a gain at the time of the sale equal to the calculated servicing asset and any
net loan origination fees. The Company uses a discount factor on the estimated
cash flows equal to 400 basis points above the then current two-year U.S.
treasury rate. The Company adjusts for prepayments on these 3-5 year term loans
as they occur, although prepayments are minimal due to the lack of alternative
U.S. dollar financing in the international markets served and the fact that such
Ex-Im Bank financing is unsecured.
The Company also sells 100% of certain other unguaranteed commercial loans
and certain residential and other consumer loans on a loan by loan basis where
no portion of the loan is retained on the Company's balance sheet.
Securitization and Sale of Loans
Beginning in 1998, the Company has securitized and sold certain whole loans
and the unguaranteed portions of certain government guaranteed loans that it
originates. In such securitization transactions the Company sells a pool of
loans to a trust, which in turn issues certificates representing beneficial
ownership interests in the trust or which issues notes and sells such securities
through private placement transactions. For all securitizations, the Company is
the servicer of the underlying loans. In order to provide credit enhancement for
the certificates or notes, the Company will retain subordinated certificates or
notes and establish a cash reserve account, all of which represent "retained
interests" in the securitizations and are referred to as such in the discussion
below. The Company established special purpose subsidiaries to facilitate the
securitizations. The unguaranteed portions of SBA loans utilized "FNBNE SBA
Holdings, Inc.", the commercial term loan securitization utilized "FNBNE
Business Loans Holdings, Inc." and the sale of commercial revolving lines of
credit to the commercial paper conduit was completed through "FNBNE Funding
Corp." Generally, the Company retains risks in the form of default, prepayment
and, in the revolving lines of credit, interest rate risk.
The interest-only strips retained by the Company are recorded at estimated
fair value and classified as an investment available-for-sale. The fair value of
an interest-only strip is determined by computing the present value of the
estimated cash flows to the Company as servicer, after providing for losses and
prepayments and, in certain transactions, estimated interest rate risk.
The Company as servicer, by contract, receives annual servicing fees
ranging from 40-100 basis points of the outstanding principal balance of the
loans and the rights to any additional cash flows arising after the investors in
the securitization trust have received the contracted return. The investors and
the securitization trust have no recourse to the Company's other assets. The
Company's retained interests
7
<PAGE>
are subordinate to the investor's interests. SBA regulations require that the
Company hold retained interests in the unguaranteed portion of securitized loans
equal to 10% of the transaction.
Key economic assumptions used in calculating a gain on the transaction and
in calculating the gain on sale and interest-only strips resulting from the
securitizations and commercial paper sale completed during the year are as
follows:
- --------------------------------------------------------------------------------
Commercial
Securitizations Paper Sale
------------------------- ------------
Unguaranteed
Portions Term Revolving
of SBA Loans Commercial Commercial
-------------- ----------- -----------
Prepayment speed ........................... 8.0% 8.0% 7.5%
Weighted-average life (in years) ........... 13.75 10.65 3.0
Aggregate expected credit losses ........... 5.74% 4.22% 1.25%
Discount rate for servicing cash flows ..... 9.48% 8.43% 8.47%
Results of Operations
Comparison of the Years Ended December 31, 1998, 1997 and 1996
Net Income. Net income totaled $7.0 million in 1998 an increase of $2.6
million or 59% from 1997 net income of $4.4 million, which had increased $1.2
million or 37% from 1996 net income of $3.2 million.
The increase in 1998 net income reflects a $5.2 million or 44% increase in
the gain on loan sales to $17.0 million for 1998. Included in the gains for 1998
are $4.1 million of gains recognized on the securitization of certain loans.
Gains from the sale of guaranteed loans increased $2.7 million or 29%. Operating
expenses increased $3.9 million in 1998 reflecting additions to lending and
credit administration personnel and the related office expense associated with
increased employees.
The increase in 1997 net income from 1996 reflects an increase in the sales
of all loan types as the Company continued its domestic and international
geographic expansion. Gains on loan sales increased by $6.0 million or 100% to
$11.8 million from 1996 to 1997. The results for fiscal 1996 included a $2.2
million gain on the sale of a suburban branch facility and related deposits.
Net Interest Income. Net interest income increased $1.9 million or 23% to
$10.2 million in 1998 due to a $47.9 million or 29% increase in average
interest-earning assets offset by a 42 basis point decrease in the yield on
earning assets. The decrease in the earnings yield was a result of Prime rate
decreases totaling 75 basis points over the last four months of the year and a
reflection of the increase in assets held in liquid investment securities. The
reduced yield on assets was somewhat mitigated by a relatively flat cost of
funds. Average interest-bearing liabilities increased $30.8 million or 25% while
the cost of funds decreased 2 basis points.
Net interest income increased $690,000 or 9% to $8.3 million in 1997 from
1996 due to a $16 million or 12% increase in average interest-bearing assets
offset by an 11 basis point decrease in the margin. The decrease in the margin
was the result of a more significant portion of assets held in investment
securities and an increase in the portion of interest-bearing liabilities in the
Company's higher rate premier money market savings account. Average
interest-bearing liabilities increased $6.4 million or 6%.
Interest Income. Interest income increased $3.5 million or 24% to $18.1
million in 1998 from $14.6 million in 1997 due to a $33.9 million or 26%
increase in average loans outstanding and a $13.9 million or 100% increase in
average investments. The yield on loans and investments decreased by 34 basis
points and 24 basis points, respectively, reflecting the 75 basis point decrease
in the Prime rate during 1998.
Interest income increased $1.3 million or 10% to $14.6 million in 1997 from
$13.3 million in 1996 due to a $7.3 million or 6% increase in average loans
outstanding and a $8.6 million or 82% increase in average investments. The yield
on investments decreased 10 basis points due to the shorter term investments
made in 1997.
Interest Expense. Interest expense increased $1.5 million or 23% to $7.9
million from $6.4 million in 1998 due to a $31 million or 25% increase in
interest bearing deposits. The increase in average balances was mitigated by a
relatively flat cost of funds for interest bearing liabilities, which decreased
by 2 basis points. The premier money market accounts average balance increased
$20 million or 27% during 1998. Interest expense increased $1.0 million on these
deposits to $4.9 million in 1998 from $3.9 million in 1997, although the cost of
funds remained flat. A $5.1 million or 17% increase in non-interest bearing
demand deposits contributed to keeping the overall cost of liabilities to 4.18%
for 1998 or a total increase of 4 basis points from 1997.
Interest expense increased $630,000 or 11% to $6.4 million in 1997 from
$5.7 million in 1996 due to a 14 basis point increase in the average rate paid
on the Company's premier money market accounts, as the underlying external index
increased during 1997 and greater reliance was placed on these accounts to fund
balance sheet growth. Total average deposits increased 5% while the average
balance of the money market savings accounts increased 18% in 1997. An increase
in the rates offered for time deposits due to competitive demands resulted in a
26 basis point increase in the cost of interest bearing liabilities, although a
$4.2 million, or 17% increase in non-interest bearing demand deposits held the
overall cost of liabilities to 4.14% for 1997, representing a 13 basis point
increase for 1997.
Provision for Possible Loan Losses. The provision for possible loan losses
totaled $3.1 million in 1998, $2.2 million in 1997 and $3.5 million in 1996. The
provision is affected by net loan charge-offs, changes in the level and mix of
loans, changes in asset quality and general economic conditions. The allowance
for loan losses balance was increased by $900,000 or 29% to $4.0 million at
December 31, 1998. See "Allowance for Loan Losses."
8
<PAGE>
Non-Interest Income. The components of non-interest income are detailed
below:
- --------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Non-interest income:
Gain on loan sales:
SBA sales ................................ $ 6,101 $ 5,056 $ 3,558
USDA sales ............................... 3,390 1,901 805
Ex-Im working capital sales .............. 474 251 201
Ex-Im medium term sales .................. 2,274 2,305 340
Unguaranteed portions of
SBA and USDA sales ..................... 436 1,522 842
Other commercial sales ................... 190 775 98
Loan-backed securitizations .............. 4,094 -- --
------- ------- -------
Gain on loan sales ..................... 16,959 11,810 5,844
Loan servicing income and fees ............. 4,353 2,618 1,475
Other non-interest income .................. 703 438 424
Income on stockholder note receivable ...... 64 244 --
Gain on securities sales ................... 33 --
Gain on branch sale ........................ -- -- 2,202
------- ------- -------
Total non-interest income .............. $22,112 $15,110 $ 9,945
======= ======= =======
Non-interest income increased $7.0 million or 46% to $22.1 million in 1998
from $15.1 million in 1997 due to a $5.1 million increase in gain on loan sales
and securitizations and a $1.7 million increase in loan servicing income.
Gains on the guaranteed portions of SBA and USDA loan sales increased $2.5
million or 36% in 1998 reflecting the continuing contribution of the Company's
four New England representative offices and the maturation of the five offices
opened in 1997. The $223,000 or 89% increase in gains on Ex-Im working capital
loan sales reflects the increased marketing and cross selling efforts by the
Company's lenders. Gains on the sale of Ex-Im Bank medium term loans were
relatively flat in 1998 as compared to 1997 as the Company's international
lenders also originated loans under a newly introduced privately-insured short
and medium term loan program which provides an alternative to the Ex-Im Bank
guaranteed loans to foreign buyers of U.S. made goods. The insurance, which
covers up to 95% of the commercial risk, is provided by a major triple A rated
private company. The Company plans to include these privately-insured loans in
securitizations in 1999.
In 1998, the Company completed two securitizations and a sale to a
commercial paper conduit; gains on these transactions totaled $4.1 million. (See
"Loan Securitizations.")
Although most of the unguaranteed portions of SBA loans were included in
the June 1998 SBA Loan-backed securitization, the Company did complete sales of
the unguaranteed portions of SBA and USDA loans on a non-recourse,
servicing-retained loan-by-loan basis. In 1998 the gain on these sales was
$436,000 on sales of loans totaling $8.2 million. In 1997, gains from the sale
of unguaranteed portions of SBA and USDA loans totaled $1.5 million on sales of
$29.2 million.
Loan servicing income comprises the servicing fees received on loans sold
on a servicing retained basis, net of amortization of the servicing asset.
- --------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Loan Servicing Income and Fees
Loan servicing income:
SBA guaranteed loans ..................... $ 1,716 $ 1,203 $ 921
USDA guaranteed loans .................... 348 278 151
Ex-Im working capital loans .............. 225 186 56
Ex-Im medium term loans .................. 448 264 43
Other commercial loans ................... 176 123 65
Securitized loans ........................ 53 -- --
Residential and consumer loans ........... 51 64 59
-------- -------- --------
Total loan servicing income ........ 3,017 2,118 1,295
Other loan fees ............................ 1,336 500 180
-------- -------- --------
Total loan servicing income
and fees ....................... $ 4,353 $ 2,618 $ 1,475
======== ======== ========
Loans serviced for others
(at period end)
Outstanding balance .................... $656,532 $429,077 $153,850
======== ======== ========
The increases in total loan servicing income reflect the growth of the
servicing portfolios. The $899,000 or 42% increase in loan servicing income to
$3.0 million in 1998 reflects the $185.4 million or 62% increase in the average
balance of commercial loans serviced for others to $486.2 million in 1998 from
$300.8 million in 1997. The 64% increase in loan servicing income to $2.1
million in 1997 from $1.3 million in 1996 reflects the $115.1 million or 62%
increase in the average balance of loans serviced for others over the period.
Although servicing income continues to increase, the margin of servicing
income to serviced loans has decreased as a result of an increase in the
servicing portfolio of Ex-Im term loans and unguaranteed commercial loans which
carry a lower servicing fee.
Other loan fees are comprised primarily of fees earned on letters of
credit, which increased $116,000 or 34% to $461,000 in 1998 from $345,000 in
1997 due to greater demand from the Company's exporting borrowers who have the
need for letters of credit to support their trade activities. Included in other
loan fees is a $97,000 gain on the sale of residential mortgage servicing rights
to 168 residential mortgage loans as the Company divested operational functions
not directly related to its primary commercial loan servicing business.
Additionally, fees forfeited by potential borrowers who chose not to close loans
with the Company increased by $174,000 to $231,000 in 1998 from $57,000 in 1997.
The non-interest income increase of $5.2 million in 1997 from 1996 reflects
a $6.0 million increase in gain on loans sales and a $1.1 million increase in
the loan servicing income, offset by the $2.2 million non-recurring gain on the
sale of the Company's suburban branch facility and its deposits in 1996.
9
<PAGE>
The servicing asset for loans sold is as follows:
- --------------------------------------------------------------------------------
At December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Servicing Asset
SBA .............................. $4,499 $3,155 $3,100
USDA ............................. 900 375 483
Ex-Im medium term ................ 2,749 2,025 374
Other commercial ................. 867 124 181
------ ------ ------
Total servicing asset .......... $9,015 $5,679 $4,138
====== ====== ======
In addition to the above, interest-only strips from the loan-backed
securitizations and sale to the commercial paper conduit facility completed in
1998 totaling $4.1 million are included in the Company's available-for-sale
investment portfolio.
Non-Interest Expense. Increases in non-interest expense reflect the
Company's growth over the periods as indicated below:
- --------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Non-interest expense:
Salaries and benefits ................ $ 11,235 $ 9,537 $ 5,089
Occupancy ............................ 1,523 985 774
Furniture and equipment .............. 1,007 692 462
Outside services ..................... 773 556 321
Office expenses ...................... 834 556 421
Marketing ............................ 1,453 847 691
Other ................................ 875 628 667
-------- -------- --------
Total non-interest expense ......... $ 17,700 $ 13,801 $ 8,425
======== ======== ========
Selected Data
Total servicing portfolio ............ $779,055 $573,544 $380,432
======== ======== ========
Number of loans serviced ............. 2,050 1,938 1,519
======== ======== ========
Number of total personnel ............ 182 131 92
======== ======== ========
Number of loan officers .............. 69 46 26
======== ======== ========
Non-interest expenses increased $3.9 million or 28% in 1998 from 1997 due
to a 39% increase in personnel. The number of loan officers increased by 50% to
69 in 1998 as two new domestic representative offices were opened and the
existing offices and international business units were further staffed. The
remaining additions to personnel were primarily in the credit administration and
loan servicing business units. Geographic expansion and personnel additions
resulted in an increase in occupancy and related expenses as new offices were
leased and additional office space in the Company's Hartford, Connecticut
headquarters was occupied.
Marketing expense increased $606,000 or 72% in 1998 reflecting increased
expenses associated with the marketing and referral activities of the Company's
international Master Agents. These expenses increased $281,000 to $412,000 in
1998. Domestic and international travel expenses also increased reflecting the
Company's continued geographic expansion. The $217,000 or 39% increase in
outside services reflects the increase in accounting and legal fees associated
with the increased reporting requirements of an SEC registrant and the diligence
on banking laws in each of the new states and countries where domestic and
international representative offices were opened in 1998.
Non-interest expenses increased $5.4 million or 64% in 1997 from 1996 due
to a 42% increase in personnel as five new representative offices were opened
and the number of Hartford based loan officers in both the domestic and
international business units was increased during the year. Salary and benefits
expense for 1997 also included approximately $636,000 associated with bonuses
paid to officers in connection with the successful completion of the September
1997 public offering.
Marketing expenses increased $156,000 or 23% in 1997 reflecting the
increase in international activity as the Company finalized Master Agency
agreements in targeted countries. The $235,000 or 73% increase in 1997 from 1996
in outside services reflected the increase in legal fees associated with the
Master Agency agreements as well as new product development and state banking
law diligence associated with the opening of the five domestic representative
offices.
The Company's efficiency ratios, calculated as the ratio of non-interest
expenses to the sum of net interest income and non-interest income, excluding
the 1996 gain on the branch sale were 55%, 59% and 55% for the years ended
December 31, 1998, 1997 and 1996, respectively.
Income Taxes. The effective income tax rates for the years ended December
31, 1998, 1997 and 1996 were 38.9%, 39.5% and 42.0%, respectively, reflecting a
1% decrease in the State of Connecticut statutory tax rate in 1998 and a $34,000
State of Connecticut tax refund received in September 1998 that resulted from a
statutory change relating to the 1991 through 1995 tax years.
10
<PAGE>
The following table sets forth the components of the Company's net interest
income and yield on average interest earning assets and rate on interest bearing
liabilities.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
For the Years Ended
December 31, 1998 December 31, 1997 December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average Earned/ Yield/ Average Earned/ Yield/ Average Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
-------------------------- ------------------------------- -----------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Total interest earning assets:
Loans (1)
Commercial ........................... $158,604 $ 15,016 9.47% $120,913 $12,002 9.93% $109,637 $ 10,882 9.93%
Residential .......................... 4,847 392 8.09% 8,129 595 7.32% 12,848 1,059 8.24%
Other consumer ....................... 1,247 114 9.15% 1,668 156 9.35% 874 86 9.84%
-------- -------- ----- -------- ------- ----- -------- -------- -----
Total Loans ............................ 164,698 15,522 9.42% 130,710 12,753 9.76% 123,359 12,027 9.75%
Investment securities(2) ............... 19,793 1,154 5.83% 19,085 1,156 6.06% 10,495 646 6.16%
Federal funds sold ..................... 26,310 1,412 5.37% 13,139 716 5.45% 12,153 632 5.20%
-------- -------- ----- -------- ------- ----- -------- -------- -----
Total investment securities and
federal funds sold ................... 46,103 2,566 5.57% 32,224 1,872 5.81% 22,648 1,278 5.64%
-------- -------- ----- -------- ------- ----- -------- -------- -----
Total earning assets ..................... 210,801 18,088 8.56% 162,934 14,625 8.98% 146,007 13,305 9.11%
-------- ----- ------- ----- -------- -----
Total non-earning assets ................. 25,190 14,957 11,485
-------- -------- --------
Total assets ............................. $235,991 $177,891 $157,492
======== ======== ========
Total interest bearing liabilities:
Deposits
Interest bearing demand deposits ..... $ 8,964 $ 212 2.37% $ 7,406 $ 183 2.47% $ 8,705 $ 241 2.77%
Premier money market ................. 92,591 4,928 5.32% 72,965 3,869 5.30% 61,519 3,176 5.16%
Other savings ........................ 9,889 295 2.98% 6,268 135 2.15% 12,607 386 3.06%
Certificates of deposit .............. 34,184 1,934 5.66% 30,825 1,786 5.79% 28,384 1,564 5.51%
IRA certificates of deposit .......... 9,310 527 5.66% 6,552 364 5.56% 6,436 347 5.39
-------- -------- ----- -------- ------- ----- -------- -------- -----
Total Deposits ........................... 154,938 7,896 5.10% 124,016 6,337 5.11% 117,651 5,714 4.86%
Other borrowings ......................... 605 28 4.63% 702 34 4.84% 623 27 4.33%
-------- -------- ----- -------- ------- ----- -------- -------- -----
Total interest bearing liabilities ..... 155,543 7,924 5.09% 124,718 6,371 5.11% 118,274 5,741 4.85%
-------- -------- ----- -------- ------- ----- -------- -------- -----
Non-interest bearing liabilities
Demand deposits ........................ 34,136 29,066 24,862
Other liabilities ...................... 2,042 2,458 1,630
-------- -------- --------
Total non-interest bearing liabilities ... 36,178 31,524 26,492
Stockholders' equity ..................... 44,270 21,649 12,726
-------- -------- --------
Total liabilities and
stockholders' equity.................... $235,991 $177,891 $157,492
======== ======== ========
Net interest income/net interest spread .. $ 10,164 3.47% $ 8,254 3.87% $ 7,564 4.26%
======== ===== ======== ===== ======== ======
Net interest margin .................... 4.82% 5.07% 5.18%
====== ===== ======
Average interest earning assets/average
interest bearing liabilities ............ 135.53% 130.64% 123.45%
======= ======= =======
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) For purposes of these computations, non-accruing loans are included in the
average balances.
(2) The yield does not give effect to changes in fair value that are reflected
as a component of stockholders' equity.
11
<PAGE>
The following rate/volume analysis shows the portions of the net change in
interest income due to changes in volume or rate. The changes in net interest
income due to both volume and rate have been allocated proportionally to changes
due to volume and changes due to rate.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, Year Ended December 31,
1998 Compared to 1997 1997 Compared to 1996
Changes due to: Changes due to:
-------------------------------- ---------------------------------
Volume Rate Total Volume Rate Total
-------------------------------- ---------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Increase (decrease) in net interest income due to:
Loans
Commercial loans ................................ $ 3,568 $(554) $ 3,014 $ 1,119 $ 1 $ 1,120
Residential loans ............................... (265) 62 (203) (346) (118) (464)
Other consumer loans ............................ (39) (3) (42) 74 (4) 70
------- ----- ------- ------- ----- -------
Total loans ................................... 3,264 (495) 2,769 847 (121) 726
Investment securities ............................. 42 (44) (2) 520 (10) 510
Federal funds sold ................................ 707 (11) 696 54 30 84
------- ----- ------- ------- ----- -------
Total investments and federal funds sold ...... 749 (55) 694 574 20 594
------- ----- ------- ------- ----- -------
Total interest earning assets ................. 4,013 (550) 3,463 1,421 (101) 1,320
------- ----- ------- ------- ----- -------
Deposits
Interest-bearing demand deposits ................ 37 (8) 29 (32) (26) (58)
Premier money market savings .................... 1,043 16 1,059 607 86 693
Other savings ................................... 108 52 160 (136) (115) (251)
Time deposits ................................... 189 (41) 148 141 81 222
IRA time deposits ............................... 156 7 163 6 11 17
------- ----- ------- ------- ----- -------
Total deposits ................................ 1,533 26 1,559 586 37 623
FHLB advances ..................................... (5) (1) (6) 4 3 7
------- ----- ------- ------- ----- -------
Total interest-bearing liabilities ............ 1,528 25 1,553 590 40 630
------- ----- ------- ------- ----- -------
Change in net interest income ................. $ 2,485 $(575) $ 1,910 $ 831 $(141) $ 690
======= ===== ======= ======= ===== =======
</TABLE>
Financial Condition
General. Total assets increased $54.9 million or 25% to $273.7 million at
December 31, 1998 from $218.9 million at December 31, 1997 and $57.3 million or
36% from the December 31, 1996 balance of $161.6 million. These increases
reflect increases in the receivables from loans sold, loan servicing assets and
federal funds which was funded by growth in deposit accounts, retained earnings
and net proceeds from the Company's September 30, 1997 public offering.
Cash and Cash Equivalents. Cash and cash equivalents increased by $40.9
million or 235% to $58.3 million at December 31, 1998 reflecting receipt of the
proceeds from commercial loan securitizations completed in December. The cash
balances were relatively flat at $17.4 million at December 31, 1997 from $18.9
million at December 31, 1996. In 1998 the Company maintained greater funds on
hand as federal funds sold which provided overnight liquidity for the Company's
increased volume of loan originations.
Investment Securities. The investment securities portfolio increased $13.3
million or 60% to $35.6 million at December 1998 from $22.3 million at December
31, 1997 and increased $6.4 million or 40% in 1997 from the December 31, 1996
balance of $15.9 million. The portfolios have historically been comprised of
U.S. Treasury and other U.S. government mortgage-backed securities and
collateralized mortgage obligations with average lives of less than five years.
As a result of the Company's 1998 securitizations, the portfolios include $15.6
million of rated and unrated subordinate interests in securities and
interest-only strips totaling $4.1 million from the transactions. Refer to Note
2 of the Company's consolidated financial statements for additional information.
Loans. Loans decreased by $21.7 million or 17% to $108.9 million at
December 31, 1998 from $130.6 million at December 31, 1997 and increased $21.2
million or 19% from $109.4 million at December 31, 1996. The decrease in the
loan portfolios is the result of the successful securitization of $113.3 million
of unguaranteed commercial loans during 1998, a portion of which was comprised
of loans originated in prior years.
Loan Securitizations. During 1998 the Company completed two commercial loan
securitization transactions and a sale to a commercial paper conduit involving
the issuance of $113.3 million of senior and subordinated securities.
Approximately 56% of the $117.1 million loans included in the securitizations
were originated in 1998. In connection with the "SBA Loan Backed Series 1998-1",
completed in June 1998, a $24.2 million Class A certificate rated AA by Moody's
Investor Services, Inc. was sold in a private placement. A $2.7 million Class B
certificate rated BBB by Moody's Investor Services, Inc. is held by the Company.
Related to "Business Loan Trust 1998-A" backed by commercial term loans and
completed in December 1998, a $55 million senior note rated AAA by Duff and
Phelps Credit Rating Co. and Aaa by Moody's Investor Services, Inc. was
12
<PAGE>
sold in a private placement. A $3.2 million A rated note, a $3.2 million BBB
rated note and a $3.1 million unrated note are held by the Company from this
securitization. A $21.4 million sale to an asset-backed commercial paper conduit
facility also occurred in December 1998. The Company holds a $3.8 million
subordinated interest to the senior $21.4 million loans sold.
In 1998, cash proceeds from the securitization of commercial loans totaled
$85.3 million net of subordinated certificates and notes and the required
initial deposits to the cash reserves held by the Company.
The following table summarizes the Company's 1998 securitization
transactions and the commercial paper sale.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Commercial
Securitizations Paper Sale
----------------------------------- --------------
Unguaranteed
Portions Term Revolving
of SBA Loans Commercial Commercial
--------------- ------------ --------------
(dollars in thousands)
<S> <C> <C> <C>
Total loans securitized or sold ................. $26,901 $65,000 $25,205
Senior certificates ............................. $24,210 $55,250 $21,424
Subordinate interests held
by Company ..................................... $ 2,691 $ 9,750 $ 3,781
Total cash reserve requirement .................. 7% 10% N/A
Initial cash reserve requirement ................ 3% 7% N/A
Initial cash reserve deposit .................... $ 807 $ 4,550 N/A
Gain recorded ................................... $ 2,648 $ 1,052 $ 394
Gain as a percentage of loans securitized ....... 9.84% 1.62% 1.56%
Month closed .................................... June December December
</TABLE>
The significantly higher gain, stated as a percentage of loans securitized,
for the unguaranteed portions of SBA loans reflects the fact that such loans are
carried at a discount following the sale of the guaranteed portions and the
stronger capital markets environment in June 1998.
Allowance for Loan Losses. The Company reviews the adequacy of the
allowance for loan losses quarterly. The allowance totaled $4.0 million at
December 31, 1998, an increase of $900,000 or 29% from the $3.1 million balance
at December 31, 1997, which was a slight increase from the $3.0 million balance
at December 31, 1996.
<TABLE>
<CAPTION>
Activity in the Allowance for Loan Losses
- ------------------------------------------------------------------------------------------
At December 31,
1998 1997 1996
- ------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Balance of allowance for loan
losses at the beginning of the period ............... $ 3,100 $ 3,000 $ 2,000
Charge-offs:
Commercial ..................................... 876 279 168
SBA ............................................ 775 262 478
Investor mortgage .............................. 582 1,395 1,730
Private ........................................ 83 46 27
USDA ........................................... -- 68 --
Residential and other consumer ................. 8 195 124
-------- -------- --------
Total charge-offs ............................ 2,324 2,245 2,527
-------- -------- --------
Recoveries:
Commercial ..................................... 30 77 16
SBA ............................................ -- 13 --
Investor mortgage .............................. 123 6 13
Private ........................................ -- -- 10
Residential and other consumer ................. -- 10 1
-------- -------- --------
Total recoveries ............................. 153 106 40
-------- -------- --------
Net charge-offs ..................................... 2,171 2,139 2,487
Provision for loan losses ........................... 3,071 2,239 3,487
-------- -------- --------
Balance of allowance for loan losses at end of period $ 4,000 $ 3,100 $ 3,000
======== ======== ========
Total loans ......................................... $113,946 $135,398 $114,627
======== ======== ========
Allowance to total loans ............................ 3.3% 2.3% 2.6%
======== ======== ========
Net charge-offs/average outstanding loans ........... 1.37% 1.71% 2.12%
======== ======== ========
</TABLE>
13
<PAGE>
During 1998, the trend in net charge-offs as measured against average
outstanding loans continued to decline. Included in net charge-offs are SBA loan
charge-offs which represent losses realized on the unguaranteed portion of SBA
loans after the liquidation of collateral.
The Company believes that the increase in charge-offs emanating from the
SBA and commercial portfolios reflects the normal seasoning of these portfolios.
As the Company generally extends both SBA and commercial loans to the same
borrowers, it is expected that there will be a high degree of correlation as to
the changes in credit losses from these two portfolios.
The Company monitors the performance of the portfolios by use of Static
Loss Pool Analysis. For purposes of this analysis, seasoned portfolios are
defined as having been originated at least 8 quarters prior to the analysis.
Using a 22-quarter time period, the SBA portfolio has generated an average
annual loss of 73 basis points. During the same time period, the commercial loan
portfolio has generated an average annual loss of 50 basis points. The average
annual losses arising from originations in the most recent eight quarters have
been substantially below the levels of the "seasoned" portfolios.
Net charge-offs from the investor mortgage portfolio, which is comprised of
multi-family urban residential units located in various Connecticut inner
cities, represented 25%, 62% and 69% of the total charge-offs for the years
ended 1998, 1997 and 1996, respectively. The outstanding balance of this
portfolio at December 31, 1998 totaled $3.1 million.
The Company tracks charge-offs by relationship and has noted no appreciable
increase in the number of relationships charged off. For the years ended
December 31, 1998, 1997 and 1996, the charge-offs were comprised of 16, 16 and
21 lending relationships, respectively. The Company estimates that it has
approximately 998 commercial lending relationships at December 31, 1998.
The following table sets forth the breakdown of the allowance for loan
losses by loan category at the dates indicated. Management believes that the
allowance can be allocated by category only on an approximate basis, and
therefore allocation of the allowance to each category is not necessarily
indicative of future losses and does not restrict use of the allowance to absorb
losses in any category. The unallocated portion of the allowance represents an
amount that is not specifically allocated to one of the loan portfolios.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Allocation of the allowance by category of loans
Unguaranteed portions of:
SBA and USDA loans ...................................... $ 1,050 $ 853 $ 491 $ 563 $ 338
Ex-Im Bank working capital loans ........................ 245 145 44 2 --
Other international loans ................................. 483 -- -- -- --
Commercial mortgage loans ................................. 128 250 271 483 237
Other commercial loans .................................... 1,367 1,052 475 316 353
Investor mortgage loans ................................... 63 269 1,061 399 581
Residential and other consumer loans ...................... 43 67 113 72 106
Loans held for sale ....................................... 43 -- -- -- --
Unallocated ............................................... 578 464 545 165 385
--------- --------- --------- --------- --------
Total allowance for loan losses ......................... $ 4,000 $ 3,100 $ 3,000 $ 2,000 $ 2,000
========= ========= ========= ========= =========
Percent of loans in each category to total loans
Unguaranteed portions of:
SBA and USDA loans ....................................... 30.0% 26.9% 30.5% 38.5% 32.0%
Ex-Im Bank working capital loans ........................ 3.9 2.8 3.0 0.2 --
Other international loans ................................. 15.4 -- -- -- --
Ex-Im Bank medium term loans .............................. -- 0.5 1.8 0.1 0.2
Commercial mortgage loans ............................... 8.5 14.7 16.4 14.5 17.1
Other commercial loans .................................. 29.7 44.8 29.4 26.9 21.6
Investor mortgage loans ................................. 2.6 4.1 6.6 7.2 9.9
Residential and other consumer loans .................... 2.9 6.2 12.3 12.6 19.2
Loans held for sale ....................................... 7.0 -- -- -- --
--------- --------- --------- --------- --------
Total ................................................... 100% 100.0% 100.0% 100.0% 100.0%
========= ========= ========= ========= =========
</TABLE>
14
<PAGE>
The following table sets forth information regarding the Company's
non-performing loans at the dates indicated:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
December 31,
1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Non-Performing Loans
Commercial:
Unguaranteed portions:
SBA and USDA loans ............................ $ 1,533 $ 1,226(1) $ 188 $ 419 $ --
Ex-Im Bank working capital loans .............. 418 -- -- -- --
Other international loans ....................... 112 -- -- -- --
Commercial mortgage loans ....................... 6 39 -- -- 703
Other commercial loans .......................... 890 535 132 -- 106
Investor mortgage loans ......................... -- 415 1,853 839 1,437
Consumer .......................................... 145 149 79 -- --
--------- --------- --------- --------- ---------
Total non-performing loans ........................ $ 3,104 $ 2,364 $ 2,252 $ 1,258 $ 2,246
========= ========= ========= ========= =========
Total loans ....................................... $113,946 $135,398 $114,627 $106,992 $95,118
========= ========= ========= ========= =========
Non-performing loans to total loans ............... 2.53% 1.75% 1.96% 1.18% 2.36%
========= ========= ========= ========= =========
Non-performing loans to total assets .............. 1.13% 1.08% 1.39% 0.89% 1.79%
========= ========= ========= ========= =========
Allowance to total non-performing loans ........... 129% 131% 133% 159% 89%
========= ========= ========= ========= =========
</TABLE>
(1)Excludes the Company's only guaranteed USDA loan not sold of $345,000 which
is fully guaranteed as to the collection of principal and interest.
Although the balance of non-performing SBA/USDA and commercial loans
increased in 1998, the Company believes that this reflects the effects of the
seasoning of the portfolio. The Company manages the non-performing assets
actively, including a quarterly review of the net realizable value of collateral
securing these loans. Any deterioration in the relationship between the loan
amount and the net realizable value of the collateral will be considered in the
evaluation of the allocation of the Allowance attributed to the subject loan
and/or a partial charge-off.
The Company had no loans past due 90 days and accruing interest at any
period end as presented in the above table.
Other Real Estate Owned. It is the Company's policy, whenever possible, not
to take title to real property collateralizing loans, thereby avoiding
management time and any environmental liabilities associated with holding such
properties. From the year end 1996 to 1998 reporting periods discussed herein,
the highest balance of other real estate owned totaled $97,000.
Receivable From Loans Sold. Receivable from loans sold represents the
balance of loans sold for which funding has not yet been received. Government
guaranteed loans are generally sold within a day of origination and settled
within 30 days of the trade date. During this thirty day period, the Company
reviews and delivers closing documents to the investor. The receivable balance
fluctuates with the month's loan sale activity and tends to be higher at any
quarter end due to increased loan closing activity. The annual average balance
of this receivable has ranged from $8-10 million. The Company actively monitors
the settlement of loans to ensure that this source of liquidity is effectively
managed.
Prepaid Expenses and Other Assets. Prepaid Expenses and Other Assets is
comprised principally of servicing assets as discussed in "Accounting for Loan
Sales" and "Non-interest Income."
- ------------------------------------------------------------------------------
At December 31,
1998 1997 1996
- ------------------------------------------------------------------------------
(dollars in thousands)
Other Assets
Servicing assets .......................... $ 9,015 $5,679 $4,138
Prepaid expenses and
other assets ............................ 4,414 1,143 631
------- ------ ------
Total other assets ........ $13,429 $6,822 $4,769
======= ====== ======
At December 31, 1998 prepaid expenses and other assets includes $1.2
million of prepaid fees related to the warehouse facilities and the commercial
paper conduit. These fees will be expensed over the terms of the underlying
facilities. Additionally, other assets include $625,000 of accrued interest
receivable related to the securitization transactions. Cash flows from the
transactions will offset this amount after the required cash reserve accounts
have been fully funded.
Deposits. Deposits have historically been the Company's primary funding
source and have increased to sustain the Company's balance sheet growth. See
"Liquidity and Capital Resources."
Federal Home Loan Bank of Boston Advances. Periodically, the Company
utilizes Federal Home Loan Bank ("FHLB") advances to provide short term
liquidity. As of December 31, 1998, the Bank had a $3.5 million unused line of
credit from the FHLB.
15
<PAGE>
Stockholders' Equity. Stockholders' equity increased $6.9 million to $49.0
million at December 31, 1998 from $42.1 million at December 31, 1997 primarily
due to the retention of earnings. Stockholders' equity increased $27.9 million
to $42.1 million at December 31, 1997 from $14.2 million at December 31, 1996
due to the issuance of 1,955,000 shares of common stock in an underwritten
public offering completed in September 1997, resulting in net proceeds to the
Company of $23.8 million and the retention of earnings. The Company has paid
quarterly dividends of $.03 per share since the fourth quarter of 1995. As
explained in Note 7 to the Company's consolidated financial statements, the
Company holds a note receivable from the Company's Chief Executive Officer
related to the issuance of 614,600 shares of common stock in June 1994, which is
reflected as a separate component of stockholders' equity.
Liquidity and Capital Resources
Management considers scheduled cash flows from existing borrowers,
projected deposit levels, estimated liquidity needs from maturing and
disintermediating deposits, approved extensions of credit, and unadvanced
commitments to existing borrowers in determining the level and maturity of
funding necessary to support operations. Historically, the Company has increased
the level of deposits to support its planned loan growth. The Company also has
supported its growth by regularly selling loans on a servicing retained basis.
In 1998 and during the first quarter of 1999, the Company entered into the
following transactions, all of which taken together will significantly change
the manner in which the Company funds its operations and plans to support its
future growth:
. Pursuant to an Agreement for Purchase and Sale of Assets and Assumption of
Liabilities with Hudson United Bank (the "Deposit Buyer"), the Company
agreed to sell its last retail branch and its checking, savings and money
market accounts;
. The Company obtained a warehouse loan facility pursuant to which up to $75
million is available to the Company (based upon the contractual advance
rate against the principal balance of the loans pledged to secure the
facility);
. The Company obtained a commitment for a second warehouse loan facility
pursuant to which, upon approval of the facility by the SBA and execution
of definitive documents, up to $50 million will be available to the Company
(based upon the contractual advance rate against the principal balance of
the loans pledged to secure the facility; the pledged loans will consist of
the unguaranteed portion of loans guaranteed by the SBA);
. The Company obtained a commercial paper conduit facility, pursuant to which
the Company has the right to sell up to $65 million of loans during the
term of the facility. The Company must retain subordinated interests in the
loans sold, equal to differing amounts based on the type of loan sold. The
Company sold loans totaling $21 million under this facility in December;
. The Company entered into a securitization transaction in June 1998 pursuant
to which the Company received approximately $24 million from a sale of the
unguaranteed portions of loans originated by the Company that were
guaranteed in part by the SBA; and
. The Company entered into a securitization transaction in December 1998
pursuant to which the Company received approximately $55 million from a
sale of unguaranteed commercial loans originated by the Company.
The funding provided and made available by the foregoing transactions, in
addition to planned increases in brokered and retail certificates of deposit, is
expected to be sufficient to fund the sale by the Company of its retail branch
(that is, to fund the payment to the Deposit Buyer of the amount of the deposit
liabilities assumed by the Deposit Buyer, less the premium and other amounts
payable to the Company). Management of the Company believes that the funding
provided by the foregoing transactions will also be sufficient, when combined
with the amounts available to the Company from issuance of brokered and retail
certificates of deposit and other sources of revenues, for the Company's
on-going liquidity requirements.
The Bank is subject to various regulatory capital requirements administered
by federal banking agencies. Failure to meet minimum capital requirements can
result in certain mandatory and discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Company's financial
condition. The regulations require that the Bank meet specific capital adequacy
guidelines as calculated under regulatory accounting practices. The Bank's
capital classification is also subject to qualitative judgments by the
regulators about interest rate risk, concentration of credit risk and other
factors.
Quantitative measures established by regulations to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of Tier I capital to
total average assets (as defined), and minimum ratios of Tier I and total
capital to risk weighted assets. The Bank's capital ratios are well in excess of
regulatory minimum requirements. As the Company is a small bank holding company,
it is not subject to any additional capital ratio requirements. See Note 7 to
the consolidated financial statements for a table of minimum required and actual
capital ratios.
Quantitative and Qualitative Disclosures About
Market Risk and Asset/Liability Management
The Company completed two loan sales and securitization transactions in
1998. In 1998, approximately 24% of the Company's $16.9 million gain on loan
sales were attributed to the two securitizations of commercial loans and the
sale of loans to a commercial paper conduit. The Company expects to continue to
sell loans to the commercial paper conduit and complete asset-backed loan
private placements in the capital markets to securitize and sell the
unguaranteed portions of SBA and USDA loans,
16
<PAGE>
commercial loans and privately-insured international loans. The Company expects
to continue to sell the guaranteed portions of SBA, USDA and Ex-Im Bank loans on
a loan-by-loan basis. Such government guaranteed loans represented approximately
50% of the total loans originated in 1998.
Although reliance on the capital markets for the sale of such loans
presents the Company with new risks related to liquidity and earnings
volatility, the Company believes that its diversified sales and funding strategy
provides it with the ability to manage such risks. The Company believes that its
overall strategy of blending whole loan sales of government guaranteed loans
with the securitization of commercial loans and its on-going ability to sell
loans to the commercial paper conduit provide a diversified array of loan sales
alternatives. As far as sources of funds, after the sale of the branch discussed
earlier, the Company will continue to receive funding from retail and brokered
certificates of deposit and from the warehouse lines provided by the investment
banking firm that lead managed the Company's initial public offering in
September 1997.
Several factors will affect the Company's ability to access its warehouse
lines of credit and complete securitizations in the future, including conditions
in the securities markets generally, and in the asset-backed securities market
specifically, the credit quality of the Company's loan portfolio, compliance of
the Company's loans with the eligibility requirements established in connection
with the warehouse lines and securitizations, the Company's ability to provide
third-party credit enhancement and adequately service its loan portfolio, and
the absence of any material downgrading or withdrawal of ratings given to
securities previously issued in the Company's securitizations.
During the third quarter of 1998 and continuing into the fourth quarter of
1998, the capital markets experienced rapid and extreme changes evidenced by a
decline of investor demand for certain asset-backed securities that carried a
credit agency rating less than the highest ratings available and a widening of
the spreads between the interest rates on treasury securities and interest rates
on asset-backed securities. The "flight to quality" by asset-backed investors
requires issuers like the Company to provide a greater level of credit
enhancement to attain higher credit ratings for a larger percentage of the
securitization in order to make the transaction marketable. The widening of
spreads in the asset-backed capital markets reduces the earnings on a
securitization and, if such events were to occur in the future, could limit the
amount of borrowings available to the Company under its warehouse lines of
credit and may make future securitizations economically unfeasible.
Any substantial reduction in the accessibility of the warehouse lines of
credit or the securitization market for the Company's loans or any adverse
change in the terms of such securitizations could have an adverse effect on the
Company's financial condition or results of operations.
An earnings at risk model is one tool utilized by the Company to measure
interest rate risk. Such a model computes the estimated effect on net income
from changes in interest earned on assets and expenses paid on liabilities, as
well as the impact of off-balance sheet items in the event of a range of assumed
changes in market interest rates. This analysis estimates the risk of loss in
market risk sensitive instruments in the event of a sudden and sustained one
hundred to three hundred basis point increase or decrease in the market interest
rates. The Company's Board of Directors has adopted an interest rate risk
policy, which establishes maximum decreases in net income and capital in the
event of a sudden and sustained change in market interest rates.
At December 31, 1998, the estimated changes in the Company's net income
based on the hypothetical changes in interest rates were within the limits
established by the Board of Directors.
Such an earnings at risk calculation is based on the estimated change in
interest income and interest expense utilizing numerous assumptions, including
historical relationships between various indices utilized by the Company in
setting interest rates and management's judgment as to the expected relationship
of such rates in the current environment. This calculation utilizes such
relative levels of market interest rates as well as assumptions regarding loan
prepayments and deposit decays and should not be relied upon as indicative of
actual results. Importantly, the computations do not contemplate any actions the
Company could undertake in response to changes in interest rates.
Certain shortcomings are inherent in the method of analysis presented in
the computation of earnings at risk. Actual results may differ from those
presented should market conditions vary from assumptions used in the
calculation. In the event of a change in interest rates, prepayment and early
withdrawal levels could deviate significantly from those assumed in the earnings
at risk calculation. Finally, the ability of many borrowers to repay their
adjustable rate loans and the value of the underlying collateral may decrease in
the event of interest rate decreases.
The Company seeks to manage its assets and liabilities to reduce the
potential adverse impact on net interest income that might result from changes
in interest rates. Control of interest rate risk is conducted through systematic
monitoring of maturity mismatches. The Company's investment decision-making
takes into account not only the rates of return and their underlying degree of
risk, but also liquidity requirements, including minimum cash reserves,
withdrawal and maturity of deposits and additional demand for funds. For any
given period, the pricing structure is matched when an equal amount of assets
and liabilities reprice. An excess of assets or liabilities over these matched
items results in a gap or mismatch, as shown in the following table. A negative
gap denotes liability sensitivity and normally means that
17
<PAGE>
a decline in interest rates would have a positive effect on net interest income,
while an increase in interest rates would have a negative effect on net interest
income. However, significant variations may exist in the degree of interest rate
sensitivity between individual asset and liability types within the repricing
periods presented due to differences in their repricing elasticity relative to
the change in the general level of interest rates. All of the Company's assets
and liabilities are U.S. dollar-denominated and, therefore, the Company bears no
foreign exchange risk.
The majority of the Company's assets reprice according to contractual
arrangements although the Company has historically had fairly broad discretion
over the frequency and magnitude of interest rate changes on its liabilities
which has enabled the Company to minimize the impact of any general changes in
the interest rate environment. This discretion may be more limited in the future
due to the sources of funds anticipated to be utilized in the future as
discussed above and in "Liquidity and Capital Resources."
The Company utilizes the analysis detailed below to generally monitor the
composition of assets and liabilities and focuses on the one-year mismatch. The
Company believes the positive one year cumulative gap of $4.1 million or 2%
reflects a relatively balanced position.
For purposes of the following analysis, checking and savings account
repricing is presented 20% in the 0-90 day period, 20% in the 91-180 day period,
30% in the 181-365 day period and 30% in the 1-5 year period. Although the
elasticity of such deposits cannot be tied to any one-time period, these are the
assumptions which have been developed by the Company based on historical
experience and are utilized for internal and regulatory reporting purposes.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
December 31, 1998
0 to 90 91 to 180 181 to 365 1 to 5 Over 5
Days Days Days Years Years Total
- -----------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial loans ................... $ 85,049 $ 6,833 $ 2,691 $ 4,340 $ 11,487 $ 110,400
Residential loans .................. -- 1,566 364 529 554 3,013
Other consumer loans ............... 160 8 41 270 54 533
Investments ........................ 21,073 4,310 3,632 4,535 2,033 35,583
Federal funds sold ................. 44,930 -- -- -- -- 44,930
-------- -------- -------- -------- -------- ---------
Total interest earning assets .... $151,212 $ 12,717 $ 6,728 $ 9,674 $ 14,128 $ 194,459
======== ======== ======== ======== ======== =========
Checking ........................... $ 11,187 $ 11,185 $ 16,778 $ 16,778 -- $ 55,928
Money market savings ............... 20,695 20,696 31,044 31,044 -- 103,479
Other savings ...................... 2,868 2,867 4,301 4,301 -- 14,337
Time deposits ...................... 31,374 4,938 7,560 2,258 -- 46,130
Treasury, tax and loan ............. 1,047 -- -- -- -- 1,047
-------- -------- -------- -------- -------- ---------
Total interest bearing liabilities $ 67,171 $ 39,686 $ 59,683 $ 54,381 $ -- $ 220,921
======== ======== ======== ======== ======== =========
Interest sensitivity gap ........... $ 84,041 $(26,969) $(52,955) $(44,707) $ 14,128 $ (26,462)
======== ======== ======== ======== ======== =========
Cumulative gap ..................... $ 84,041 $ 57,072 $ 4,117 $(40,590) $(26,462)
======== ======== ======== ======== ========
Cumulative gap as a percentage of
total interest earning assets .. 43% 29% 2% (21)% (14)%
======== ======== ======== ======== ========
</TABLE>
Importantly, the above table reflects the balance sheet as of December 31, 1998
and does not consider the projected sources of funding which are expected to be
utilized after the sale of the Company's last retail branch and checking,
savings and money market accounts.
18
<PAGE>
Seasonality
The Company's business is seasonal, as the level of domestic loan
originations tends to be lower during the first quarter when many U. S.
companies have not yet produced their fiscal financial statements and during the
third quarter when many U. S. manufacturers shut down for a limited time for
summer vacation. Further, as the Company relies more on securitizations for the
sale of loans, the Company's earnings will also be lower in the quarters when
loans originated are held in portfolio for a future securitization.
Impact of Inflation
The consolidated financial statements and related data presented elsewhere
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on the operations of the Company is reflected in increased operating
costs. Interest rates have a significant impact on the Company's performance.
Increases in interest rates affect the ability of the Company's borrowers to
service their variable rate debt. Furthermore, inflation can directly affect the
value of loan collateral in general, and real estate collateral in particular.
These factors are taken into account in the initial underwriting process and
over the life of the loans. The Company believes that it has the systems in
place to continue to manage the rates, liquidity and interest rate sensitivity
of the Company's assets and liabilities.
Year 2000 Compliance
As the Year 2000 approaches, a critical business issue has emerged
regarding how existing application software programs and operating systems can
accommodate this date value. In brief, many existing application software
products in the marketplace were designed to only accommodate a two digit date
position which represents the year (e.g., `95 is stored on the system and
represents the year 1995). As a result, the year 1999 (i.e., `99) could be the
maximum date value these systems will be able to accurately process.
Utilizing the guidance provided by the Federal Institutions Examination
Council ("FFIEC") as a framework, the Company has developed a Year 2000
Compliance Program as discussed below. The Company's Year 2000 Compliance
Workplan ("Workplan") includes the following broad components:
. Review of Mission Critical Systems for Year 2000 Readiness
. Renovation of Internal Mission Critical Systems
. Renovation of External Mission Critical Systems
. Testing of Mission Critical Systems
. Development of Business Resumption Contingency Plan
. Assessment of Customer Risk
. Remediation Contingency Plan
Senior management and the Technology Committee of the Board of Directors
are responsible for monitoring compliance with the Workplan. In addition, the
Company's primary regulator, the Office of the Comptroller of the Currency,
performs periodic off-site inquiries and on-site visitations to assess the
status of the Company's Year 2000 readiness and progress against the Workplan
and federal regulations. While the Company has devoted a significant amount of
human resources to address its Year 2000 readiness, management does not believe
that the resultant deferral of other information technology ("IT") projects has
had a material impact on the Company's financial condition or results of
operations.
The Company has reviewed all mission critical systems, prioritized the
details of the plan and its resources, and has established deadlines for each of
the components of the Workplan. The Company's primary internal mission critical
systems included a deposit item processing system, wide area network which
supports word processing and spreadsheet applications as well as other external
software systems, and an AS/400 operating system. The Company determined that
the deposit item processing system could not be readily made Year 2000 compliant
and, therefore, outsourced this function in the first quarter of 1998. Total
annual costs for this third party service are estimated at $130,000 and are
estimated to be reduced to $36,000 after the sale of the branch and related
deposits. The Company's word processing and spreadsheet software applications
and the AS/400 operating system were upgraded to Year 2000 compliant versions in
the first half of 1998. Total costs of such software upgrades approximated
$55,000. Certain hardware components were also upgraded in conjunction with
these software initiatives at an estimated of cost of $20,000. Management
estimates that additional costs to be incurred to execute the Workplan will not
exceed $20,000.
Third party vendors support the Company's other mission critical IT and
non-IT systems. During the fourth quarter of 1998, the Year 2000 readiness of
the systems provided by third party suppliers and other material third parties
were tested and found to be compliant.
Development of the Business Resumption Contingency Plan is well underway at
December 31, 1998, as required by the FFIEC. Although the Company expects that
each mission critical system will be Year 2000 Compliant, such a plan will be
designed to mitigate serious disruptions to the Company's business flow.
The Company's Workplan also requires that the Year 2000 readiness of major
borrowers, wholesale time deposit brokers, investment bankers providing
borrowing facilities to the Company, and primary loan purchasers be evaluated.
Documentation has been received from these parties and it appears to meet the
FFIEC standards for determining Year 2000 preparedness and provides information
to assess any potential risk to the Company. The Company has reviewed the
documentation and it appears that the parties have adequately assessed Year 2000
risks and undertaken efforts to mitigate potential problems.
19
<PAGE>
The above expectations are subject to uncertainties. If for example, the
Company fails to identify and address all Year 2000 problems in the mission
critical operations, fails to develop a comprehensive contingency plan, or is
affected by the inability of critical third parties to continue operations due
to such problems, the results of the Company's operations or financial condition
could be materially impacted. Such impact might result from operational
difficulties of the Company's borrowers and their resultant inability to repay
their loans to the Company; an inability of the Company to access wholesale
funds providers or other borrowing facilities; and an inability of the Company
to normally process deposit, loan or loan investor transactions.
Based on the current information and the efforts to date, however, it is
not expected that Year 2000 problems will have a material effect on the
Company's results of operations or financial condition. It also does not appear
that a Remediation Contingency Plan will be required. If it is subsequently
determined that such a plan is required, it will be developed pursuant to the
applicable FFIEC guidance.
Recent Accounting Pronouncement
SFAS No. 133
In June 1998, the FASB issued No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all of the Company's
financial statements issued after December 31, 1999. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities, and requires that all derivatives be recognized as either assets or
liabilities in the entity's balance sheet and be measured at fair value. Changes
in the fair value of the derivative instruments are to be recognized depending
on the intended use of the derivative and whether or not it has been designated
as a hedge. This statement is not expected to have a significant impact upon the
Company's financial position, results of operations or cash flows.
20
<PAGE>
Report of Independent Accountants
The Board of Directors and Stockholders of
First International Bancorp, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity and
cash flows present fairly, in all material respects, the financial position of
First International Bancorp, Inc. and Subsidiary (the "Company") at December 31,
1998 and December 31, 1997 and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1998, in conformity
with generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
January 27, 1999
21
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Balance Sheets
December 31, 1998 and 1997
(dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks ....................................... $ 13,405 $ 10,944
Federal funds sold ............................................ 44,930 6,450
---------- ---------
Cash and cash equivalents ................................. 58,335 17,394
Investment securities (Note 2):
Available for sale at fair value ............................ 31,456 12,767
Held to maturity at amortized cost
(fair value $1,989 and $7,429) .............................. 1,986 7,435
U.S. Agency stocks at cost .................................... 2,177 2,069
Loans, net (Note 3) ........................................... 108,958 130,625
Loans held for sale ........................................... 8,577 9,070
Receivable from loans sold (Note 1) ........................... 43,610 28,775
Accrued interest receivable ................................... 1,383 1,200
Premises and equipment, net (Note 4) .......................... 3,815 2,694
Prepaid expenses and other assets ............................. 13,429 6,822
---------- ---------
Total assets ............................................... $273,726 $218,851
========== =========
Liabilities and Stockholders' Equity
Deposits (Note 5) ............................................. $219,874 $172,321
U.S. Treasury demand note ..................................... 1,047 1,085
Accrued interest payable ...................................... 768 745
Other liabilities ............................................. 2,966 2,552
---------- ---------
Total liabilities ......................................... 224,655 176,703
Commitments and Contingencies (Notes 3 and 4)
Stockholders' equity (Notes 1, 7, 8, 9 and 13):
Common stock, $.10 par value, 12,000,000 shares authorized;
7,952,637 and 7,866,735 shares issued and outstanding ....... 795 787
Preferred stock, $.10 par value, 2,000,000 shares authorized;
no shares issued and outstanding .......................... -- --
Paid-in capital in excess of par value ...................... 32,561 32,083
Stockholder note receivable ................................. (941) (877)
Accumulated other comprehensive income ...................... 428 12
Retained earnings ........................................... 16,228 10,143
---------- ---------
Total stockholders' equity ................................ 49,071 42,148
---------- ---------
Total liabilities and stockholders' equity ................ $ 273,726 $ 218,851
========== ==========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
22
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans, including net fees ..................... $15,522 $12,753 $12,027
Investment securities ......................... 1,154 1,156 646
Federal funds sold ............................ 1,412 716 632
--------- -------- --------
Total interest income ....................... 18,088 14,625 13,305
--------- -------- --------
Interest expense:
Deposits ...................................... 7,896 6,337 5,714
Other ......................................... 28 34 27
--------- -------- --------
Total interest expense ...................... 7,924 6,371 5,741
--------- -------- --------
Net interest income ......................... 10,164 8,254 7,564
Provision for possible loan losses .............. 3,071 2,239 3,487
--------- -------- --------
Net interest income after
provision for possible loan losses .......... 7,093 6,015 4,077
Non-interest income:
Gain on sale of guaranteed commercial loans .... 12,239 9,513 4,904
Gain on commercial loan-backed securitizations . 4,094 -- --
Gain on sale of commercial loans ............... 626 2,297 940
Loan servicing income and fees ................. 4,353 2,618 1,475
Service charges and other deposit fees ......... 500 438 424
Other income ................................... 267 244 --
Gain on sale of securities ..................... 33 -- --
Gain on branch sale ............................ -- -- 2,202
--------- -------- --------
Total non-interest income .................... 22,112 15,110 9,945
--------- -------- --------
Total operating income ....................... 29,205 21,125 14,022
--------- -------- --------
Non-interest expense:
Salaries and benefits ......................... 11,235 9,537 5,089
Occupancy ..................................... 1,523 985 774
Office expenses ............................... 834 556 421
Marketing ..................................... 1,453 847 691
Furniture and equipment ....................... 1,007 692 462
Outside services .............................. 773 556 321
Other ......................................... 875 628 667
--------- -------- --------
Total non-interest expense .................. 17,700 13,801 8,425
--------- -------- --------
Income before income taxes .................. 11,505 7,324 5,597
Provision for income taxes ...................... 4,472 2,895 2,353
--------- -------- --------
Net income .................................. $ 7,033 $ 4,429 $ 3,244
========= ======== ========
Basic earnings per share (Notes 1 and 7) ....... $ .89 $ .70 $ .56
========= ======== ========
Diluted earnings per share (Notes 1 and 7) ...... $ .86 $ .67 $ .56
========= ======== ========
</TABLE>
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the consolidated financial
statements
23
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Accumulated Other
Comprehensive
Income
-------------------
Paid-in Unrealized
Capital in Stockholder Holding Gain (Loss)
Common Excess of Note on Investments Retained
Stock Par Value Receivable Available-for-Sale Earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 ...................... $ 576 $ 8,202 $(1,007) $ (28) $ 3,859 $ 11,602
Repurchase and retirement of 7,875 shares of
common stock (Note 7) ........................... (1) (21) -- -- -- (22)
Issuance of 21,000 shares of common stock under
option plan (Note 8) ............................ 2 41 -- -- -- 43
Dividends on common stock ($.11/share) ............ -- -- -- -- (658) (658)
Principal payment on stockholder note
receivable (Note 7) ............................. -- -- 53 -- -- 53
Comprehensive income:
Increase in unrealized holding loss, net of taxes -- -- -- (46) -- (46)
Net income ...................................... -- -- -- -- 3,244 3,244
--------
Comprehensive income ............................ -- -- -- -- -- 3,198
----- -------- ------ ------ -------- --------
Balance at December 31, 1996 .................. 577 8,222 (954) (74) 6,445 14,216
Issuance of 145,350 shares of common stock
under option plan (Note 8) ...................... 14 249 -- -- -- 263
Issuance of 1,955,000 shares of common stock
at public offering (Note 1) ..................... 196 23,612 -- -- -- 23,808
Dividend on common stock ($.12/share) ............. -- -- -- -- (731) (731)
Discount on stockholder note receivable (Note 7) .. -- -- 92 -- -- 92
Accretion on stockholder note receivable (Note 7) . -- -- (15) -- -- (15)
Comprehensive income:
Decrease in unrealized holding loss, net of taxes -- -- -- 86 -- 86
Net income ...................................... -- -- -- -- 4,429 4,429
--------
Comprehensive income ............................ -- -- -- -- -- 4,515
----- -------- ------ ------ -------- --------
Balance at December 31, 1997 .................. 787 32,083 (877) 12 10,143 42,148
Issuance of 85,902 shares of common stock
under option plan (Note 8 ) ..................... 8 478 -- -- -- 486
Dividends on common stock ($.12/share) ............ -- -- -- -- (948) (948)
Accretion on stockholder note receivable (Note 7) . -- -- (64) -- -- (64)
Comprehensive income:
Increase in unrealized holding gain, net of taxes -- -- -- 416 -- 416
Net income ...................................... -- -- -- -- 7,033 7,033
--------
Comprehensive income ............................ -- -- -- -- -- 7,449
===== ======== ======== ====== ======== ========
Balance at December 31, 1998 .................. $ 795 $ 32,561 $ (941) $ 428 $ 16,228 $ 49,071
===== ======== ======== ====== ======== ========
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
24
<PAGE>
First International Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
For the Years Ended December 31, 1998, 1997 and 1996
(dollars in thousands)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................. $ 7,033 $ 4,429 $ 3,244
------------ ----------- -----------
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization .............................................. 678 644 374
Amortization of investment premiums, net ................................... 16 7 55
Accretion of loan discount, net ............................................ 1,930 1,161 1,042
Provision for possible loan losses ......................................... 3,071 2,239 3,487
Provision for loss on other real estate owned .............................. 35 -- 200
Increase in other liabilities .............................................. 745 1,004 686
Increase in deferred loan costs ............................................ (322) (42) (15)
(Increase) decrease in accrued interest receivable ......................... (183) (377) 54
Increase in accrued interest payable ....................................... 22 123 324
Deferred income tax provision (benefit) .................................... (173) 121 (249)
Gain on sale of investment securities ...................................... (33) -- --
Gain on sale of loans ...................................................... (16,959) (11,810) (5,844)
Loss on sale of other real estate owned .................................... 3 -- --
(Increase) decrease in receivable from loans sold .......................... (14,836) (18,434) 932
Increase in prepaid expenses and other assets .............................. (6,786) (2,113) (1,395)
Discount on stockholder note receivable .................................... -- 92 --
Accretion on stockholder note receivable ................................... (64) (15) --
(Increase) decrease in loans held for sale ................................. 493 (9,070) --
Loans originated for sale .................................................... (322,065) (223,830) (132,839)
Proceeds from sale of loans originated for sale .............................. 342,399 244,516 141,568
------------ ----------- -----------
Total adjustments ........................................................ (12,029) (15,784) 8,380
------------ ----------- -----------
Net cash provided by (used in) operating activities ...................... (4,996) (11,355) 11,624
Cash flows from investing activities:
Net decrease (increase) in loans ........................................... 13,516 (33,406) (14,119)
Purchase of investment securities available for sale ....................... (34,486) (13,587) (10,514)
Purchase of investment securities held to maturity ......................... -- (8,496) (500)
Purchase of equity securities .............................................. (709) (782) (415)
Proceeds from sales of investment securities available for sale ............ 4,537 -- --
Proceeds from maturities and principal repayments of
investment securities available for sale ................................. 11,876 11,998 1,500
Proceeds from maturities of mortgage-backed securities available for sale .. 60 486 4,023
Proceeds from maturities and principal repayments of
investment securities held to maturity ................................... 4,525 4,000 --
Proceeds from maturities of mortgage-backed securities held to maturity .... 925 123 1,526
Proceeds from sale of equity securities .................................... 602 -- --
Proceeds from sale of branch premises ...................................... -- -- 275
Proceeds from sale of other real estate owned .............................. 51 -- 100
Capital expenditures, net .................................................. (1,799) (1,823) (894)
------------ ----------- -----------
Net cash used in investing activities .................................... (902) (41,487) (19,018)
------------ ----------- -----------
Cash flows from financing activities:
Net increase in deposits ................................................... 47,553 28,005 15,954
Net increase (decrease) in other borrowings ................................ (37) 24 841
Proceeds from sale of common stock at public offering, net ................. -- 23,808 --
Proceeds from issuance of common stock under option plan ................... 271 263 43
Repurchase of common stock ................................................. -- -- (22)
Dividends paid ............................................................. (948) (731) (658)
Principal payment on stockholder note receivable ........................... -- -- 53
------------ ----------- -----------
Net cash provided by financing activities ................................ 46,839 51,369 16,211
------------ ----------- -----------
Net increase (decrease) in cash and equivalents .......................... 40,941 (1,473) 8,817
Cash and cash equivalents at beginning of year ............................. 17,394 18,867 10,050
------------ ----------- -----------
Cash and cash equivalents at end of year ................................... $ 58,335 $ 17,394 $ 18,867
============ ============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ................................................................... $ 7,902 $ 6,248 $ 5,418
Income taxes ............................................................... $ 3,182 $ 2,791 $ 2,664
Non-cash items:
Real estate acquired in settlement of loans ................................ $ 186 -- --
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements
25
<PAGE>
First International Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. Summary of Significant Accounting Policies:
Basis of Presentation
The consolidated financial statements include the accounts of First
International Bancorp, Inc. (the "Company") and the consolidated accounts of its
wholly-owned subsidiary, First International Bank, N. A., (the "Bank"), formerly
known as First National Bank of New England. In 1998, the Bank established three
special purpose subsidiaries to facilitate loan securitizations and sales to a
commercial paper conduit. Intercompany accounts and transactions have been
eliminated in consolidation.
The Bank operates a full service branch at its headquarters in Hartford,
Connecticut and representative offices, which are responsible for regional loan
origination efforts, in Boston and Springfield, Massachusetts; Providence, Rhode
Island; Rochester, New York; Morristown, New Jersey; Philadelphia and
Pittsburgh, Pennsylvania; Washington D.C.; Cleveland, Ohio; and Detroit,
Michigan.
The Bank sold a suburban branch facility and certain deposits in 1996.
In December 1998, the Company signed an agreement to sell its main branch
premises, which is its only branch, and all of its checking, savings and money
market accounts. This transaction is expected to close in March 1999. (See Note
16.) The Company will retain its retail and brokered certificate of deposit
accounts. Expected other sources of funding will include warehouse credit lines,
a commercial paper conduit and loan securitizations and sales. The Company's
primary revenues are derived from net interest income and the origination and
sale, on a servicing retained basis, of commercial loans. In 1998, the Company
also began to securitize and sell commercial loans and portions thereof.
The Company completed an underwritten public stock offering of 1,700,000
shares in September 1997 and issued an additional 255,000 shares in October when
the underwriters exercised their option to purchase such shares. The offering
resulted in net proceeds to the Company of $23.8 million.
The Bank is a national leader in the use of loan guarantee programs offered
by the U.S. Small Business Administration ("SBA"), the U.S. Department of
Agriculture ("USDA") and the Export-Import Bank of the United States ("Ex-Im
Bank"). Continued availability of such loan guarantees are dependent upon timely
and adequate federal budget appropriations. Each of these federal programs is
funded through September 1999, but there can be no assurance of sufficient
budgetary allocations to allow a continuation of such programs in substantially
their current form.
In preparing the consolidated financial statements, management makes
estimates and assumptions that affect the reported amounts of assets and
liabilities as of the date of the balance sheet and the results of operations
for the period. Material estimates in these consolidated financial statements
relate to the allowance and provision for possible loan losses, the valuation of
other real estate owned and the estimated lives of loans sold or securitized
where servicing has been retained. Market conditions are evaluated and
independent appraisals of significant properties are obtained by management as
needed in the process of setting the estimates. Notwithstanding this diligence,
such estimates are particularly sensitive to the economic environment and can be
significantly affected by changing economic conditions affecting the value of
the collateral, interest rates, borrowers' financial position and other factors.
Accordingly, actual results could differ significantly from the estimates.
Investment Securities
Securities that may be sold as part of the Company's asset/liability or
liquidity management, or in response to or in anticipation of changes in
interest rates and resulting prepayment risk, or for other similar factors, are
classified as available-for-sale and carried at fair market value. Unrealized
holding gains and losses on such securities are reported net of related taxes as
a separate component of stockholders' equity. Debt securities that the Company
has the ability and positive intent to hold to maturity are classified as
held-to-maturity and carried at amortized cost. Realized gains and losses on the
sales of all investment securities are reported in earnings and computed using
the specific identification cost basis. Declines in the market value of
investment securities that are deemed to be other than temporary are charged to
income.
Loans
Loans are stated at their principal amount outstanding. Interest income on
loans is recognized on the simple interest method based upon the principal
amount outstanding.
Receivable from loans sold and gain on commercial loan sales are
attributable to the sale of commercial loans which have been at least partially
guaranteed by the SBA, the
26
<PAGE>
USDA or Ex-Im Bank as well as the sale of unguaranteed commercial loans.
Transactions are generally settled within 30 days of the sale. The gain on the
sale of a portion of a loan is based on the relative fair market values of the
loan sold and the loan retained. A portion of the gain on commercial loan sales
is due to a servicing asset which represents the present value of the
differential between the servicing fee received by the Company and adequate
compensation, defined as the fee a sub-servicer would require to assume the role
of servicer, after considering the estimated effects of prepayments. The
discount rate utilized in calculating the servicing asset approximates the
market rate an investor would demand on a risk-adjusted basis. The servicing
asset is amortized as a charge to non-interest income over the estimated lives
of the underlying loans on an effective interest method. The servicing asset is
analyzed periodically for impairment based on the term of the serviced loan, the
perceived alternatives for refinancing, the current interest rate environment
and historical default and prepayment patterns, and is carried at the lower of
amortized cost or net realizable value.
The discount on retained loans, which relates to the retained portion of
the unguaranteed portion of SBA and USDA loans, is reflected as a reduction of
loans in the consolidated balance sheet. The discount is recorded in interest
income over the estimated life of the retained loan on an effective interest
method.
Loans Held for Sale
The Company classifies loans for which it does not have a positive intent
to hold to maturity as loans held for sale and carries them at the lower of cost
or market based on the aggregate value of the portfolio.
Loan Origination Fees (Costs)
Fees for loan originations and commitments, and related origination costs,
are deferred and recognized as a yield adjustment utilizing the interest method
over the contractual life of the related loan, adjusted for prepayment and
sales.
Provision/Allowance For Possible Loan Losses
The Company evaluates the collectibility of impaired loans, as defined
below, 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 collectibility of contractual principal and interest
based on the estimated fair value of the collateral. Smaller-balance homogeneous
loans consisting of residential mortgages and consumer loans are evaluated for
collectibility by the Company based on historical loss experience rather than on
an individual loan-by-loan basis. The Company evaluates all impaired loans,
other than small balance loans, on an individual loan-by-loan basis; it does not
aggregate impaired loans into major risk classifications. The Company considers
a loan to be impaired when, based on current information and events, it is
probable that it will be unable to collect all amounts of contractual interest
and principal as scheduled in the loan agreement. An insignificant delay of
under 60 days or a 10% shortfall in the amount of the payment is not an event
that, when considered in isolation, would automatically cause the Company to
consider a loan to be impaired. The Company places a loan on nonaccrual status
when it is 90 days or more past due or when, in management's assessment, the
full collectibility of principal and interest is uncertain. Except for certain
restructured loans, impaired loans are loans that are on nonaccrual status.
When an impaired loan or a portion of an impaired loan is deemed
uncollectible, the portion deemed uncollectible is charged against the allowance
for loan losses and subsequent recoveries, if any, are credited to the
allowance.
The Company recognizes interest income on impaired loans on a cash basis
and reverses any accrued interest income at the date of determination.
Management determines the adequacy of its allowance for possible loan
losses primarily through periodic reviews of the loan portfolio, loan
delinquencies, collateral on loans and past payment history adjusted for such
factors as known changes in the character of the loan portfolio and current
economic conditions. Consideration is also given to anticipated economic
conditions, as well as other relevant factors in establishing the allowance. The
allowance is increased by provisions for loan losses charged to income and
decreased by charge offs, net of recoveries.
Securitizations
The Company securitizes and sells certain unguaranteed commercial loans and
the unguaranteed portion of certain guaranteed commercial loans. In connection
with these transactions, the Company records a gain which is based on the fair
market value of the assets securitized and is required to retain one or more of
the following retained interests in the securitized assets: interest-only
strips, subordinated certificates, servicing rights and cash reserve accounts.
Subsequent to the securitization, the retained interests are carried at fair
value. To obtain fair values, quoted market prices are used if available. If
fair value quotes are unavailable, the Company estimates fair value based on the
present value of future cash flows expected based on key assumptions (i.e.,
credit loss, prepayment speed, discount rate). Subordinated certificates and
interest-only strips are classified as investments available-for-sale.
Other Real Estate Owned
Other real estate owned ("OREO"), representing property acquired by
foreclosure or acceptance of a deed in lieu of foreclosure, is carried at the
lower of the unpaid loan balance at the date of acquisition or fair value less
estimated disposal costs. Improvements are capitalized to the extent realizable.
Holding and selling costs are expensed as incurred.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation and amortization are computed on the straight-line
method over the estimated useful lives of the assets. Leasehold improvements are
amortized over the period of the related lease. Costs of maintenance and repairs
are expensed, while major improvements are capitalized.
27
<PAGE>
Income Taxes
Income taxes are provided based on the asset/liability method of
accounting. Deferred income taxes and tax benefits are recognized for the future
income tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. A valuation
allowance is established when it is more likely than not that some portion of
the deferred tax asset will not be realized.
Earnings Per Share
Earnings per share for all periods presented have been calculated in
accordance with SFAS No. 128, "Earnings Per Share" which requires the
presentation of basic and diluted earnings per share. Basic earnings per share
is determined based on the weighted average shares outstanding, while diluted
earnings per share reflects the potential dilution that could occur if options
to issue common stock were exercised. (See Note 7.)
Stock Option Plans
The Company has chosen not to adopt fair value accounting for stock based
compensation and continues to employ intrinsic value accounting for its option
plans as detailed in Note 8. Certain disclosures as if fair value accounting had
been adopted, including pro forma net income and earnings per share, have been
made in these financial statements.
Common Stock Split
On June 26, 1997, the Company's stockholders approved a 3.5-for-1 stock
split to stockholders of record on July 14, 1997, effective August 7, 1997.
Stockholders' equity has been restated to give retroactive recognition to the
stock split in prior periods by reclassifying from paid-in capital in excess of
par value to common stock an amount equal to the par value of the additional
shares arising from the split. In addition, all references to the number of
shares, per share amounts and stock option data have been restated.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold. Generally, federal
funds are sold for one day periods or terms of less than 30 days.
The Company is required to maintain certain levels of cash reserves at the
Federal Reserve Bank of Boston based on its deposit accounts. Such required
reserves totaled $1,082,000 at December 31, 1998.
Included in cash are certain restricted deposit accounts, related to the
Company's loan securitization transactions. Such deposits totaled $5,973,000 at
December 31, 1998.
Comprehensive Income
In 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which established standards for reporting comprehensive income, defined
as the change in equity of a business enterprise during a period from nonowner
sources. The Company's comprehensive income is comprised of net income and the
unrealized holding gain (loss) on investments classified as available-for-sale.
Segment Information
In 1998, the Company adopted SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS 131 supersedes SFAS 14 "Financial
Reporting for Segments of a Business Enterprise," replacing the "industry
segment" approach with the "management" approach. The management approach
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. SFAS No. 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS No. 131
did not affect results of operations or financial position. (See Note 12.)
Reclassifications
Certain amounts from 1997 and 1996 have been reclassified to conform to
the 1998 presentation.
Recent Accounting Pronouncement
SFAS No. 133
In June 1998, the FASB issued No. 133 "Accounting for Derivative
Instruments and Hedging Activities," which is effective for all of the Company's
financial statements issued after December 31, 1999. This statement establishes
accounting and reporting standards for derivative instruments and for hedging
activities, and requires that all derivatives be recognized as either assets or
liabilities in the entity's balance sheet and be measured at fair value. Changes
in the fair value of the derivative instruments are to be recognized depending
on the intended use of the derivative and whether or not it has been designated
as a hedge. This statement is not expected to have a significant impact upon the
Company's financial position, results of operations or cash flows.
28
<PAGE>
- --------------------------------------------------------------------------------
2. Investment Securities:
Securities classified as available-for-sale (carried at fair value) and as
held to maturity (carried at amortized cost) as of December 31, 1998 and 1997
are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1998
Available for Sale
U.S. Treasury obligations ..................... $ 11,579 $ 15 $ (1) $11,593
U.S. Government mortgage-backed securities .... 88 3 -- 91
Mutual funds .................................. 19 -- -- 19
Commercial loan-backed securities ............. 14,930 696 -- 15,626
Interest-only strips .......................... 4,127 -- -- 4,127
-------- -------- --------- -------
$ 30,743 $ 714 $ (1) $31,456
======== ======== ========= =======
Held to Maturity
U.S. Government mortgage-backed securities .... $ 1,361 $ 4 $ (1) $ 1,364
Debt securities of foreign governments ........ 625 -- -- 625
-------- -------- --------- -------
$ 1,986 $ 4 $ (1) $ 1,989
======== ======== ========= =======
December 31, 1997
Available for Sale
U.S. Treasury obligations ..................... $ 12,013 $ 15 $ (3) $12,025
U.S. Government mortgage-backed securities .... 648 9 -- 657
Mutual funds .................................. 85 -- -- 85
-------- -------- --------- -------
$ 12,746 $ 24 $ (3) $12,767
======== ======== ========= =======
Held to Maturity
U.S. Government mortgage-backed securities .... $ 2,285 $ 4 $ (10) $ 2,279
Debt securities of foreign governments ........ 1,150 -- -- 1,150
Variable rate preferred stock ................. 4,000 -- -- 4,000
-------- -------- --------- -------
$ 7,435 $ 4 $ (10) $ 7,429
======== ======== ========= =======
</TABLE>
Stock securities are carried at cost and are comprised of the following:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
December 31,
- ------------------------------------------------------------------------------------------------------------------
1998 1997
-----------------------
(dollars in thousands)
<S> <C> <C>
Federal Reserve Bank ................................................................... $ 933 $ 224
Federal Home Loan Bank of Boston (FHLBB) ............................................... 645 1,246
Private Export Funding Corporation ..................................................... 599 599
------ ------
$2,177 $2,069
====== ======
</TABLE>
The Company is required to hold common stock investments in the Federal
Reserve Bank based on First International Bank's capital and in the FHLBB based
on borrowings from the FHLBB (Note 6).
At December 31, 1998 and December 31, 1997, investments with a carrying
value of $13,303,000 and $14,422,000, respectively, were pledged to
collateralize public and government deposits, as required by law, and certain of
the Bank's lines of credit. The Bank sold two debt securities with a par value
of $4,500,000 in 1998, recording gains of $32,600. There were no sales of debt
securities for the two year period ended December 31, 1997.
29
<PAGE>
The contractual maturities of debt securities at December 31, 1998 and 1997 are
as follows:
- --------------------------------------------------------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
- --------------------------------------------------------------------------------
(dollars in thousands)
December 31, 1998
Available for sale
Due in one year or less ............... $11,599 $11,613 6.18%
Due after one year
through five years ............ 3,669 3,669 7.62%
Due after 10 years .................... 15,387 16,083 5.76%
Mortgage-backed securities ............ 88 91 8.11%
------- ------- -----
$30,743 $31,456 6.15%
======= ======= =====
Held to maturity
Due after one year
through five years ............ $ 100 $ 100 7.75%
Due after five years
through ten years ............. 525 525 7.46%
Mortgage-backed securities ............ 1,361 1,364 6.48%
------- ------- -----
$ 1,986 $ 1,989 6.80%
======= ======= =====
- --------------------------------------------------------------------------------
Weighted
Amortized Fair Average
Cost Value Yield
- --------------------------------------------------------------------------------
(dollars in thousands)
December 31, 1997
Available for sale
Due in one year or less ............... $ 5,588 $ 5,588 5.65%
Due after one year
through five years ............ 6,510 6,522 5.82%
Mortgage-backed securities ............ 648 657 6.22%
------- ------- -----
$12,746 $12,767 5.77%
======= ======= =====
Held to maturity
Due after one year
through five years ............ $ 4,545 $ 4,545 4.43%
Due after five years
through ten years ............. 1,100 1,100 7.88%
Mortgage-backed securities ............ 1,790 1,784 6.09%
------- ------- -----
$ 7,435 $ 7,429 5.34%
======= ======= =====
- --------------------------------------------------------------------------------
3. Loans:
The outstanding balances of loans originated and held by the Company are as
follows:
- --------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Commercial and industrial ...................... $ 78,750 $ 71,836
Commercial real estate ......................... 31,650 55,192
Residential real estate ........................ 3,013 6,515
Consumer loans and lines of credit ............. 533 1,855
--------- ---------
Total loans .............................. 113,946 135,398
========= =========
Less: Allowance for possible loan losses ....... 4,000 3,100
Discount on retained loans ............... 1,419 1,782
Net deferred loan origination costs ...... (431) (109)
--------- ---------
Loans, net .......................... $ 108,958 $ 130,625
========= =========
At December 31, 1998, the Company had fixed and variable rate loans with
maturities greater than one year totaling $11,464,000 and $58,814,000
respectively.
The scheduled maturities of the Company's loan portfolio as of December 31,
1998 are as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
After One
Within One Year Through After Five
Year Five Years Years Total
- -------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Commercial and industrial ....... $40,264 $11,095 $ 27,391 $ 78,750
Commercial real estate .......... 2,843 988 27,819 31,650
Residential loans ............... 436 493 2,084 3,013
Consumer loans and
lines of credit ......... 125 270 138 533
------- ------- -------- --------
$43,668 $12,846 $ 57,432 $113,946
======= ======= ======== ========
</TABLE>
The outstanding balances of loans originated by the Company and sold to
others on a servicing retained basis are as follows:
- --------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Guaranteed Loans:
SBA .......................................... $245,073 $195,454
USDA ......................................... 75,526 45,806
Ex-Im Bank ................................... 117,726 82,794
FHLMC ........................................ 455 17,305
-------- --------
$438,780 $341,359
-------- --------
Unguaranteed Portions
and Unguaranteed Loans:
SBA .......................................... $ 48,323 $ 51,673
USDA ......................................... 6,173 5,326
Securitized commercial ....................... 104,133 --
Other commercial ............................. 56,957 27,235
Home equity lines ............................ 2,166 3,484
-------- --------
$217,752 $ 87,718
-------- --------
Total loans serviced for others .............. $656,532 $429,077
======== ========
30
<PAGE>
During 1998 the Bank completed two commercial loan securitization
transactions and a sale to a commercial paper conduit. These transactions
resulted in the issuance of $113.3 million of senior and subordinated securities
and included $117.1 million of loans. Key economic assumptions used in recording
these transactions and in measuring the Bank's retained interests were as
follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Commercial
Securitizations Paper Sale
-------------------------- ----------
Unguaranteed
Portions Term Revolving
of SBA Loans Commercial Commercial
------------ ---------- ----------
<S> <C> <C> <C>
Prepayment speed ......................... 8.0% 8.0% 7.5%
Weighted-average life
(in years) ....................... 13.75 10.65 3.0
Aggregate expected
credit losses .................... 5.74% 4.22% 1.25%
Discount rate for
servicing cash flows ............. 9.48% 8.43% 8.47%
</TABLE>
In connection with the December 1998 sale of revolving commercial loans, a
subsidiary of the Bank entered into an interest rate swap with a notional amount
of $19,000,000 to mitigate the interest rate risk inherent in the transaction.
The swap provides for net settlement on a monthly basis, which is recorded as an
adjustment to interest income. At December 31, 1998 there had been no
settlements related to the swap transaction.
Changes in the Allowance for possible loan losses were as follows:
- --------------------------------------------------------------------------------
December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Reserve at beginning of year .................. $ 3,100 $ 3,000 $ 2,000
Provision charged to income ................... 3,071 2,239 3,487
Recoveries on loans previously charged off .... 153 106 40
Loans charged off ............................. (2,324) (2,245) (2,527)
------- ------- -------
Balance at end of year ........ $ 4,000 $ 3,100 $ 3,000
======= ======= =======
Certain information with regard to impaired loans is detailed below:
- --------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Impaired loans ................................ $2,959 $2,215
Allocated allowance ........................... $ 731 $ 644
Average recorded investment ................... $2,587 $2,194
Interest income recognized .................... $ 152 $ 131
The carrying value of the impaired loans has been calculated based on the
estimated fair value of the underlying collateral.
Nonaccrual loans totaled $3,104,000 and $2,364,000 at December 31, 1998 and
1997, respectively. The gross interest income that would have been recorded if
the non-accrual loans had been current in accordance with their original terms
would have been $176,000 and $231,000 for the years ended December 31, 1998 and
1997, respectively. The actual amount of interest income recognized on those
loans was $160,000 and $134,000 for the years ended December 31, 1998 and 1997,
respectively. There were no loans over 90 days and still accruing interest at
each period end presented.
Loans to principal stockholders, directors, companies of which directors
are principal owners, individuals directly related to or affiliated with
directors, and executive officers aggregated $662,000 and $602,000 at December
31, 1998 and 1997, respectively. During 1998, repayments and sales amounted to
$639,000 while advances under new or existing loans totaled $699,000.
In the normal course of business, the Bank enters into agreements to
extend credit which are not reflected in the accompanying consolidated financial
statements.
Outstanding credit commitments are detailed below:
- --------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Commercial lines of credit ..................... $61,652 $47,987
Consumer lines of credit ....................... 373 530
Performance letters of credit .................. 8,284 18,975
Financial letters of credit .................... 14,593 1,415
Commercial letters of credit ................... 8,433 1,542
------- -------
Total credit commitments ............... $93,335 $70,449
======= =======
At December 31, 1998 and 1997, letters of credit totaling $18,801,000 and
$17,548,000, respectively, carry the guarantee of Ex-Im Bank.
Commitments to extend such credit are agreements to lend to a client as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require the payment of a fee. Since some of the agreements may expire
without being drawn upon or may be terminated by the Bank, these amounts do not
necessarily represent a future cash requirement of the Bank. Prior to entering
into any agreement to extend credit, the Bank evaluates the client's
creditworthiness in accordance with loan underwriting standards as approved by
the Board of Directors. The amount of collateral obtained, if deemed necessary,
is based on management's credit evaluation of the client. Collateral for
commercial loan commitments varies but may include accounts receivable,
inventory, property, plant and equipment and commercial real estate.
Although the Bank's maximum exposure to credit loss is the total contract
amount of the commitments and letters of credit noted above, management does not
anticipate any material losses as a result of these agreements and does not
consider them to represent an undue level of credit, interest or liquidity risk
for the Bank.
31
<PAGE>
The Bank specializes in lending to small and medium size commercial
enterprises and professional firms throughout the Northeast, the Mid-atlantic
and Midwest regions of the U.S. Approximately 30% of the loans outstanding have
been made to borrowers located in Connecticut. Such loans and loan commitments
are generally collateralized by real estate or other assets.
The Bank also lends to companies in various international emerging markets.
Such U.S. dollar denominated loans are either (i) fully guaranteed by Ex-Im
Bank and are sold at origination to various investors on a non-recourse,
servicing retained basis or, (ii) insured by a privately issued credit insurance
policy which provides coverage of up to 95% of the commercial risk of the
transaction.
Gains on the sale of these loans and the related servicing income in
aggregate and by significant country is detailed below.
- --------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1998 1997
Gains from loan sales Servicing income
- --------------------------------------------------------------------------------
(dollars in thousands)
All international .............. $2,274 $2,229 $430 $264
Brazil ......................... $ 873 $1,326 $284 $ 95
Dominican Republic ............. $ 320 $ 15 $ 9 --
Philippines .................... $ 275 -- $ 7 --
No other countries account for a significant portion of gain on loan sales
or servicing income.
Loans held by the Bank to borrowers located outside the U.S. totaled
$14,272,000 at December 31, 1998.
The Company reported total revenues from the gain on loan sales, interest
income and loan servicing income from loans made to companies located outside
the U.S. in the aggregate amounts of $4,242,000, $3,199,000 and $471,000 for
the years ended December 31, 1998, 1997 and 1996, respectively. The Company does
not have any assets located outside of the U.S.
- --------------------------------------------------------------------------------
4. Premises, Equipment and Leases:
- --------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------
(dollars in thousands)
Buildings and leasehold improvements ............... $2,252 $1,590
Furniture, fixtures, and equipment ................. 4,544 3,408
------ ------
6,796 4,998
Less: Accumulated depreciation
and amortization ................... 2,981 2,304
------ ------
Premises and equipment, net ................ $3,815 $2,694
====== ======
The Company leases its corporate offices in Hartford, Connecticut and other
facilities for its U.S. representative offices. Each of the leases provide for
minimum and contingent rentals and include renewal options. Total rental expense
for the years ended December 31, 1998, 1997 and 1996 was $1,279,000, $833,000
and $636,000 respectively. Minimum future obligations for premises under
noncancelable leases are as follows:
- --------------------------------------------------------------------------------
Year End Operating Leases
- --------------------------------------------------------------------------------
(dollars in thousands)
1999 $1,321
2000 1,554
2001 1,469
2002 1,433
2003 96
Thereafter 10
------
$5,883
======
- --------------------------------------------------------------------------------
5. Deposits:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction Accounts:
Non-interest bearing checking ............ $ 44,599 -% $ 38,236 -% $ 27,888 -%
Interest bearing checking ................ 11,329 2.51 7,867 2.51 8,248 2.52
-------- ---- -------- ---- -------- ----
Total checking accounts .......... 55,928 0.51 46,103 0.43 36,136 0.58
Savings accounts ................................. 117,816 4.86 92,003 5.25 69,278 5.09
Time deposits under $100,000 ..................... 19,034 5.56 26,542 5.88 37,085 5.57
Time deposits $100,000 or more ................... 27,096 5.49 7,673 5.26 1,817 5.06
-------- ---- -------- ---- -------- ----
Total deposits ................... $219,874 3.89% $172,321 4.06% $144,316 4.08%
======== ==== ======== ==== ======== ====
</TABLE>
32
<PAGE>
- --------------------------------------------------------------------------------
December 31,
Time Deposit Maturities 1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Time deposits maturing within:
1 year .................................. $43,872 $31,593 $35,712
2 years ................................. 1,390 1,984 2,350
3 years ................................. 294 245 290
4 years ................................. 115 219 259
5 years ................................. 459 174 206
More than 5 years ....................... -- -- 85
------- ------- -------
Total time deposits ..................... $46,130 $34,215 $38,902
======= ======= =======
- --------------------------------------------------------------------------------
Maturity Period of Time December 31,
Deposits Over $100,000 1998
- --------------------------------------------------------------------------------
(dollars in thousands)
Three months or less .............................. $23,338
Over three through six months ..................... 603
Over six through twelve months .................... 2,694
Over one year ..................................... 461
-------
Total time deposits over $100,000 ................. $27,096
=======
- --------------------------------------------------------------------------------
6. Funding Sources:
Warehouse Credit Lines:
The Bank has a $75 million warehouse line of credit with Prudential
Securities Credit Corporation ("Prudential") to fund commercial (non-government
guaranteed) loan originations. The Bank also has a commitment from Prudential
for a $50 million warehouse line of credit to fund the unguaranteed portion of
SBA loans. Upon approval of the SBA and execution of closing documents this line
will be available to the Company. Advances under each of the facilities will be
at an interest rate of LIBOR plus 120 basis points and the advance rates are
between 80% and 85% of the principal balance outstanding on the loans pledged to
collateralize the facility. The term of each facility is one year. There were no
outstanding advances at December 31, 1998 under the warehouse line of credit.
Commercial Paper Conduit:
The Bank has a $65 million commercial paper conduit facility with First
Union Capital Markets to fund the purchase of revolving lines of credit and
certain other commercial loans. At December 31, 1998, $21.4 million was sold
under this facility. The facility is a three year committed facility that is
renewable annually.
Brokered Certificates of Deposit:
The Bank has the ability to solicit wholesale certificates of deposit
through established brokers. At December 31, 1998, the Bank had written
agreements with five national brokers for the issuance of such deposits. As a
well-capitalized institution (see Note 7) the Bank may utilize brokered
certificates of deposit to the extent deemed appropriate by the Company. At
December 31, 1998, the Bank had $20 million of such deposits outstanding which
mature on March 24, 1999.
Federal Home Loan Bank of Boston Advances:
The Bank currently has the ability to borrow approximately $3.5 million
from the FHLBB under a line of credit. Any outstanding advances from the FHLBB
are collateralized mortgage loans on residential properties and certain U.S.
Treasury and Agency-issued securities.
Other Borrowings:
The Bank also maintains lines of credit at various correspondent banks
which are primarily used for the issuance or confirmation of letters of credit.
At December 31, 1998, these lines aggregated $31 million of which $15 million is
required to be collateralized upon usage. Letters of credit totaling $17 million
were outstanding for the Bank's clients at December 31, 1998 under such lines.
- --------------------------------------------------------------------------------
7. Stockholders' Equity:
Earnings Per Share Calculation:
The table detailed below reconciles the number of shares used in the basic
earnings per share ("EPS") calculation to the number of shares used in the
diluted EPS calculation in accordance with SFAS 128 (see Note 1). There were no
changes to net income available to common stockholders between the basic and
diluted EPS calculations.
- --------------------------------------------------------------------------------
Years Ended December 31,
1998 1997 1996
- --------------------------------------------------------------------------------
(shares in thousands)
Common shares outstanding for basic EPS ........ 7,909 6,330 5,763
Dilutive securities from stock option plans .... 291 237 72
----- ----- -----
Common shares outstanding
for diluted EPS ........................ 8,200 6,567 5,835
===== ===== =====
33
<PAGE>
Options to purchase 227,000 shares of common stock at a weighted average
price of $15.00 per share were outstanding at the end of 1998, but were not
included in the computation of diluted EPS because the exercise price of the
options exceeded the average market price of the common shares.
Stockholder Note Receivable:
In June 1994 the Board of Directors approved the issuance of 614,600 shares
(as adjusted for the common stock split) of the Company's common stock to the
Company's Chief Executive Officer at a price of $1.69 per share. The terms of
the transaction provided for a cash down payment of $17,560 and a promissory
note in the amount of $1,020,000 for the balance. The note is collateralized by
the stock issued. Principal is due at maturity on December 31, 2000. Interest
was to accrue at the rate of 7% and was due at maturity; however, upon
completion of the public offering in September 1997, the accrued interest was
forgiven and it was converted to a non-interest bearing note (See Note 1). The
note was then discounted to yield a market rate of interest. The President is
legally entitled to any cash dividends declared, although the promissory note
provided that 75% of such cash dividends must be retained by the Company and
applied to the note as a repayment of principal. This repayment provision was
eliminated effective January 1, 1997.
Although the stock is legally outstanding, since a note was accepted in
exchange for a portion of the issue price, the note receivable is presented as a
separate component of stockholders' equity. These shares are legally outstanding
and are included in the earnings per share calculations as of the date of
issuance. On January 27, 1999, the Company agreed to forgive the remaining
principal balance of the stockholder note receivable and agreed to pay a bonus
to the Company's Chief Executive Officer equal to the amount of his resulting
tax liability. These transactions will be reflected in the results for the
quarter ended March 31, 1999 through an increase in salaries expense.
Repurchase and Retirement of Common Stock:
The Board of Directors has authorized the Company's repurchase of up to
400,000 shares of common stock, subject to market conditions at any time through
March 31, 1999. No shares have been repurchased since 1996. In 1996 the Company
repurchased and retired 8,000 shares of the Company's common stock for an
average purchase price of $2.78 per share.
Preferred Stock:
The Company has established a class of 2,000,000 shares of preferred stock.
The Board of Directors was granted the power to establish and designate the
different series and voting powers, designations, preferences and other rights,
qualifications, limitations or restrictions to be placed upon any shares of
preferred stock to be issued by the Company.
Dividends:
Dividends payable by First International Bancorp, Inc. are generally
unrestricted (see below), although the ability of the Company to pay dividends
may, from time to time, be dependent upon the dividends paid to it by the Bank.
A national bank must obtain the approval of the Office of the Comptroller of the
Currency (OCC) if the total of all dividends declared in any calendar year
exceeds the bank's net profits, as defined, for that year combined with its
retained net profits for the preceding two calendar years.
Regulatory Capital Requirements:
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets (as defined in regulations). Management believes
that, as of December 31, 1998 and 1997, the Bank meets all capital adequacy
requirements to which it is subject and that, under the current regulations, the
Bank will continue to meet its minimum capital requirements in the foreseeable
future.
As of December 31, 1998 and 1997, the most recent notifications from the
Office of the Comptroller of the Currency categorized the Bank as
well-capitalized under the regulatory framework for prompt corrective action. To
be categorized as well-capitalized, the Bank must maintain minimum total and
Tier I risk-based and Tier I leverage ratios as set forth in the table below.
There are no conditions or events since the notification that management
believes have changed the Bank's category.
34
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Amounts
Amounts To be Well Capitalized
For Capital Under Prompt Corrective
Actual Amounts Adequacy Purposes Action Provisions
Capital Ratio Capital Ratio Amount Ratio
- -----------------------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital/Risk Weighted Assets ................. $49,929 21.78% $18,343 8.00% $22,929 10.00%
Tier I Capital/Risk Weighted Assets ................ $47,181 20.58% $ 9,171 4.00% $13,757 6.00%
Tier I Capital/Average Assets ...................... $47,181 18.59% $10,151 4.00% $12,689 5.00%
As of December 31, 1997:
Total Capital/Risk Weighted Assets ................. $31,415 17.57% $14,348 8.00% $17,935 10.00%
Tier I Capital/Risk Weighted Assets ................ $29,170 16.32% $ 7,174 4.00% $10,761 6.00%
Tier I Capital/Average Assets ...................... $29,170 14.74% $ 8,258 4.00% $10,322 5.00%
As of December 31, 1996:
Total Capital/Risk Weighted Assets ................. $14,253 11.62% $ 9,811 8.00% $12,264 10.00%
Tier I Capital/Risk Weighted Assets ................ $12,702 10.36% $ 4,906 4.00% $ 7,358 6.00%
Tier I Capital/Average Assets ...................... $12,702 8.44% $ 6,017 4.00% $ 7,522 5.00%
</TABLE>
- --------------------------------------------------------------------------------
8. Stock Option Plans:
The Company's 1994 Incentive Stock Option Plan allows for the award of
options to officers which vest immediately. As of December 31, 1998, 45,064
shares were available for issuance under this plan.
The Company's Amended and Restated 1996 Stock Option Plan provides for the
issuance of options that may be granted to full time officers and directors.
These options would generally vest ratably over a four-year period beginning one
year after the grant date. A total of 970,106 shares have been authorized for
issuance under this plan. At December 31, 1998 there were 328,509 shares
available for issuance under the plan.
Both plans provide that the options may be granted to purchase common stock
at a price not less than the fair market price of the Company's stock at the
date for the granting of such options, and unless otherwise provided, the
options have a ten year term. The plans also provide that options granted and
the related option price are adjusted to reflect changes in the shares
outstanding due to stock splits and dividends, or other adjustments.
The following tables detail the activity under the 1994 Incentive Stock
Option Plan and 1996 Stock Option Plan:
- --------------------------------------------------------------------------------
Average
Option Option
1994 Incentive Stock Option Plan Shares Price
- --------------------------------------------------------------------------------
Outstanding at January 1, 1996 ................ 304,500 $1.752
Granted ............................... 83,653 2.191
Exercised ............................. (21,000) 2.045
Canceled .............................. (37,538) 1.866
-------- ------
Outstanding at December 31, 1996 .............. 329,615 1.832
Exercised ............................. (144,325) 1.765
Canceled .............................. (5,513) 2.191
-------- ------
Outstanding at December 31, 1997 .............. 179,777 1.875
Exercised ............................. (57,013) 1.758
Canceled .............................. (263) 2.191
-------- ------
Outstanding at December 31, 1998 .............. 122,501 $1.929
======== ======
35
<PAGE>
- --------------------------------------------------------------------------------
Average
Option Option
1996 Stock Option Plan Shares Price
- --------------------------------------------------------------------------------
Outstanding at January 1, 1996 ................. -- $ --
Granted ................................ 46,663 2,191
Canceled ............................... (1,568) 2,191
--------- -------
Outstanding at December 31, 1996 ............... 45,095 2,191
Granted ................................ 453,025 5,356
Exercised .............................. (1,025) 2,191
Canceled ............................... (44,240) 2,642
--------- -------
Outstanding at December 31, 1997 ............... 452,855 5,313
Granted ................................ 225,500 14,969
Exercised .............................. (13,889) 3,121
Canceled ............................... (37,783) 5,704
--------- -------
Outstanding at December 31, 1998 ............... 626,683 $ 8,913
========= =======
In July 1997, the Company's Board of Directors approved the grant of
options to purchase 5,000 shares of common stock to each non-employee director
in recognition of their prior service at the price of $8.50 per share. A total
of 40,000 options, which vested 180 days from the date of grant were awarded at
that date. There are 25,000 options outstanding with a remaining contractual
life of 8.60 years at December 31, 1998.
Certain information with regard to options outstanding at December 31, 1998 is
detailed below:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Weighted-
Number of Average Weighted-
Options Remaining Average Number
Range of Outstanding at Contractual Life Exercise Exercisable at
Exercise Price December 31, 1998 (years) Price December 31, 1998
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1994 Incentive Stock
Option Plan: $1.689 to $2.191 122,501 6.30 $1.929 122,501
1996 Stock Option Plan: $2.191 to $2.631 218,417 8.00 $2.589 91,791
$6.875 1,000 9.80 $6.875 ---
$8.50 174,566 8.60 $8.500 89,091
$9.875 5,000 9.90 $9.875 ---
$13.5 to $14.375 79,000 9.40 $14.209 3,750
$15.375 to $16.3125 148,700 9.10 $15.432 4,198
--------- --------- ---------
Total, Both Plans: 749,184 $7.687 311,331
========= ========= =========
</TABLE>
There is no compensation expense for any options granted prior to July 15,
1997, the date of the Company's initial filing with the Securities and Exchange
Commission indicating its intent to complete a public stock offering (Note 1),
based on the minimum value methodology assuming a four year expected life and
annual dividends ranging from 4.6% to 6.2% of the exercise prices.
In estimating the compensation which would be attributable to each option
grant since July 15, 1997 if fair value accounting were to be utilized, the
Company has used the Black Scholes option pricing model with the following
weighted average assumptions for options granted in 1998 and 1997: dividend
yield of 1.0% and 1.4%; expected volatility of 37.5% and 30%; risk free interest
rate of 5.08% and 6.14%; and an expected life of 5 years. Had compensation been
determined in accordance with the fair value provisions of SFAS No. 123, the
Company's net income, basic earnings per share and diluted earnings per share
would have been reduced to the pro forma amounts indicated below:
- --------------------------------------------------------------------------------
December 31,
1998 1997
- --------------------------------------------------------------------------------
Net income (in thousands)
As reported $ 7,033 $ 4,429
Pro forma $ 6,577 $ 4,336
Basic earnings per share
As reported $ .89 $ .70
Pro forma $ .83 $ .69
Diluted earnings per share
As reported $ .86 $ .67
Pro forma $ .80 $ .66
36
<PAGE>
- --------------------------------------------------------------------------------
9. Income Taxes:
The components of the income tax provision (benefit) for the years ended
December 31 are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Current Provision:
Federal ........................... $3,346 $ 2,047 $ 1,883
State ............................. 953 727 719
------ ------- -------
4,299 2,774 2,602
------ ------- -------
Deferred Provision (Benefit):
Federal ........................... 135 87 (184)
State ............................. 38 34 (65)
------ ------- -------
173 121 (249)
------ ------- -------
Total provision for income taxes ...... $4,472 $ 2,895 $ 2,353
====== ======= =======
The effective tax rates differ from the federal statutory rate due to state
taxes, net of the federal benefit and a dividend received deduction. In 1998 the
Company received a $34,000 State of Connecticut tax refund resulting from a
statutory change relating to prior years. The State of Connecticut statutory tax
rate has decreased in each of the last 3 years.
The components of the net deferred tax asset (liability) at December 31 are as
follows:
- --------------------------------------------------------------------------------
1998 1997
Federal State Federal State
- --------------------------------------------------------------------------------
(dollars in thousands)
Deferred tax assets:
Allowance for possible loan losses .... $ 499 $ 136 $ 123 $ 38
Other ................................. 92 25 74 23
----- ----- ----- ----
Total deferred tax assets ............... 591 161 197 61
----- ----- ----- ----
Deferred tax liabilities:
Investments mark-to-market ............ 222 61 7 2
Depreciation .......................... 74 20 88 27
Deferred loan costs ................... 167 46 32 10
Deferred gain on sale of loans ........ 404 109 -- --
Other ................................. 6 1 2 1
----- ----- ----- ----
Total deferred tax liabilities .......... 873 237 129 40
----- ----- ----- ----
Net deferred tax assets (liabilities) ... $(282) $ (76) $ 68 $ 21
===== ===== ===== ====
The allocation of the deferred tax provision involving items charged to current
year income and items charged directly to stockholders' equity for the year
ended December 31, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1998 1997
Federal State Federal State
- ------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Deferred tax provision allocated to shareholders' equity $215 $59 $ 46 $16
Deferred tax provision allocated to income ............. 135 38 87 34
------ ----- ----- -----
Total deferred tax provision ................... $350 $97 $133 $50
====== ===== ===== =====
</TABLE>
37
<PAGE>
- --------------------------------------------------------------------------------
10. Employee Benefit Plan:
The Company maintains a contributory savings plan which qualifies under
Section 401(k) of the Internal Revenue Code for employees meeting certain
service requirements. Eligible employees may make contributions to the Plan
based on specified percentages of their compensation. Beginning July 1, 1998,
the Company matched 100% of employees' contribution, up to 6% of compensation.
The matching contribution was 85% in prior periods. The Company's matching
contributions totaled $290,000, $139,000 and $96,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
- --------------------------------------------------------------------------------
11. Estimated Fair Values of Financial Instruments:
Statement of Financial Accounting Standards No. 107 "Disclosures About Fair
Value of Financial Instruments" (SFAS 107) requires the Company to disclose fair
value information for certain of its financial instruments, including loans,
securities, deposits, borrowings and other such instruments. Quoted market
prices are not available for a significant portion of the Company's financial
instruments and, as a result, the fair values presented may not be indicative of
net realizable or liquidation values. Fair values are estimates derived using
present value or other valuation techniques and are based on judgments regarding
future expected loss experience, current economic conditions, risk
characteristics and other factors. In addition, fair value estimates are based
on market conditions and information about the financial instrument at a
specific point in time. Fair value estimates are based on existing on- and
off-balance sheet financial instruments without attempting to estimate the value
of anticipated future business and the value of assets and liabilities that are
not considered financial instruments. Such items include loan servicing, core
deposit intangibles and other customer relationships, premises and equipment,
foreclosed real estate and income taxes. In addition, the tax ramifications
relating to the realization of the unrealized gains and losses may have a
significant effect on fair value estimates, and have not been considered in the
estimates.
The following is a summary of the methodologies and assumptions used to
estimate the fair value of the Company's financial instruments pursuant to SFAS
107:
Cash, cash equivalents and other: The fair value of cash and due from banks,
federal funds sold, accrued interest receivable and accrued interest payable, is
considered to approximate the book value due to their short-term nature and
negligible credit losses.
Securities: Securities classified as available-for-sale are carried at fair
value. Fair value for securities available for sale and held to maturity was
determined by secondary market and independent broker quotations where
available, or by the Company's estimate of market value.
Loans: The fair values for loans are estimated using discounted cash flow
analyses, and interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Loans held for sale: The fair values for loans held for sale are based on
estimated sales prices derived from the current market conditions.
Deposit liabilities: The fair value for demand and savings deposits is equal to
the amount payable on demand at the balance sheet date which is equal to the
carrying value. The fair value of certificates of deposit was estimated by
discounting cash flows using rates currently offered by the Bank for deposits of
similar remaining maturities.
The fair value information of the Company's financial instruments required to be
valued by SFAS No. 107 are as follows:
- --------------------------------------------------------------------------------
December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------
Carrying Estimated Carrying Estimated
Value Fair Value Value Fair Value
-----------------------------------------------
(dollars in thousands)
Financial Assets
Cash and due from banks ........... $ 13,405 $ 13,405 $ 10,944 $ 10,944
Federal funds sold ................ 44,930 44,930 6,450 6,450
Securities available for sale ..... 31,456 31,456 12,767 12,767
Securities held to maturity ....... 1,986 1,989 7,435 7,429
Loans ............................. 108,958 109,970 130,625 130,567
Loans held for sale ............... 8,577 8,630 9,070 9,207
Accrued interest receivable ....... 1,383 1,383 1,200 1,200
Financial Liabilities
Deposits
Checking .................. $ 55,928 55,928 $ 46,103 $ 46,103
Savings ................... 117,816 117,816 92,003 92,003
Time deposits ............. 46,130 46,349 34,215 34,402
U.S. Treasury demand note ......... 1,047 1,047 1,085 1,085
Accrued interest payable .......... 768 768 745 745
38
<PAGE>
- --------------------------------------------------------------------------------
12. Segment Information:
The Company has determined that its reportable segments are its domestic
Commercial Banking divisions, its International Banking division and its Loan
Servicing business unit. The domestic Commercial Banking divisions are an
aggregation of the Commercial Banking-East and Commercial Banking-West
divisions, which included 6 and 8 business units, respectively, at December 31,
1998. The Commercial Banking divisions offer SBA, USDA and other commercial
loans to small and medium size manufacturers in the U.S. Each Commercial
division is headed by an Executive Vice President and the divisions offer the
same products and services and have the same marketing approach. The
International Banking division is comprised of two business units which market
Ex-Im Bank guaranteed loans and privately insured loans to small and medium size
manufacturers located in international emerging markets and the Company's Trade
Finance business unit, which provides Ex-Im Bank guaranteed export working
capital lines of credit to U.S. companies and import financing for U. S.
companies.
The Loan Servicing business unit is responsible for all loan operations
functions, which include the preparation of loan documents, the maintenance of
loans and the servicing of loans managed for others.
The segment information prepared internally and utilized for
decision-making includes only revenues from gain on loan sales and certain fees
and only certain expenses. Gains on the sale of loans and loan related fee
income are allocated to business units and aggregated for each division. As
detailed in the reconciliation below, the gain on securitizations was not fully
allocated to the business units in 1998. Direct expenses, principally personnel
costs, and a limited amount of certain other expenses, such as supplies and
indirect marketing are allocated to the business units. The Company does not
allocate interest income or interest expense to business units, nor allocate the
loan loss provision, corporate overhead expense or income taxes. Likewise,
assets, including loans, are not allocated among business units and, therefore,
are not disclosed below. The Company is currently evaluating the costs and
benefits of making certain additional income, expense and asset allocations in
the future.
The accounting policies of the segments are the same as those described in
Note 1. There are no intersegment revenues.
Financial information for the Company's business segments is as follows:
- --------------------------------------------------------------------------------
For the Years Ended December 31,
Commercial Banking Division 1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Gains on the sale of loans ............... $ 11,560 $ 7,384 $ 4,396
Other loan-related income ................ 198 76 51
--------- --------- ----------
Total allocated revenues ......... 11,758 7,460 4,447
Allocated non-interest expense ........... 5,800 3,998 2,155
--------- --------- ----------
Direct net contribution .......... $ 5,958 $ 3,462 $ 2,292
========= ========= ==========
Number of business units at year end ..... 14 10 5
========= ========= ==========
Number of lending officers ............... 53 35 19
========= ========= ==========
- --------------------------------------------------------------------------------
For the Years Ended December 31,
International Banking Division 1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Gains on the sale of loans ............... $ 2,814 $ 2,555 $ 541
Other loan-related income ................ 603 258 43
--------- --------- ----------
Total allocated revenues ......... 3,417 2,813 584
Allocated non-interest expense ........... 2,239 1,633 888
--------- --------- ----------
Direct net contribution .......... $ 1,178 $ 1,180 $ (304)
========= ========= ==========
Number of business units at year end ..... 3 3 2
========= ========= ==========
Number of lending officers ............... 16 11 7
========= ========= ==========
- --------------------------------------------------------------------------------
For the Years Ended December 31,
Loan Servicing Business Unit 1998 1997 1996
- --------------------------------------------------------------------------------
(dollars in thousands)
Loan servicing income .................... $ 3,017 $ 2,119 $ 1,294
Allocated non-interest expense ........... 1,265 1,442 609
--------- --------- ----------
Direct net contribution .......... $ 1,752 $ 677 $ 685
========= ========= ==========
Loans under management at year end ....... $779,055 $573,545 $ 380,432
========= ========= ==========
39
<PAGE>
Detailed below are reconciliations of the amounts reported for each business
segment to the amounts reported in the consolidated income statement:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Commercial International Loan Unallocated Consolidated
For the Year Ended December 31, 1998 Banking Banking Servicing Amounts Totals
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total allocated revenues ....................... $11,758 $3,417 $3,017 $--- $18,192
Interest income ................................ 13,341 1,675 -- 3,072 18,088
Unallocated gain on the sale of commercial loan-
backed securitizations ................. -- -- -- 2,598 2,598
Other fees and income .......................... -- -- -- 1,322 1,322
------- -------- -------- ------- --------
Total revenues ......................... 25,099 5,092 3,017 6,992 40,200
------- -------- -------- ------- --------
Non-interest expense ........................... 5,800 2,239 1,265 8,396 17,700
Interest expense ............................... -- -- -- 7,924 7,924
Provision for possible loan losses ............. -- -- -- 3,071 3,071
------- -------- -------- ------- --------
Total expenses ......................... 5,800 2,239 1,265 19,391 28,695
======= ======== ======== ======= ========
Income before income taxes ..... $19,299 $2,853 $1,752 $(12,399) $11,505
======= ======== ======== ======= ========
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Commercial International Loan Unallocated Consolidated
For the Year Ended December 31, 1997 Banking Banking Servicing Amounts Totals
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total allocated revenues ....................... $7,460 $2,813 $2,119 $ -- $12,392
Interest income ................................ 12,082 671 -- 1,872 14,625
Unallocated gain on the sale of commercial loan-
backed securitizations ................. -- -- -- 1,871 1,871
Other fees and income .......................... -- -- -- 847 847
------- -------- -------- ------- --------
Total revenues ......................... 19,542 3,484 2,119 4,590 29,735
------- -------- -------- ------- --------
Non-interest expense ........................... 3,998 1,633 1,442 6,728 13,801
Interest expense ............................... -- -- -- 6,371 6,371
Provision for possible loan losses ............. -- -- -- 2,239 2,239
------- -------- -------- ------- --------
Total expenses ......................... 3,998 1,633 1,442 15,338 22,411
------- -------- -------- ------- --------
Income before income taxes ..... $15,544 $1,851 $677 $(10,748) $7,324
======= ======== ======== ======== ========
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Commercial International Loan Unallocated Consolidated
For the Year Ended December 31, 1996 Banking Banking Servicing Amounts Totals
- ----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C> <C>
Total allocated revenues ....................... $4,447 $584 $1,294 $-- $6,325
Interest income ................................ 11,841 186 -- 1,278 13,305
Unallocated gain on the sale of commercial loan-
backed securitizations ................. -- -- -- 907 907
Other fees and income .......................... -- -- -- 2,713 2,713
------- -------- -------- ------- --------
Total revenues ......................... 16,288 770 1,294 4,898 23,250
------- -------- -------- ------- --------
Non-interest expense ........................... 2,155 888 609 4,773 8,425
------- -------- -------- ------- --------
Interest expense ............................... -- -- -- 5,741 5,741
Provision for possible loan losses ............. -- -- -- 3,487 3,487
------- -------- -------- ------- --------
Total expenses ......................... 2,155 888 609 14,001 17,653
------- -------- -------- ------- --------
Income before income taxes ..... $14,133 $(118) $685 $(9,103) $5,597
======= ======== ======== ======== ========
</TABLE>
40
<PAGE>
- --------------------------------------------------------------------------------
13. Other Comprehensive Income:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
For the Years Ended December 31,
1998 1997 1996
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Unrealized holding gains (losses) on investments available-
for-sale arising during period ................... $690 $148 ($77)
Tax expense (benefit) .................................... 274 62 (31)
----- ----- ------
Other comprehensive income net of tax ............. $416 $ 86 ($46)
===== ===== ======
</TABLE>
- --------------------------------------------------------------------------------
14. Parent Company Financial Information:
First International Bancorp, Inc. is the parent company of First International
Bank. There have been no loans extended from the Bank to First International
Bancorp, Inc. since inception of the holding company.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
First International Bancorp, Inc. For the Years Ended December 31,
Condensed Balance Sheets 1998 1997
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C>
Assets
Cash on deposit with Bank subsidiary ....................... $267 $7,334
Investment securities:
Available for sale, at fair value ...................... 19 85
Held to maturity, at amortized cost (fair value $4,000). -- 4,000
Investment in the Bank ..................................... 48,503 30,622
Other assets ............................................... 282 107
------- -------
Total assets ....................................... $49,071 $42,148
======= =======
Liabilities and Stockholders' Equity
Stockholders' equity ....................................... $49,071 $42,148
------- -------
Total liabilities and stockholders' equity ......... $49,071 $42,148
======= =======
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
First International Bancorp, Inc. For the Years Ended December 31,
Condensed Statements of Income 1998 1997 1996
- ----------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Dividends from Bank ............................ $650 $731 $415
Net interest income from investments ........... 116 102 --
Equity in undistributed net income of the Bank . 6,366 3,796 2,829
Non-interest expense, net ...................... (87) (284) --
------- ------- -------
Income before income taxes ............. 7,045 4,345 3,244
Provision (benefit) for income taxes 12 (84) --
------- ------- -------
Net income ............................. $7,033 $4,429 $3,244
======= ======= =======
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
First International Bancorp, Inc. For the Years Ended December 31,
Condensed Statements of Cash Flows 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
Cash flow from operating activities
Net income ................................................................. $7,033 $4,429 $3,244
Adjustments to reconcile net income to net cash provided by operating
activities:
Equity in undistributed net income of subsidiary ................... (6,366) (3,796) (2,829)
Decrease (increase) in other assets ................................ 40 (107) --
Stockholder note receivable discount ............................... -- 92 --
Stockholder note receivable accretion .............................. (64) (15) --
--------- -------- --------
Net cash provided by operations ............................ 643 603 415
========= ======== ========
Cash flows from investing activities:
Purchase of investment securities available for sale, net .......... (4,068) (4,085) --
Proceeds from maturities and sales of securities held to maturity
and available for sale .................................... 8,135 -- --
Additional investment in Bank subsidiary ........................... (11,100) (12,545) --
--------- -------- --------
Net cash used in investing activities ...................... (7,033) (16,630) --
--------- -------- --------
Cash flows from financing activities:
Proceeds from sale of common stock under option plan ............... 271 263 43
Proceeds from sale of common stock at public offering, net ......... -- 23,808 --
Repurchase of common stock ......................................... -- -- (22)
Dividends paid ..................................................... (948) (731) (658)
Principal payment on stockholder note receivable ................... -- -- 53
--------- -------- --------
Net cash provided by (used in) financing activities ........ (677) 23,340 (584)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents ....... (7,067) 7,313 (169)
Cash and cash equivalents beginning of year ................................ 7,334 21 190
--------- -------- --------
Cash and cash equivalents end of year ...................................... $267 $7,334 $21
========= ========= ========
</TABLE>
- -------------------------------------------------------------------------------
15. Selected Quarterly Consolidated Financial Information (unaudited):
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net interest income ................................................ $2,792 $2,481 $2,690 $2,201
Provision for possible loan losses ................................. 781 1,125 659 506
------ ------ ------ ------
Net interest income after provision for possible loan losses 2,011 1,356 2,031 1,695
Gain on sale of loans .............................................. 2,822 5,537 2,543 6,057
Other non-interest income .......................................... 1,087 1,425 1,108 1,534
------ ------ ------ ------
Total operating income ..................................... 5,920 8,318 5,682 9,286
Non-interest expense ....................................... 3,541 4,290 4,323 5,546
------ ------ ------ ------
Income before income taxes ................................. 2,379 4,028 1,359 3,740
Provision for income taxes ......................................... 976 1,587 474 1,436
------ ------ ------ ------
Net income ................................................. $1,403 $2,441 $885 $2,304
------ ------ ------ ------
Basic earnings per share ........................................... $.18 $.31 $.11 $.29
------ ------ ------ ------
Diluted earnings per share ......................................... $.17 $.30 $.11 $.28
====== ====== ====== ======
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
1997 Quarter Ended March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C> <C>
Net interest income ................................................ $1,799 $1,812 $2,119 $2,523
Provision for possible loan losses ................................. 368 591 157 1,123
------ ------ ------ ------
Net interest income after provision for possible loan losses 1,431 1,221 1,962 1,400
Gain on sale of loans .............................................. 2,222 3,256 1,739 4,593
Other non-interest income .......................................... 618 707 1,064 912
------ ------ ------ ------
Total operating income ..................................... 4,271 5,184 4,765 6,905
Non-interest expense ....................................... 2,496 3,414 3,472 4,419
------ ------ ------ ------
Income before income taxes ................................. 1,775 1,770 1,293 2,486
Provision for income taxes ......................................... 763 729 542 861
------ ------ ------ ------
Net income ................................................. $1,012 $1,041 $751 $1,625
====== ====== ====== ======
Basic earnings per share ........................................... $.17 $.18 $.13 $.22
====== ====== ====== ======
Diluted earnings per share ......................................... $.17 $.18 $.12 $.20
====== ====== ====== ======
</TABLE>
42
<PAGE>
- --------------------------------------------------------------------------------
16. Agreement to Sell Branch and Deposits:
On December 31, 1998, First International Bank entered into an Agreement
for Purchase and Sale of Assets and Assumption of Liabilities (the "Deposit Sale
Agreement") with Hudson United Bank. Pursuant to the Deposit Sale Agreement, the
Bank will sell its single branch in Hartford and approximately $150 million in
checking, savings and money market accounts to Hudson United Bank for a premium
of 6% of such deposits.
Following the sale of the branch, the Bank will continue to offer
FDIC-insured depository accounts in the form of certificates of deposit. The
Bank expects to fund its business with certificates of deposit, warehouse credit
lines, a commercial paper conduit and loan securitizations and sales. The branch
and deposit sale is expected to close by the end of the first quarter of
1999.
- --------------------------------------------------------------------------------
Notes
43
<PAGE>
Directors and Officers
- ---------------------------------------
First International Bank
Board of Directors
William J. Anderson
* Michael R. Carter
Carter Morse & Company
Brian J. Charlebois
Executive Vice President
* Arnold Chase
Chase Enterprises
* Cheryl Chase
Chase Enterprises
Craig M. Cooper
Fairbank Mortgage Company
Leslie A. Galbraith
President, Chief Operating Officer
and Chief Financial Officer
Dean Goodermote
Process Software Corporation
* Frank P. Longobardi, CPA
Haggett, Longobardi & Company
David G. Sandberg
* Brett N. Silvers
Chairman and Chief Executive Officer
Kenneth R. Sonenclar
Classics Interactive, Inc.
Douglas K. Woods
Liberty Precision Industries, Ltd.
* Member of First International
Bancorp, Inc. Board of Directors
- ---------------------------------------
First International Bancorp, Inc.
Officers
Brett N. Silvers
Chairman, Chief Executive Officer
and President
Leslie A. Galbraith
Executive Vice President,
Secretary and Treasurer
- ---------------------------------------
First International Bank
Officers
Chairman and Chief Executive Officer
Brett N. Silvers
President, Chief Operating Officer
and Chief Financial Officer
Leslie A. Galbraith
Executive Vice Presidents
Richard W. Bradshaw
Brian J. Charlebois
David J. Etter
Paul J. Falvey
James G. Fortsch
Frank P. La Monaca
Senior Vice Presidents
Charles E. Baker
David M. Baroody
Bradley C. Berryman
Cynthia D. Bradley
David B. Cook
Tyler T. Foster
Ira J. Gottlieb
Stephen M. Greene
Thomas G. Hollinger
Theodore J. Horan
Timothy Jones
Keith D. Kelly
Frank M. Mac Hugh
Todd D. Maugans
Gerald F. O'Loughlin
Constance E. Perrine
Charles E. Poehnert
Richard M. Rabideau
Leona M. Rapelye
Michael J. Rister
Matthew J. Roach
Gerald R. Tavernier, Jr.
Shaun P. Williams
44
<PAGE>
General Information
- --------------------------
Corporate Headquarters
280 Trumbull Street
Hartford, CT 06103
(860) 727-0700
www.FirstInterBank.com
NASDAQ: FNCE
Transaction Counsel
Updike, Kelly & Spellacy
One State Street
Hartford, CT 06123
Corporate Counsel
Bingham Dana LLP
100 Pearl Street
Hartford, CT 06103
Independent Accountants
PricewaterhouseCoopers LLP
100 Pearl Street
Hartford, CT 06103
Transfer Agent
Requests for changes in the registration of stock certificates, replacement of
lost or destroyed certificates, or undeliverable dividend checks should be
referred to the Company's Transfer Agent:
ChaseMellon Shareholder Services
Securities Transfer Services
111 Founders Plaza, Suite 1100
East Hartford, CT 06108
1-800-288-9541
TDD Line 1-800-231-5469
From Outside U.S.: 201-329-8668
TDD Foreign Line: 201-329-8354
www.chasemellon.com
Annual Meeting
Tuesday, April 27, 1999, 4:00 p.m.
The Hilton Hartford Hotel
315 Trumbull Street
Hartford, CT 06103
Form 10-K
A copy of First International Bancorp, Inc.'s annual report and Form 10-K as
filed with the Securities and Exchange Commission is available upon request to
the Company's Chief Financial Officer:
Leslie Galbraith
First International Bancorp, Inc.
280 Trumbull Street
Hartford, CT 06103
860-241-2529
[email protected].
Investor Relations
Media representatives, analysts and investors seeking information are invited to
contact the Vice President of Corporate Communications:
Katie Armstrong
First International Bancorp, Inc.
280 Trumbull Street
Hartford, CT 06103
860-241-4705
[email protected]
Market for the Company's Common Stock and Related Stockholder Matters
The Company's common stock was listed on The Nasdaq Stock Market(SM) under
the symbol FNCE on September 23, 1997. The Company's initial public offering was
paid at $13.50 per share. The following table sets forth the range of the high
and low closing sales prices for the Company's common stock on the Nasdaq:
1998 High Low
- -------------------------------------------------
Fourth Quarter $12 $6 7/8
Third Quarter $14 3/4 $9 1/2
Second Quarter $17 3/8 $14 3/8
First Quarter $17 3/4 $12 1/2
1997 High Low
- -------------------------------------------------
Fourth Quarter $18 1/2 $11 1/4
Third Quarter (from 9/23/97) $18 1/2 $15 1/2
On March 5, 1999, the Company had approximately 181 stockholders of record.
This number does not include beneficial owners holding shares through nominee or
"street" names. The Company believes the number of beneficial stockholders is in
excess of 1400.
Holders of the common stock are entitled to receive dividends when, as,
and if declared by the Board of Directors, out of funds legally available for
such purpose. The Company has paid quarterly cash dividends to its stockholders
since October 1995 equal to $.03 per share.
The Company currently plans to continue to declare and pay quarterly cash
dividends on approximately the same basis to the holders of the common stock.
However, there can be no assurance that dividends will be declared and paid in
the future. In determining whether and to what extent the Company should declare
and pay dividends, the Company's Board of Directors will consider, among other
factors, the Company's consolidated financial condition and results of
operations, tax considerations, general economic conditions and capital
requirements. Additionally, the Company's ability to declare and pay dividends
may depend upon the receipt of dividends from its wholly owned subsidiary, First
International Bank, N.A. which is restricted by the requirements of federal
banking law. See Note 7 of the Consolidated Financial Statements.
<PAGE>
[LOGO OF FIRST INTERNATIONAL BANK APPEARS HERE]
Financing manufacturers worldwide(R)
Corporate Headquarters
Hartford
280 Trumbull Street
Hartford, CT 06103
(860) 727-0700
(860) 525-2083 (fax)
www.FirstInterBank.com
U. S. Representative Offices
Boston, MA
Cleveland, OH
Detroit, MI
Morristown, NJ
Philadelphia, PA
Pittsburgh, PA
Providence, RI
Rochester, NY
Springfield, MA
Washington, DC
International
Representatives
Argentina
Brazil
Central America
India
Indonesia
Korea
Mexico
Philippines
Poland
South Africa
Turkey
West Africa
Member FDIC,
Equal Housing Lender
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
The Registrant has the following subsidiaries:
First International Bank, National Association; a national banking
association
First International Bank, N. A. has the following subsidiaries:
FNBNE SBA Holdings, Inc., a Delaware corporation
FNBNE Business Loans Holdings, Inc., a Delaware corporation
FNBNE Funding Corp., a Delaware corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
- ----------------------------------
We consent to the incorporation by reference in the registration statements of
First International Bancorp, Inc. on Form S-8 (File Nos. 333-46149 and 333-
46151) of our report dated January 27, 1999, on our audits of the consolidated
financial statements of First International Bancorp, Inc. as of December 31,
1998 and 1997, and for the years ended December 31, 1998, 1997 and 1996, which
report is incorporated by reference in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
Hartford, Connecticut
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> OCT-01-1998 JAN-01-1998
<PERIOD-END> DEC-31-1998 DEC-31-1998
<CASH> 13405 13405
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 44930 44930
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 31456 31456
<INVESTMENTS-CARRYING> 34906 34906
<INVESTMENTS-MARKET> 35619 35619
<LOANS> 112958 112958
<ALLOWANCE> 4000 4000
<TOTAL-ASSETS> 273726 273726
<DEPOSITS> 219874 219874
<SHORT-TERM> 1047 1047
<LIABILITIES-OTHER> 3734 3734
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 795 795
<OTHER-SE> 48276 48276
<TOTAL-LIABILITIES-AND-EQUITY> 273726 273726
<INTEREST-LOAN> 3903 15522
<INTEREST-INVEST> 264 1154
<INTEREST-OTHER> 198 1412
<INTEREST-TOTAL> 4365 18088
<INTEREST-DEPOSIT> 2157 7896
<INTEREST-EXPENSE> 2164 7924
<INTEREST-INCOME-NET> 2201 10164
<LOAN-LOSSES> 506 3071
<SECURITIES-GAINS> 33 33
<EXPENSE-OTHER> 5546 17700
<INCOME-PRETAX> 3740 11505
<INCOME-PRE-EXTRAORDINARY> 3740 11505
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2304 7033
<EPS-PRIMARY> 0.29 0.89
<EPS-DILUTED> 0.28 0.86
<YIELD-ACTUAL> 3.89 4.82
<LOANS-NON> 3104 3104
<LOANS-PAST> 0 0
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 0 0
<ALLOWANCE-OPEN> 4200 3100
<CHARGE-OFFS> 706 2324
<RECOVERIES> 0 153
<ALLOWANCE-CLOSE> 4000 4000
<ALLOWANCE-DOMESTIC> 4000 4000
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 578 578
</TABLE>
